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Common triggers of a sales and use tax audit

On Behalf of | Nov 10, 2022 | Blog, Internal Revenue Service

A sales and use tax audit from the IRS can be confusing and concerning. One of the first questions to pop into your head when you receive the letter is “what triggered the sales and use tax audit?” Below is a comprehensive look at the most common triggers of a sales and use tax audit:

Having a large liability in a prior sales and use tax audit

Different states use audit liabilities to identify companies that are not effectively managing their taxes. Equally, states want to focus their attention on audits that are more likely to generate revenue. If a previous audit on your company yielded high returns, they will flag you for subsequent sales and use tax audits.

Ceasing operations or closing a location

Closing a business location, declaring bankruptcy or dissolving the business will trigger a sales and use tax audit. The state views this as a final chance to recover any owed taxes. You will get a sales and use tax audit letter in the mail within a short period.

The structure of your business

Partnerships and sole proprietors generally have fewer resources. Therefore, they may not have a dedicated staff that works on their sales and use tax filing. Such organizations will get audited frequently because they usually yield desirable returns. The person handling the books is less likely to comply with current laws on sales and use tax filings.

The industry your business operates within

Specific industries are prone to issues with sales and use tax compliance. For instance, cash-based businesses like bars and restaurants are targeted by the state often. This is because cash sales are often underreported when filing sales and use taxes. Construction contractors are also flagged frequently due to the complex nature of their purchases and sales.

Sales and use tax filing irregularities

Every taxpayer’s sales and use tax returns are continuously monitored to identify suspicious activity. Any irregularities will trigger a sales and use tax audit. Some of the most prevalent irregularities include late filings, wide fluctuations in reported figures, and never reporting use tax.

Random audits

Sometimes, a sales and use tax audit simply happens at random. Businesses get selected at random for these audits. You may not have done anything to trigger the sales and use tax audit in the first place. Therefore, it just might be your turn – think of it as bad luck.

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