Expert: Don Sadler - 11/1/2007

Question
i am a new business owner in construction, last month i got a letter that i have to set up an interview for auditing by 10/15/07  , i had an agreement with my accountatnt that she will take care of it, she didnt't , my insurance was cancelled because of that ,and I just learned that today, can I do anything?

Answer
Anna,



I don’t know the particulars of your situation but I can give you generic advice regarding being audited regardless of the reason or situation.  In your particular case, construction audits are typically designed to determine if you have been appropriately managing the sales/use taxes.  This can be a complex area for contractors as laws vary from state to state and the whole business of sub contractors, billing cycles, and cost allocation needs the services of an accountant.

You question of “What can I do” is to 1) Hire a new accountant (and be sure your contract includes audit representation), 2) Meet with the agency to discuss the audit, 3) Obtain as much information as you can about why the audit, what is the scope of the audit [scope means what areas and time-frame they will be looking at and what areas are excluded] as well documentation they will require, what standards they will use to reach a conclusion, as well as the process of contesting the results of the audit, and 4) Read and heed the advice below.

Auditing is a simple process (in theory) of comparing “what is” to “what should be”.

You can expect the auditors will want to identify “what is”. In other words, they will either want to see your records that show amount of sales and use tax incurred and how it was allocated (or collected) and to whom.  They may already have a list of your sales from some other source... they may even have some reason to suspect that you are really selling retail and they are not receiving any tax revenue like they should.  

Lack of records can hurt you because the law in most states requires that you maintain auditable records - especially for wholesale and retail operations.

Generally speaking, as an ‘auditee’ you have more control of the environment than you might imagine...

You must realize that the person auditing you is doing so for some reason.  Something is suspicious, you were chosen at random, or someone has given them a tip about you (a disgruntled employee, an unhappy customer, a competitor, a jilted lover, whoever).
If you have operated in good faith and made an effort to comply with law, there may not be any problem, they may just want to see some documented proof of your decisions regarding sales and use tax.  One of the key things auditors look for is “reasonableness”. In other words, even if you lack documented proof (receipts, records, etc), you may still be able to convince them of your legitimate actions provided you are reasonable in your transactions.

The audit process is generally that they will have an “Entrance conference” with you where they explain the objectives of the audit, the criteria they will use (the “what should be” as mentioned above), the time frame under audit, the expected time they will take conducting your audit, the documents you need to provide, and they should entertain any questions you might have.  You should be prepared to ask why they are auditing you, what their methodology is, how will they determine if you are in violation of law, you should insist that they validate their findings with you prior to including them in any report.  You should ask about how you will resolve any disagreements with them, what is the procedure for escalating the issues to their bosses.  You should also obtain the name and telephone of their supervisor.  It would be appropriate to call their supervisor (but not on speaker) while they sit across the desk from you.  You should verify the auditor’s name, the objective of the audit, and ask the supervisor “why me????”

Know this; the person auditing you is typically under VERY GREAT pressure to produce results quickly.  That is the bad thing about being an auditor – the boss is always, ALWAYS, pushing to work faster.  Since you know this, you should use it to your advantage.  It is better for the auditor to write a clean report, let you go, and move on to the next audit than to spend too much time with you without getting results.  You can manage this by doing the following:

1) NEVER be belligerent or argumentative or uncooperative.

2) Don’t be too smart – be a little dumb so they have to explain everything to you twice.

3) Always be courteous and helpful but very, very slow. Whatever they need – you are very happy to give to them but you don’t have it with you (maybe it is off site and you will have to retrieve it from somewhere else)... make a note of what they need.  Make the note wrong so you will return with the wrong thing.

4) When you return with the wrong thing, make them explain everything all over again as if you don’t understand. Show them the note you wrote down before to prove that you are trying your best to give them what they want but it is all so confusing.

The point is that they know that the boss will be looking at the number of hours they are spending on your case and they will soon give up – unless your tax situation is really bad or you simply got caught being dishonest and they want to go for big bucks or make an example of you.

Remember; be helpful and friendly but ever so slow, slow, slow.