Limiting Exposure Through Automation

Discover how tax professionals and state officials view audits.

August 30, 2007
by Dick Eppleman

Though they represent multiple industries and interests, tax professionals have little trouble agreeing that compliance and audit concerns associated with missing or invalid exemption certificates are significantly challenging — too costly, fraught with errors and too often leading to assessments that drain a company’s revenues and resources.

With that in mind, Vertex Inc. recently surveyed tax professionals and state audit officials. The purposes of the surveys were to identify ways to streamline exemption certificate management, reduce sales and use tax assessments and help companies deal with related tax issues more efficiently. Conducted separately, the surveys revealed that while tax professionals and state audit officials see the challenges from different vantage points, there are many shared concerns. There are also important areas of agreement of how to solve some of the most vexing certificate and tax issues, particularly regarding ways to reduce assessments.

As tax professionals and state audit officials both acknowledged, seldom — if ever — have state audit officials spoken so candidly about the exemption certificate process, assessments and how automation might help. In that light, we will discuss the findings of both studies and will offer concrete, real-life examples of the issues organizations face with exemption certificates and audit assessments. Further, it will show that when organizations automate their certificate and tax processes, they save money, expend fewer resources addressing their tax issues and reduce their audit assessments.

Significant Findings

In the surveys, tax professionals and state audit officials both identified the inability to produce exemption certificates as a major contributor to companies’ audit assessments. As one tax professional noted, “Being able to always locate the exemption certificates we need at audit time would significantly reduce audit assessments.” Said another, “Since this is where most of our audit exposure emanates, it would benefit our company greatly to have a better way of keeping this information up to date.”

Forty-four percent of the state audit officials surveyed indicated that not having an automated sales-and-use tax exemption certificate system has at least a medium impact on audit assessments. From the audit officials’ standpoint, automation is beneficial because it leads to greater ease of statistical sampling and efficiency, both of which mean audit officials spend less time onsite at organizations — and less time overall auditing them.

In turn, many tax professionals also agreed that automation could help. When they were asked how they could best focus their efforts to improve sales-and-use tax exemption certificate and compliance processes, 59 percent said, “Increase automation of the sales-and-use tax processes.”

However, the survey indicated continued reliance on manual processes among tax professionals, even in light of the evidence that automation could reduce assessments and add efficiency. More than two-thirds of companies surveyed still use manual processes to manage and maintain exemption and resale certificates.

Significantly, tax professionals in both the public and private sectors and audit officials indicated that automated solutions may reduce the likelihood of future audits: 77 percent indicated that when errors are found on exemption certificates, the companies that made the errors are considered a likely or somewhat likely lead on future audits. A good system equals cleaner audits and audit officials are quick to note good internal controls when found. Since it can be reasonably postulated that automated solutions reduce errors, it follows that automated solutions, when applied correctly, can reduce assessments.

Also significantly, state tax officials reported having a more positive and productive audit experience with companies that have moved to a commercial automation system for ECM sales and use tax calculations and other tax tasks. They reported that commercial software allows for greater ease of statistical sampling, greater efficiency in the audit (less looking at source documents, ease of access to information) and greater accuracy for the taxpayer.

Because automated solutions enable state tax officials to primarily audit an organization through checking rates and jurisdiction coding, time is saved by state tax officials and companies using the software. Said one state tax official: “When we audit a company that uses commercial software … the records are more accurate and there is more information available — there are fewer problems in fewer areas.”

To obtain the complete survey analysis and additional articles on tax industry trends and challenges, please visit: vertexinc.com/AICPA.

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Dick Eppleman, Vertex Director of Government Markets, has served in various sales roles in the information technology industry for more than 18 years.  He is a member of the Institute for Professionals in Taxation and has spoken before various business and government groups on topics including the Streamlined Sales Tax Project, Electronic Filing and Economic Value.