Reverse Audits for Corporate Taxpayers: Best Practices for - - PowerPoint PPT Presentation

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 mike@dillontaxconsulting.com

• Dec. 13, 2012

Mark Loyd, Bingham Greenebaum Doll mloyd@bgdlegal.com

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 Slide 24 – Slide 27 Slide 15 – Slide 18 Slide 19 – Slide 23

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

Mark Loyd, Bingham Greenebaum Doll

www.bgdlegal.com

Primary Goal For The Reverse Sales Tax Audit

O BTAIN A R EFUND OR C REDIT OF S ALES AND U SE TAX Motivations:

• Refund for refund’s sake
• Manage state DOR audit assessment
• Improve ongoing compliance

Scrutiny: Primarily on tax-paid transactions

• Compare with state DOR audit: Scrutiny on non-

tax-paid transactions

9

www.bgdlegal.com

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

O BTAIN A R EFUND OR C REDIT OF S ALES AND U SE TAX ( CONT.) Approaches :

• Compliance : Focus on all sale/purchase transactions
• Ensure compliance with tax matrix (tax-paid and non-tax-paid)
• Improve error rate
• Results -oriented: Focus on refund/credit
• High level: Focus on tax -paid items with most

potential for refund/credit

• Targeted: Focus on specific issue(s)

10

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Logistical Goals Of Reverse Tax Audit

Identify transactions on which tax was potentially

• verpaid, using efficient methodologies
• Approaches to examining sales/purchases:
• Examine all
• Sample
• Review group of like suspect Items
• Group homogeneous transactions :
• PO, invoice, G/L account, vendor, etc.

11

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Logistical Goals Of Reverse Tax Audit (Cont.)

Identify errors 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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Logistical Goals Of Reverse Tax Audit (Cont.)

Evaluate sales/use tax position Also, confirm determinations that tax is 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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Logistical Goals Of Reverse Tax Audit (Cont.)

Assemble documentation demonstrating tax was

• verpaid on transactions
• Invoices
• Alternatives: Purchase orders, contracts
• Description of property, process or use
• Graphic illustration (e.g., pictures or videos) of

property, process or use

14

INDICATIONS OF POSSIBLE TAX OVERPAYMENTS

Mark Loyd, Bingham Greenebaum Doll Mike Dillon, Dillon Tax Consulting

www.bgdlegal.com

Evidence And Indications Of Possible Tax Overpayments

• Focus on tax -paid sale/purchase transactions
• Tax accrual and expense G/L accounts
• 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 matrix
• Sales and use tax returns

16

Evidence And Indications Of Possible Tax Overpayments (Cont.)

• Lack of internal tax function focused on sales tax
• Lack of a use tax accrual process

– No internal review of purchases for proper tax Application by vendor – Vendor incentive and A/P incentive – Potential for exposure as well

• State sales tax audit yields “no change.”

17

Evidence And Indications Of Possible Tax Overpayments (Cont.)

• Electronically delivered purchases
• Rapid expansion of activities into new states with

which company lacks sales tax experience

• Decentralized purchasing
• Complex purchase, delivery and use activities

(including drop shipments)

18

SAFEGUARDS AGAINST FUTURE TAX OVERPAYMENTS

Mike Dillon, Dillon Tax Consulting

Implementing Safeguards Against Future Overpayments

• Use tax accrual process

– Internal review of purchases for proper tax application by vendor – Vendor/account scrub

• Sales and use tax matrix

– Manual or automated process – Consistency and uniformity

20

Implementing Safeguards Against Future Overpayments (Cont.)

• Dedicated A/P staff and departmental incentive

program for accuracy – Inaccurate reliance on human knowledge and manual processing – Staff turnover – Inaccurate recordkeeping in turn attracts tax auditors.

• Dedicated compliance staff and uniform processes

– A/P must apply tax laws and keep up with the constantly changing product taxability rules. – Incentive is expedient processing, not compliance.

21

Implementing Safeguards Against Future Overpayments (Cont.)

• Regularly review purchase accounts

– Large purchase accounts – Special purchase accounts – Specific vendors

• Effective rate agreements

– Simplify use tax compliance – Take sales tax application out of hands of vendors

22

Implementing Safeguards Against Future Overpayments (Cont.)

• Sales and use tax compliance software

– 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

Mike Dillon, Dillon Tax Consulting Mark Loyd, Bingham Greenebaum Doll

www.bgdlegal.com

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

• Contingent fees
• Alternative fee structures

– Hybrid of hourly or fixed, and percentage – Strata with different percentages for increased results

• Fee application to historical results only, not

prospective results

26

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

• Do fees apply to refunds realized? Recognized ?

Credits taken?

• Will firm identify potential exposure ?

– Do you want to file a refund? – Will the claim invite audit?

27