Reverse Audits -- What to Know Before Setting the Contingent Fee
Your company is ready to move forward with a sales and use tax reverse audit. How does the contingent fee work? Which questions should be asked to assure a fair fee agreement?
Reverse audit projects are typically contracted under a contingent fee engagement, where the firm receives a percentage of the total refunds as payment for services rendered.
What if Overpayments Are Not Found?
If the reverse audit does not find significant overpayments and refunds are not requested from the state or vendors, no fees are owed to the firm. However, travel and out-of-pocket expenses are typically reimbursed.
What if the Company Decides Not to Pursue Refunds?
If overpayments are identified by the firm and no significant underpayments are uncovered, but the company decides not to request refunds, typically the firm will be entitled to a pre-approved lower percentage of the total potential refunds to help cover the time and resources invested by the firm into the reverse audit. Very few companies decline the opportunity to recoup overpaid tax dollars. Cherry Bekaert has only occasionally encountered this request, usually due to new management, an acquisition, or other major operational changes.
What if the Company is Audited?
Sometimes after requesting refunds, the company may receive a state audit notice. The firm has no control over the decision by a state revenue department to audit the company. However, if the company teams up with experienced sales tax professionals, these experts will look for signs of underpayments while conducting the reverse audit. If the team suspects that a significant amount of sales tax was not remitted to the state for taxable purchases, they should stop the reverse audit and recommend appropriate next steps.
What is an Appropriate Contingent Fee?
One set percentage does not apply to every reverse audit. Typically the contingent fee percentage is based on several factors. Examples include the following:
Total number of locations to be reviewed
States where the review takes place
How AP records are stored
Size of the company
If and when the last reverse audit was conducted
When is a Contingent Fee Not the Method of Payment?
Some companies have policies in place that do not allow payment based on a contingent fee. In this case, payment is based on pre-approved hourly rates and estimated time commitments.
What is More Important than the Contingent Fee?
As with any agreement, the lowest fee is not necessarily the best choice. Look for a team that wants to build a relationship with your company. Securing refunds should only be the first step to this partnership. Training key employees to identify exemption opportunities, putting processes in place to avoid overpayments in the future and setting standards to reduce exposure and maximize savings are all just as important as obtaining refunds for the lowest contingent fee.
Cherry Bekaert has a sales and use tax team with more than 100 years of combined experience conducting reverse audits. Check out the 20 signs they say indicate that a company is ready for a reverse audit.