There is much to consider when it comes to the impact of COVID-19 on your business. One key consideration is proper documentation of state and local taxes in anticipation of an audit.
Why Should I Care About a State and Local Tax Audit in the Midst of a Pandemic?
States are spending exorbitant amounts of money on unforeseen expenses that are necessary and unavoidable during this time of crisis, but not included in their budgets or emergency funds.
With the uncertainty of when the country will reopen for business, states are looking for ways they can generate revenue to replenish the non-budgeted cash outflow. Since legislative measures take time to pass and become effective, states most likely will turn to their quick and easy revenue generating tool: an audit.
Audits present an immediate solution by allowing states to broaden their tax base by identifying and pursuing registered and unregistered businesses to ensure each is in compliance with state tax filings and liabilities. In the interest of expediting resolution, and immediate cash flow, states could potentially be more willing to settle matters under audit, or be more lenient in waiving penalties, so long as the business under audit pays up tax dollars.
We’ve outlined state and local responses to the COVID-19 Pandemic
What Do I Need to Be Aware of to Ensure Compliance?
States now have the ability to cross-reference tax types. For example, Texas cross references franchise tax returns and sale tax permits. In addition, states can compare a list of taxpayers who are registered under business income tax and compare it to a list of taxpayers who are registered under sales tax.
If a business is identified to be filing under only one tax type and not the other, states could audit that taxpayer to determine if the taxpayer is in compliance with other taxes. And, states are pursuing remote sellers that store inventory in Amazon warehouses, and through the avenues opened via the Wayfair decision.
How do taxpayers prevent and mitigate the likely uptick of collection efforts such as an audit?
Step 1: Determine Where You Have Exposure:
Sales and Business Income Tax Diagnostic
Consider a high-level nexus analysis to identify tax filing obligations. The scope includes physical and economic presence testing, as well as any potential jurisdiction filing issues. The diagnostic provides a list of jurisdictions that require filing as well as recommendations and next steps toward tax compliance.
Step 2: Business Decision:
Voluntary Disclosure Program
A voluntary, and anonymous in most states, program that allows a taxpayer to come into compliance with state tax liabilities. The program provides benefits from proactively disclosing prior period liabilities such as limitation of the look-back period, abatement of penalties, and closure to prior periods.
If a taxpayer has already been contacted by a state, that taxpayer can limit its tax liability exposure by allowing a tax professional to manage the audit and review the state auditor’s work. This allows the tax professional a chance to argue key points in the auditor’s assessment and, potentially, lower the tax liability the taxpayer would incur.
What You Need to Be Aware Of
While the economic outlook is uncertain, one thing we can all count on is that state governments will have a lot of determination to replenish diminishing funds caused by COVID-19. To prevent your business from carrying more of the replenishment burden than necessary, be proactive and start reviewing your business’s activities to assess whether your company is complying with tax laws in all state and local jurisdictions.
Preparation is key as state’s ramp up audit efforts.