How do I prepare for a sales tax audit?

Preparation is the key variable in audit outcomes. Organized records and professional representation typically produce better results than responding unprepared.

Key takeaways

• Confirm the scope immediately: the audit notice will specify which tax type, which periods, and which entity is under audit, verify this is accurate before gathering anything
• Don’t respond without understanding what you’re being asked for: request a pre-audit conference to understand the auditor’s process, their information request, and the expected timeline before producing documents
• Consider professional representation: a sales tax professional, CPA, or tax attorney who specializes in state tax audits can negotiate scope, respond to information requests appropriately, and often achieves better outcomes than self-representation
• Gather sales records for the audit period: total sales by state, sales broken down by taxable vs. exempt, exemption certificates for all exempt transactions, and documentation of any sales you believe weren’t taxable in the audit state
• Verify exemption certificate files: pull all exemption certificates for the audit period and confirm they’re complete, correct, and on file, missing certificates for exempt sales are the most common audit finding and the most preventable
• Review your returns: compare your filed returns against your sales data; unexplained variances between reported sales and underlying records invite further scrutiny
• Understand the auditor’s method: state auditors often use sampling, they audit a representative period or sample of transactions and project findings across the full audit period; understanding their sampling methodology matters for negotiating the final assessment
• Don’t volunteer information: answer the auditor’s specific requests; don’t proactively disclose issues outside the audit scope