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Sales and Use Tax Audit
Maryland Tax Attorney For Sales Tax Audits
Sales tax compliance has become an increasingly important focus for U.S. businesses. Effective tax risk management and being prepared for a sales tax audit are important aspects of good corporate governance and sound financial operations. As your Bethesda tax attorney, we can help.
In Maryland, businesses undergoing state Sales and Use tax audits often face an uphill battle to defend themselves against indiscriminate enforcement by the State’s revenue agents.
If you are a business owner or do business in the state of Maryland, here are seven things you need to know about the Maryland Sales Tax Audit Program:
1. The Maryland Comptroller’s Office is aggressively seeking to enforce its sales and use tax laws.
While the risk of being audited by the IRS is relatively low, the risk of being dealt a sales tax audit in Maryland is very high. Because the sales tax is Maryland’s third-largest source of revenue (see graphic to the right), the state is serious about enforcing its complex rules surrounding the taxation of goods, services, and purchases. While all businesses should be prepared for a sales tax audit, the state is targeting four key areas: Commercial cleaning and janitorial services, government contractors, security services, and multi-state businesses.
2. Maryland has added new auditors to aid in its cadre of sales tax enforcement.
Due to the volume of new staff, the quality of the auditor may vary markedly depending on their experience, educational background, and prior auditing practice. Hiring criteria for auditors generally requires functional knowledge of accounting and bookkeeping concepts, but the job does NOT require a CPA certification. When this happens, our certified tax lawyers are here and ready to help.
3. State auditors are not only reviewing your sales, but also your purchases.
Out-of-state consumables purchased from online-based office suppliers like Quill.com or Amazon.com aren’t really tax-free. Maryland imposes a use tax on the importation of tangible and otherwise taxable goods into the state. If you have made out-of-state purchases, you should expect to have some type of use tax calculated unless you have previously accrued and filed use tax returns. Our expert tax advice can pay off big in this department.
4. There is at least a 90 percent chance that your initial assessment will be wrong.
Audit methodologies may have systemic flaws, including block sampling errors, misapplied apportionment formulas, straight line growth formulas, and basic math errors, that are encapsulated in a projection methodology favored by the comptroller’s office. The methodology almost always overstates or understates the taxpayer’s true liability, resulting in expensive corrections borne by the taxpayer. Hiring quality tax attorneys will help you file a completely accurate report.
5. Auditors tend to resolve ambiguities in the state’s favor and not that of the taxpayer’s.
Purchases without invoices, for example, will almost always be deemed taxable. The strength of your bookkeeping records and the auditor’s methodology heavily influence the amount of tax that is assessed. When you are audited, it is a smart move to hire tax experts to get all affairs in order.
6. The audit methodology (based on projection) magnifies small bookkeeping mistakes.
This potentially charges taxpayers for the same mistake multiple times. This unfortunate outcome may be avoided by working with an experienced Maryland tax attorney.
7. Auditor’s reports will vary.
You should not assume the auditor’s calculations are correct. You should request all work papers, calculations, and methodologies that the auditor used to reach his/her conclusions throughout and at the termination of the audit.
Our Sales Tax Attorneys’ Approach to Audits
1. The Time Out—A Pre-Audit Compliance Review
At the beginning of the audit process, our tax experts start by reviewing a client’s records, business operations, and bookkeeping systems to determine whether the client has underpaid or overpaid sales and/or use taxes.
2. Tax Minimization—The Pre-Audit Approach
If we determine that deficiencies exist in processes or operations, we provide solutions to recover missing documents and to order missing statements. We also develop strategies to ensure ongoing compliance, and act to minimize prior exposure periods. With access to industry-leading technology, data recovery, accounting, and forensic services, our firm will engage experts on your behalf to get the job done. Whenever we enlist third parties, we always do so in a manner that retains attorney-client privilege.
3. Audit Representation
We guide taxpayers through the audit process and act to minimize auditor intrusion into their business operations. We act to eliminate or avoid tax assessments during the audit.
We educate auditors, when needed, as to the correct application of Maryland tax laws, COMAR, statutory exemptions, public policy, and constitutional limitations on state and local taxation.
4. Audit Analytics
Our Maryland sales tax audit defense team identifies opportunities to reduce assessments through formula-based allocations of income, expense, and multi-state apportionment of revenues. We model potential outcomes using original, auditor-developed spreadsheets, and we work papers through expansion and contraction of test periods, alternative methodologies of sales calculations, and contra-analysis of cash-versus accrual accounting, when required. We challenge revenue and sales assumptions that cannot be independently validated, and we regress extrapolated revenue, growth, and sales figures against actual data when available. Our team of tax lawyers is here to provide a comprehensive set of services to minimize your risk or liability.
5. Penalty and Interest Abatement
Once it appears that a tax will be assessed, we proactively look to minimize penalties and interest through abatement requests, creation of tax credits, and overpayments/offsets.
6. A Cooperative Approach
Playground rules! We work with your in-house or outside team of acco
untants, bookkeepers, and tax preparers. Don’t have them? We do! We can provide attorneys, CPAs, JD/LLMs, and MBAs when appropriate to work with you.
Contact us today to learn more about how we can help you with Maryland sales and use tax audits, and see why a local tax attorney can mean a world of difference.