While VAT and sales tax audits can be stressful, handling your first tax audit well is important. This is because being audited once potentially increases your risk of future audits, especially if the first tax audit results in you owing a significant amount of additional taxes to the relevant tax authority. This guide will help you navigate a tax audit. We’ll share common audit triggers to be aware of, how to prepare for an audit, and how to mitigate your chances of a future audit.
Please bear in mind that the information provided in this guide does not constitute tax or legal advice. This guide has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax or legal advice. You should consult your own tax, legal, and other advisors when managing a tax audit.
Common audit triggers
Audits might seem random, but there are specific triggers that might make certain companies more susceptible to an audit. Material changes that occur within a company, such as a new tax registration or significant increase in the amount of revenue reported, are good examples of activities that could result in an audit notice. Here are a few other common audit triggers:
1. An oddity on a sales tax or VAT return
Many tax authorities have systems that analyze past returns and flag any oddities that might indicate an audit is warranted. In addition, tax authorities often filter filer information to identify audit targets based on company size, transaction volume, or tax return complexity.
2. Consistently filing late
A company that chronically files late or fails to meet its requirement to file a return at all is at a higher risk for an audit notice. And a history of amended tax returns is another common trigger for an audit.
3. A history of audits
A company that has been audited in the past is likely to be audited again. This is especially true if the previous audits uncovered mistakes that resulted in additional payments being owed to the relevant tax authority. In addition, if a customer of yours is being audited, something might be discovered that could lead to an audit notice for your company.
4. A change in tax obligations
Crossing tax registration thresholds can happen quickly in a new state or country, and companies aren’t always aware that they have become subject to new obligations to collect taxes from customers. Tax authorities generally track sales, and if a company crosses a threshold but doesn’t collect tax, it might receive an audit notice.
5. Initiating a VAT refund
In certain countries, like Italy and Spain, a substantial VAT refund request is a common audit trigger. This is especially true if the company has recently registered to collect VAT.
Managing a sales tax or VAT audit
If you’ve received an audit notice, here are a few ways to best manage the audit—both before the auditor arrives and while they are conducting their review.
Preparing for an audit
As soon as you receive an audit notice, it’s important to start preparing. You want to give yourself as much time as possible to collect relevant documents and records before the auditor arrives.
You can expect that the auditor will request basic accounting documents like financial statements, past sales or VAT tax returns, and bank statements. It’s also important to collect tax-related documents like invoices, bills, resale and exemption certificates, and shipping records. Having these documents ready will not only help to speed up the audit, but will also give the auditor a good impression of how well the business is organized and managed.
If you find yourself missing an exemption certificate for one or more of your customers, contact those businesses immediately to request copies of the certificates. This is one of the reasons starting your audit preparation process as early as possible is important.
If you aren’t as familiar with tax compliance requirements, or don’t have someone managing tax full time for your business, consider speaking to a tax professional for guidance. It can be helpful to have an expert for support and to guide you through the process.
During the initial conference, the auditor might ask you to sign a statute of limitations waiver, depending on the country and tax authority. This extends the usual statute of limitations for the period that’s being audited, giving the auditor more time to review your records without losing a year’s worth of unrecovered tax to statutes of limitations. The statute of limitations varies for state and country, but it is generally between three and eight years, with extensions for suspected fraudulent behavior. It’s important to note that, in most cases, interest on taxes due continues to accrue while the waiver period is in place. It might give you more time to get your documents in order, but consider the costs carefully.
During an audit
Even though being audited might seem stressful, keep in mind that the auditor is only there to do their job. If the audit is happening in person, provide the auditor a proper place to perform the audit, with all the requested documents available. You might also want to make yourself available to answer any questions that come up during their review of the documents.
In addition, it’s best practice to ask the auditor to provide all requests in writing, so that you can keep a complete record of everything that occurs during the audit. If you are unsure if a request is normal, contact your tax professional for advice.
Mitigating your chances of a future audit
At the end of the audit, you might find underpayment issues that will result in your business owing additional taxes as well as penalties and interest. If you and your tax professional agree with the auditor’s assessment, paying the balance owed will complete the audit.
In some tax jurisdictions, you might have the right to appeal a tax audit assessment if you believe the assessment was incorrect. In this case, hiring a certified tax professional or attorney might be the best course of action.
How Stripe can help
The best way to prepare for a possible audit is to stay organized and ensure you are maintaining compliance, even as your company grows. Stripe Tax reduces the complexity of global tax compliance, so you can focus on growing your business. It automatically calculates and collects sales tax, VAT, and GST on both physical and digital goods and services in all US states and more than 40 countries. Stripe Tax is built into Stripe, so you can get started faster—no third-party integrations or plug-ins are required.
Stripe Tax helps you:
- Understand where to register and collect taxes: See where you need to collect taxes based on your Stripe transactions, and after you register, switch on tax collection in a new state or country in seconds. You can start collecting taxes by adding one line of code to your existing Stripe integration or add tax collection to Stripe’s no-code products, such as Invoicing, with the click of a button.
- Register to pay tax: Stripe Tax provides links to the websites where you can register to pay tax, once you exceed the threshold to register.
- Automatically collect tax: Stripe Tax calculates and collects the amount of tax owed, no matter what or where you sell. It supports hundreds of products and services and is up-to-date on tax rules and rate changes.
- Simplify filing and remittance: Stripe generates itemized reporting and tax summaries for each filing location, helping you easily file and remit taxes on your own, with your accountant, or with one of Stripe’s filing partners. Consult with your tax advisor to understand how specific requirements might apply to your business.