The complexities of telecommunications tax make any telecommunications company potentially susceptible to an audit. However, there are steps that companies can take to reduce their risk of being audited and their potential liability in the event that they are audited. If your company is in the telecom services space, use these five tips to address your company’s audit risk.
1. Determine All Applicable Regulatory Requirements First
Many of the complexities inherent to telecommunications axes stem from the numerous regulatory requirements that companies must abide by. Because this is one of the main underlying causes of tax issues, begin your company’s tax strategy by determining what regulations the company is responsible for.
Identify the federal, state, and local regulatory agencies that may assess communications tax burdens on your company, and then see what the specific regulations of each agency are. Check for sales and use tax rates, long-distance tax rates, tax exemption requirements, and other taxes and fees. And don’t assume that these will be uniform across multiple jurisdictions. Each agency that has jurisdiction over your company’s services will likely have its own requirements.
By sorting through all of these regulatory details before developing your company’s telecom tax strategy and system, you can devise a solution that betters suits all of the applicable regulations. You won’t have to adopt a strategy or system post-design to accommodate another obligation. Instead, you can make sure all obligations are met by the solution that you ultimately implement.
2. Implement a Telecom Tax Compliance Reporting System
Your telecom tax solution will have to include the calculation, collection, and remittance of applicable taxes and fees. Make sure the solution also includes reporting and recording of the taxes, as failing to properly report or record could result in a major audit issue.
Not reporting all applicable taxes is sure to increase your company’s risk of a telecom tax audit, and this is a major reason to check all regulatory requirements. Any jurisdiction that doesn’t believe your company is properly reporting telecom taxes and fees will question whether those taxes are being remitted accurately, and they’ll likely investigate. The investigation may have the dual motivation of holding your company accountable and or getting the taxing jurisdiction its maximum potential tax revenue.
Should your company be audited, failing to have accurate and detailed records would make defending your company’s actions more difficult. Auditors aren’t always prone to give companies the benefit of the doubt if there’s a lack of evidence, and records are some of the best evidence you can provide. Robust records could help your company survive an audit with minimal injury or even unscathed, but incomplete or inaccurate records could have devastating consequences on the audit outcome.
3. Conduct Internal Audits Regularly
One of the best ways to be prepared for an external audit by a regulatory agency is to regularly conduct your company’s own internal audits. Internal audits should check for the accurate collection and remittance of all relevant sales and use taxes, and they should also confirm that all necessary records are in place. Of course, anything that’s not in place should be remedied as much as possible.
In addition to confirming that all necessary documentation is available, internal tax audits should also check for updates to regulatory codes. Each regulatory agency should be re-checked to see whether there are new collection and remittance requirements since the last audit was done. If your company has expanded its service area or added new services, the tax requirements for these should also be checked during an internal audit.
4. Maintain Consist Language About Products and Services
A potential tax audit pitfall that companies frequently overlook is the language that’s used to describe their telecom products and services.
Specifically, the language contained in marketing collateral and used by salespeople should match the language that the tax team would use during an audit. It will be difficult to convince auditors that certain services aren’t subject to telecommunications taxes and fees if telecom language is used to describe them on a website, in sales calls, and on mailings.
In particular, watch for words such as “phone,” “phone calls,” “voice-activated calling,” “internet calling,” “video chat,” video conferencing” and similar terms. Certainly, use these when they’re relevant, but keep their usage limited to only those products that these terms truly describe.
5. Rely on a Telecommunications Tax Consultant
Perhaps the best way to reduce your company’s potential telecommunications tax audit risk is to rely on a tax consultant who’s familiar with this particular area of tax law. Because telecom tax is so complicated, even large businesses in the industry can have difficulty sorting through all of the various regulations and staying current on regulatory developments. For smaller companies with more limited resources, the task is often all but impossible.
A telecommunications consultant will have the knowledge and expertise to help your company come into compliance with applicable regulatory requirements. The consultant can devise a system that will reduce your company’s risk exposure if it ever is audited. Of course, a good consultant will also provide audit services should your company ever go through an external audit.
If you need a tax consultant who works with telecommunications service companies, contact the team at FAStek. Experts in telecommunications tax, our team will help you minimize the risk of a potential telecom tax audit. If you do still get audited, which can’t be fully avoided, we’ll also be there to support you through the auditing process to keep any negative outcome minimal.