Reverse Audits for Corporate Taxpayers: Best Practices for Identifying...

Reverse Audits for Corporate Taxpayers:

Best Practices for Identifying Sales Tax Refunds

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THURSDAY, DECEMBER 13, 2012

Presenting a live 110-minute teleconference with interactive Q&A

Mark Loyd, Partner, Bingham Greenebaum Doll, Louisville, Ky.

Mike Dillon, President, Dillon Tax Consulting, Annapolis, Md.

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Reverse Audits for Corporate Taxpayers: Best Practices for Identifying Sales Tax Refunds Seminar

Mike Dillon, Dillon Tax Consulting

[email protected]

Dec. 13, 2012

Mark Loyd, Bingham Greenebaum Doll

[email protected]

Today’s Program

Goals For The Reverse Audit

[Mark Loyd]

Indications Of Possible Tax Overpayments

[Mark Loyd and Mike Dillon]

Safeguards Against Future Tax Overpayments

[Mike Dillon]

Negotiating With, Managing Reverse Audit Outsourcing Firm

[Mike Dillon and Mark Loyd]

Slide 8 – Slide 14




Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

GOALS FOR THE REVERSE AUDIT


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Primary Goal For The Reverse Sales Tax Audit

OBTAIN A REFUND OR CREDIT OF SALES AND U SE TAX

Mot ivat ions :

• Refund for refund’s sake

• Manage s tate DOR aud i t a s sessment

• Improve ongo ing compl iance

Scrut iny : Pr imar i ly on tax -pa id t ransact ions

• Compare wi th s tate DOR aud i t : Sc rut iny on non -

tax -pa id t ransact ions

9

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Primary Goal For The Reverse Sales Tax Audit (Cont.)

O BTA IN A R EFUND OR C RED IT OF S ALES AND U SE TAX ( CONT. )

Approaches :

• Compl i ance : Focu s on a l l s a le/pu rcha se t ran sac t i on s

• Ensure compliance with tax matrix (tax-paid and non-tax-paid)

• Improve error rate

• Resu l t s -o r ien ted : Focu s on re fund/c red i t

• High leve l : Focu s on tax -pa id i tems w i th mos t

po ten t i a l f o r re fund/c red i t

• Targeted : Focu s on spec i f i c i s s ue ( s )

10

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Logistical Goals Of Reverse Tax Audit

Ident i fy t ransact ions on which tax was potent ia l ly

overpaid, us ing ef f ic ient methodologies

• Approaches to examin ing sa les/purchases :

• Examine all

• Sample

• Review group of like suspect Items

• Group homogeneous t ransact ions :

• PO, invoice, G/L account, vendor, etc.

11

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Logistical Goals Of Reverse Tax Audit (Cont.)

I den t i f y e r ro r s

Error Cause O f Error Resolution

Tax paid or not paid in error

No tax matrix Create tax matrix

Tax matrix not used Redistribute tax matrix; more training

Tax matrix misunderstood Update/revise tax matrix; more training or re-training

Exemption read too narrowly or broadly

Update tax matrix

12

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Eva lua te s a le s/u se tax pos i t i on

A l s o , con f i rm de te rm ina t i on s tha t tax i s due

Position Support

Not taxable Extra-jurisdictional; subject matter not taxed

Exempt Property; transaction; entity

Credit Economic development; incentivize action (e.g., recycling)

13

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Assemble documentat ion demonstrat ing tax was

overpaid on t ransact ions

• Invo ices

• Alternatives: Purchase orders, contracts

• Descr ipt ion o f property, process or use

• Graphic i l lus t rat ion (e .g . , p ic tures o r v ideos ) o f

property, process o r use

14

INDICATIONS OF POSSIBLE TAX OVERPAYMENTS



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Evidence And Indications Of Possible Tax Overpayments

• Focus on tax -pa id s a le/pu rcha se t ran sac t i on s

• Tax acc rua l and expense G/L account s

• List of tax-paid items from financial systems with relevant

available data

• Financial account information: G/L account, business unit, cost

center, vendor, etc.

• G/L vs. procurement cards

• Sales tax or use tax paid? Direct pay permit?

• Tax mat r i x

• Sa le s and u se tax re tu rn s

16

Evidence And Indications Of Possible Tax Overpayments (Cont.)

• Lack o f interna l tax funct ion focused on sa les tax

• Lack o f a use tax accrua l process

– No internal review of purchases for proper tax

Application by vendor

– Vendor incentive and A/P incentive

– Potential for exposure as well

• State sa les tax aud i t y ie lds “no change.”

17

Evidence And Indications Of Possible Tax Overpayments (Cont.)

• Electron ica l ly de l i vered purchases

• Rapid expans ion o f act iv i t ies into new s tates wi th

which company lacks sa les tax exper ience

• Decentra l i zed purchas ing

• Complex purchase , de l i very and use act iv i t ies

( inc lud ing drop sh ipments )

18

SAFEGUARDS AGAINST FUTURE TAX OVERPAYMENTS


Implementing Safeguards Against Future Overpayments

• Use tax accrua l process

– Internal review of purchases for proper tax application

by vendor

– Vendor/account scrub

• Sa les and use tax matr ix

– Manual or automated process

– Consistency and uniformity

20

Implementing Safeguards Against Future Overpayments (Cont.)

• Ded i ca ted A/P s ta f f and depa r tmenta l i ncen t i ve

p rog ram fo r accu racy

– Inaccurate reliance on human knowledge and manual processing

– Staff turnover

– Inaccurate recordkeeping in turn attracts tax auditors.

• Ded i ca ted comp l i ance s ta f f and un i fo rm p roce s se s

– A/P must apply tax laws and keep up with the constantly

changing product taxability rules.

– Incentive is expedient processing, not compliance.

21


• Regular ly rev iew purchase accounts

– Large purchase accounts

– Special purchase accounts

– Specific vendors

• Ef fect ive rate agreements

– Simplify use tax compliance

– Take sales tax application out of hands of vendors

22


• Sa les and use tax compl iance so f tware

– Automated tax decision, rating and return preparation

– Keep accounting personnel focused on higher-value work

– Seamless integration with accounting/billing

– Data archived for audit purposes

23

NEGOTIATING WITH, MANAGING REVERSE AUDIT OUTSOURCING FIRM



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Negotiating With And Managing A Reverse Audit Outsourcing Firm (Cont.)

Approach

Compliance

Refund/credit

High level

Targeted

Options

Contingency fee

By the hour

Flat fee

Hybrid

25

Negotiating With And Managing A Reverse Audit Outsourcing Firm

• Cont ingent fees

• Alternat ive fee s t ructures

– Hybrid of hourly or fixed, and percentage

– Strata with different percentages for increased results

• Fee app l i cat ion to h i s tor ica l resu l t s on ly, not

prospect ive resu l t s

26

Negotiating With And Managing A Reverse Audit Outsourcing Firm (Cont.)

• Do fees app ly to refunds rea l i zed? Recognized ?

Cred i t s taken?

• Wil l f i rm ident i fy potent ia l exposure ?

– Do you want to file a refund?

– Will the claim invite audit?

27

Reverse Audits for Corporate Taxpayers: Best Practices for Identifying...

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