How I successfully reduced $198,000 from a sales and use tax audit initial assessment

This business, a Texas manufacturer, came to me after they had hired another accounting firm to defend their tax audit. After about a year working with this firm, they received an initial audit assessment of approximately $235,000 plus interest and penalties. The business wanted me to review the audit assessment and provide a second opinion. 

Upon reviewing the documents I discovered several errors of the tax assessment on interstate commerce and a potential error on the manufacturing exemptions disallowed by the auditor. I asked the auditor to provide the legal citations that his decisions was based on. I started my research into this area of the law and the related court cases. I found that we had a chance to reduce a significant amount of the tax liability so we decided to push back. Our strategies were to obtain enough “clear and convincing” proof and to shift the burden of proof to another party if possible.

The tax assessment errors on interstate commerce were easily resolved. By reviewing the contract terms and working with the related parties we got enough proofs to prove the point-of-sales were out of the state’s jurisdiction. The manufacturing exemption however, was a different story. The law is vague, the manufacturing process was very complex, and the accounting documents alone would not satisfy our burden of proof. I needed more time and an additional source of information. After successful negotiating with the auditor for a 2 week extension I spent several hours on the production floor and reviewed the list of exempted items with several manufacturing engineers. At the end of the day I was able to send the auditor a 3-page statement backed with images, videos, engineering statements, 3rd party technical statements, ect., to support our position. We turned the tables! if the auditor wanted to deny our position he had to tell us why.

Long story short, the auditor finally agreed to accept all the exempted items on my list and removed the $150,000.00 plus interest and penalties from his first assessment. I also saved the business tens of thousand of dollars additionally on interstate commerce transactions and other corrections found during my review of the tax assessment.

If you have to face a sales and use tax audit ask yourself a crucial question: Do you have the best audit representation? It is in your best interests to retain someone who is knowledgeable of the state laws, who will advocate on your behalf and not hesitate to go the extra mile in reducing your tax assessment.

And remember that you don’t have to fight it alone because your help is just few clicks away.

Copyright © 2018 Thanhdung Arnold, CPA