Washington Sales Tax Audits: What to Expect & How to Prepare
The Washington Department of Revenue has the right to audit your business to ensure compliance with business and occupation tax, retail sales tax, use tax, and public utility tax requirements. If you are selected for an audit, you must cooperate with the auditor and provide documents that back up the claims made on your tax returns.
Generally, Washington state tax audits look back at the last four calendar years plus the current year. Business owners are required to keep documents related to income (gross receipts and sales from all sources), deductions and exemptions, and purchases for at least five years. Maintaining accurate records can be invaluable if you are selected for an audit.
If you cannot back up the details on your sales tax or other state tax returns, you risk failing the audit and incurring a tax liability plus interest and penalties. The following guide explains what to expect during a sales tax audit, and then, it outlines why you may want to get legal representation.
To get help now, contact us at Seattle Legal Services today.
Why Washington Businesses Get Audited
The DOR has the right to audit any business with nexus in the State of Washington. The DOR may select your business for an audit based on inconsistent or incomplete tax returns or discrepancies between different types of returns.
The DOR also selects businesses randomly for audits, and it often targets specific industries such as bail bonds companies, convenience stores, and businesses in cash-based industries.
Audits serve a valuable purpose for the state as they help to ensure compliance and protect the state’s ability to collect revenue. The DOR also claims that audits can serve an educational purpose for business owners.
What to Expect During a Washington Sales Tax Audit
The DOR will send you a letter if you are selected for an audit, outlining the type of audit and the records you need to provide. Then, the auditor will contact you to schedule the audit at a DOR office, your place of business, or your tax professional’s audit.
During the audit, you will need to provide records related to your business’s income, purchases, deductions, and exemptions. That may include sales records, purchase records, exemption certificates, and financial statements. Generally, you must provide these records electronically, but there may be some exceptions available.
In some cases, the auditor may ask to see all of the records from the audit period, but in others, they will rely on sampling which is where you provide records from a small period of time.
The auditor will want to know about your business’s operations and how you handle the bookkeeping and tax prep. They may want to take a tour of your business to develop a greater understanding of your processes. The audit timeline varies–generally, the bigger the business, the longer the process will take.
Audit Results and Appeals
At the end of the audit, the auditor will either accept your returns as they were filed, or they will make adjustments to the returns that may lead to a tax liability or a credit. The audit results will be available through your online account, but the auditor should also send you a final audit report through the mail.
If you agree with the results of the audit, you can simply pay the amount due. To minimize penalties and interest, you can make a prepayment at any time during the audit process. If you end up not owing additional tax, you can get a refund of the prepaid amount.
If you disagree with the audit findings, you should request a meeting with the auditor’s manager or ask for an informal administrative review. If you cannot come to an agreement through that process, the DOR will give you info on how to appeal. You must appeal within 30 days from the postmarked date on the audit report.
Common Mistakes Found in Sales Tax Audits
Here are some of the most common issues discovered during sales tax audits in Washington:
- Failure to account for all taxable sales.
- Misreporting taxable sales.
- Incorrect or missing exemption certificates.
- Failure to register for an account and collect sales tax when you have nexus in the state.
To avoid these common pitfalls, review the DOR’s sales tax rules closely if you open a business in Washington or sell goods or services to customers based in Washington. Consider consulting with a tax attorney based in the state to ensure you understand how to stay compliant with the rules.
How to Prepare for a Sales Tax Audit
Audits are never fun, but they can be a lot easier if you are prepared. To ensure your business is audit-proof and ready for auditors at any time, keep these tips in mind:
- Track sales and sales tax collected accurately – Most point of sales and e-commerce software can help you with this process.
- File sales tax returns on time – Double-check the sales report for accuracy if you’re filing manually or to reduce the risk of manual entry errors, consider using software that automatically ports the numbers from your sales reports to the DOR’s online system.
- Review old reports and returns – If you are selected for an audit, look over your sales tax reports and ensure they align with your sales records.
- Keep records organized – The audit will be easier if you have well-organized records that you know how to access easily.
- Work with a tax professional – A tax pro can represent you in front of the DOR, and they can guide you through the audit process as you share records with the auditor, review audit findings, make payment arrangements, and appeal the audit results if necessary.
When you are selected for an audit, you are obligated to work with the auditor, but you also have many rights. Working with a tax pro helps to ensure that your rights are protected throughout the process.
What Happens If You Don’t Collect Sales Tax?
If you are supposed to collect sales tax and you haven’t been, you can face severe consequences. If the DOR realizes that you have not been collecting sales tax, they can hold you personally liable for the uncollected sales tax and add a 39% penalty plus interest to your account.
However, if you reach out before the DOR contacts you, you may be able to use the Voluntary Disclosure Program to minimize penalties and reduce the look-back period.
What If You Collect Sales Tax and Don’t Remit It to the State?
If you collect sales tax but fail to remit it, you may face a late filing penalty of 29% of the tax due and a 5% penalty for significant understatement of tax. You can incur an additional 5% penalty if you have not registered to pay the sales tax.
You may still qualify for the Voluntary Disclosure Program if you have collected but not remitted sales tax to the state. To qualify, you must not be registered for a sales tax account, and you must contact the DOR before they contact you.
In this case, your look-back period will be as long as you have been collecting sales tax, but rather than facing a 39% penalty, you will only face a 29% penalty.
Steps to Stay Compliant After an Audit
To stay compliant after a sales tax audit, keep these tips in mind:
- Talk with the auditor or tax pro about how to avoid the mistakes you made on your return – The DOR says that auditors should be willing to educate taxpayers about the rules and how to stay compliant moving forward. However, the auditors will generally not be willing to educate you about complicated concerns, and a tax pro can give you details tailored to your situation.
- Create processes that help you avoid the mistakes you made – For example, if you entered numbers incorrectly into the sales tax return, consider automating the process or hiring a tax pro to help you.
- Monitor changes to the rules – State tax codes, due dates, and processes change regularly. Stay up to date on recent changes so that you know what to expect.
Audit Representation in Washington State
Dealing with the DOR can be confusing and frustrating, and that’s compounded if you’re facing a business audit. To protect yourself from unnecessary tax assessments and penalties, consider hiring an experienced tax attorney to represent you through the audit process.
At Seatle Legal Services, PLLC, we have extensive experience dealing with the WA DOR, and we can help your business deal with sales tax audits, common sales tax mistakes, and other tax problems related to the WA DOR. Contact us today to set up a consultation.