Can you give advice on how to be best prepared for a franchise and excise tax audit? This for the state of Tennessee.
The best defense for any audit is recordkeeping and documentation.
Preparation basically is collection, organization and reconciliation of the records and documents.
The auditor is looking to prove or tie out the amounts on the return first to the books and then to the underlying documents, receipts, statements, etc.
If you can explain how the amounts on the return coincide to the bookkeeping and then produce the records that support the items recorded then you will satisfy the auditor.
When I am preparing for an audit that is the same process I undertake.
That is, I will first prepare notes (or review and refamiliarize with those already with the return) to know how what is on the return is (or is not) reflected on the return. Any differences can be researched and reconciled.
Then the supporting documents for the books are organized and reviewed to also note and explain any differences. In some cases additional documents are requested from vendors, banks, etc. to ensure the amounts recorded were correct.
Knowing what was reported where, how it was computed, why items were or were not included and being able to access the supporting documents for entries is what is needed to prepare.
Like any endeavor, there is an optimal amount of preparation (not too little and not too much) and the amount of time and effort needed will depend on the previous time and effort spent collecting, understanding and organizing the documentation.
Please ask if you need more discussion or clarification.
When you read my answer I can not edit.
"That is, I will first prepare notes (or review and refamiliarize with those already with the return) to know how what is on the return is (or is not) reflected on the return."
I will first prepare notes (or review and refamiliarize with those already with the return) to know how what is on the return is (or is not) reflected on the BOOKS.
Sorry for the typo.
Did you receive my additional questions?
Sorry I did not.
Please retry, thanks.
I am looking for more specific information about what an excise and franchise audit is--and what documents I should be preparing. I plan to have an accountant represent me, but because of Sept 15th deadlines, he has not provided me with much information. Is a Excise/Franchise audit less time consuming and serious than a tax audit or full blown IRS audit? What do they key in on during this type of audit? Thank you.
You are welcome.
The Excise/Franchise audit is the state equivalent of the IRS audit of the federal return. It is an overall and not a specific item that is examined. Both audits are looking at the net income of the business so that the scope of both is similar.
That is, all the items that go into the expense and income are part of the audit.
Bank statement reconciliation as compared to sales is standard. Amounts that were deposited and not counted as sales or not in the bookkeeping need to be understood and documented to the extent possible.
An experienced auditor will tend to key in on items that are either unusual in size, apparently not exact as in always round numbers, and those that are often abused (such as travel and entertainment).
Most clients that I represent already know where the bookkeeping or documentation needs to be reviewed and reinforced prior to sharing it with an auditor. I review the books, bank statements and such to look for the same types of items the auditor may key on.
There is not any specific item that a franchise tax or excise tax audit will examine because it is the net income (or net income earned in that state) which is being proved much like an IRS audit.
Two areas that need to be addressed in addition to income and expenses are any allocation of income between states for a company operating n more than one state and differences or adjustments that are made to get to the net income under state law as compared to federal law.
The state may or may not adopt all of the provisions in the federal law to arrive at income for state purposes. Often there may be adjustments required when the state law does not conform to the federal law.
For more information on this concept see http://www.mncpa.org/publications/footnote/2011-10/mn-non-conformity-to-federal-tax-law.aspx
So customer sales tax is not a focus? It is primarily the business income and business expenses. Is that correct?