One of our team members sat in on the Michigan Department of Treasury’s MI sales & use tax audit webinar to provide this short summary for your reference. Here are some tips to make your audit process easier and less painful!
Understand Your Basic Responsibilities
If you’ve already been selected for an audit and are familiar with your tax-collection responsibilities, skip ahead. For everyone else, it is important to know that sales & use tax collection is your obligation. When you don’t collect sales & use tax the liability falls on you. Even though customers commonly pay sales taxes, the selling business is the one responsible for adequately collecting and remitting sales taxes. (If you need help with sales tax compliance, reach out to one of our tax experts here.)
Fortunately, MI is an easier state to deal with sales and use tax. They only have the 6% rate for the entire state with no local rates, and their online platform MTO (Michigan Tax Online) is helpful and can make the process much easier! (Read about the benefits of MTO and refresh on general MI sales and use tax tips here.)
Why Did I Get Picked For An Audit?
Michigan uses sales & use tax risk assessment software to select candidates for an audit. To put it simply, a computer crunched some numbers, and you were the lucky audit winner. Fortunately, our assistance can make the Michigan sales & use tax audit process a lot less painful. Our reverse audits can reduce liabilities, fees, and penalties. With our help, we may even be able to get your audit shifted from the red to the black!
What To Expect?
If you’ve been selected, you most likely already got the audit pre-confirmation letter and a Michigan tax audit questionnaire in the mail. Michigan uses these forms to gather necessary information before meeting in-person or over-the-phone for a pre-audit conference. After you have been notified that a Michigan sales & use tax audit will be performed and paperwork about your business and operations has been filled out, a timeline for the audit is planned out. You can work with the auditor to refute this timeline if it won’t work with your operations.
For example, if they want to come onsite during your busiest month, you can tell the auditor that month is bad and request they visit sooner or later. Next, you’ll receive an audit confirmation letter and a records request, so the state can review your files. Most audits (and especially ones done on cash-basis operations) involve an in-person audit appointment where the auditor will come onsite and review your operations. The auditors will work on your files, present the review findings, and then hold a closing conference to come to an “agreement” about the audit.
How Do I Defend Myself?
Michigan usually takes a two month sample of your invoices then projects those findings over the entire audit period. This process is why it’s so important to enlist experts like us to defend you during a sales & use tax audit. Most businesses have inconsistent numbers, and many healthy businesses grow their sales every year. As a result, a two month sample can over-project your actual liabilities and undervalue where you’ve overpaid sales and use taxes. When we work with a client for Michigan tax audit defense, we find areas of overpayment by looking at all invoices during the audit period to provide the most accurate schedule to reduce your liabilities. Because each dollar saved reduces the overall interests and fees, a full sales & use tax recovery review is one of the best ways to defend yourself during a Michigan sales & use tax audit.
Communicate with the Auditor
Besides getting experts like us to help, remember that you can always work with the auditor to communicate how the audit is working with your business and whether or not the audit timeline works for you. If the auditor’s two month sample is unrepresentative of your business, you can inform them that this timeline will over-project. If the holiday season is a big sales season for your business, it might not be appropriate for the auditor to select November and December as the two months they choose. As we mentioned before, if the timeline of the audit will interfere with your operations, you can relay that to the auditor to find a schedule that will be less interruptive.
Don’t Throw Anything Away
Of course, you should always hold onto all of your records physically or digitally. This advice applies to anything the Michigan Department of Treasury gives you during your sales & use tax audit.
What Is A Closing Agreement Audit?
Michigan now employs a closing agreement audit to save on time and money for themselves. They’ll offer to use industry-specific, historical information to estimate an approximate audit value for your business, especially if you work in a cash-basis industry. This type of audit is always optional. To save the most amount of money, we’d recommend choosing a full audit and enlisting the help of a dedicated team like us. Why let Michigan guess how much you owe and cut them a check just because they said so?
How Do I Appeal?
While we’d recommend reaching out to one of our experts first, you should know that you have two basic opportunities to appeal your Michigan tax audit when it comes to sales and use taxes. If you’ve already been audited and have received your “intent to assess” (or more simply, the bill) from the state, you have 60 days to request an informal conference. If you’re earlier in the process, you can submit a request for reconsideration anytime after receiving the pre-audit determination and before receiving the intent to assess.
Have a question? Contact Aaron Giles, Agile Consulting Group.
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