I love this question. The answer is simple. Learn the tax rules as they apply to your business. And prioritize compliance with the rules BEFORE an audit is generated.
By the time an audit is generated, your records are either good or they’re not. You have taxed the transactions in the audit period correctly, or you haven’t. You have paid sales or use tax due on your purchases, or you haven’t. You have receipts and other documentation needed to conduct the audit, or you don’t.
Most shortcomings, in terms of getting documentation, can be overcome. But there are some things that cannot be overcome. We can secure exemption and resale certificates to prove sales should not have been taxed, assuming you didn’t fail to collect tax in error. We can ask customers to reimburse you if you didn’t charge tax on taxable sales. We cannot do much to improve your situation if you did not pay sales or use tax on items you consumed.
Make no mistake, rehabilitating records takes time and will cost money that you could have saved if your records were ready for review.
When you get audited, pay attention to your results. FIX the areas of noncompliance. Be open when communicating your business with your advocate. Give them as much information as you can about what you do.
There is one thing that shocks most business owners: an auditor’s failure to identify an error does not mean that you don’t have tax exposure. It is common for people to say, “I was audited 3 years ago. The auditor didn’t tax this. Why is it being taxed now? I didn’t change how I do this.” The answer is “You were lucky 3 years ago. You didn’t handle it correctly in the last audit period. Your luck ran out. The tax is due.”
People do “graduate”, change their procedures, and get no tax due audit results. This is the goal…Avoid audit deficiencies by proactively addressing sales and use tax responsibilities before an audit is generated.