Wednesday, February 10, 2010

A Policy a Day Keeps the Auditor Away

I was doing a class in Miami and we had just broken for lunch. I had been talking about why you should have sales and use tax policies and procedures. "Mike" came up to me as everybody else hurried out and said, "You know, that policies and procedures thing really works."

Sensing a good story, I sat down and encouraged him to continue.

Mike said that, a couple of years ago, he had gotten word that the Florida Department of Revenue was going to conduct a sales tax audit. About a month before the audit was scheduled to begin, the auditor shows up for the pre-audit meeting.

Auditor: I don't suppose you have a sales tax manual that I can look at, do you? (She really didn't expect it...she was just going through the questions on her checklist.)

Mike: Yes, as a matter of fact, we do. I've made a copy of our accounting manual for you, and I've put yellow sticky-notes on the pages related to sales and use tax (ta da!).

Auditor: Oh. Great (flipping through the binder).

Auditor (three days later, the auditor calls): Hey Mike, I just took a look at this sales tax manual. Wow, you've really covered the bases here. Heck, I've even gotten some good ideas out of it. Listen, honestly, do you actually follow these procedures?

Mike: Yes. You'll notice that there are revision dates on all of the procedures and we update them whenever there's a change. And we review the entire manual once a year.

Auditor: OK. Listen, we scheduled me in for six weeks. But let's change that to my coming in for just one week. I'll do some testing of your procedures manual and talk to some of your people, then we'll see how to handle the rest of the audit. Oh, and those 1,000 documents I told you to pull...just pull the first 100 for now.

Auditor (on Friday of the initial week of the audit): Mike, I've got nothing. You've got your ducks in a row, and you're not doing anything systemically wrong. There's no point in continuing. We'll call this audit closed and I'll put a note in the file that you guys have systems, policies and procedures in place. Now, I'm off to audit someone who doesn't have a good sales tax manual.

Having well documented systems gives you enormous credibility with the auditor. They want to be productive and, if you appear to have "your ducks in a row", they know they're going to be wasting time. So they might just cut your audit short and go bother someone else.

So the question is, do you have a good sales tax manual? Or is the auditor going to be cutting another audit short to come and nail you?

True story, by the way.

The Sales Tax Guy

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