Michigan Sales Tax Audits: What to Expect and How to Prepare 

Michigan’s General Sales Tax Act of 1933 authorizes the collection of the Michigan sales tax. Administered and enforced by the Michigan Department of Treasury, this is usually a 6% tax on the sale of tangible personal property made by Michigan businesses and individuals. The sales tax rate is 4% for sales involving electricity, natural gas, artificial gas, and home heating fuels used for residential homes. Non-Michigan sellers must also collect and remit this tax if they have a sufficient connection, or nexus, with the state.

Because it’s consumers that pay this tax, MI sales tax shouldn’t be a big deal for businesses and individual sellers of tangible goods. Unfortunately, it’s a big deal because of how challenging it can be to collect the tax and send it to the Michigan Department of Treasury, along with the accompanying sales tax returns. 

Just figuring out who needs to collect this tax is an ordeal in and of itself. Then determining when tax payments must be made and completing the returns can overwhelm even the most seasoned business owners. Then even if you do everything right, you could still be subject to a sales tax audit. The purpose of this article is to provide an overview of the Michigan sales tax audit process. 

Key Takeaways

• Sales tax audits – To ensure sales taxes are collected and reported properly, the Michigan Department of Treasury audits sales tax returns.
• Beginning of the process – Form 4692, Audit Confirmation Letter and Records Request.
• What to expect – Most audits occur at the taxpayer’s place of business and include not just reviewing financial documents and business operating records, but also interviewing key business personnel.
• Conclusion – Following the audit, a taxpayer will have a chance to contest the auditor’s findings by providing additional information, requesting reconsideration or an informal conference, or filing an appeal with the Michigan Court of Claims or Tax Tribunal.
• Audit representation – Given the complexity of a sales tax audit, potential sanctions, and the burden audit cooperation can place on a taxpayer, it’s highly advisable that a taxpayer consult with a tax professional to help during the audit. 

Why Michigan Businesses Get Audited for Sales Tax 

The audit’s goal is to ensure eligible individuals and businesses comply with their sales tax obligations. It accomplishes this goal in at least two ways.

First, the audit consists of an examination of a taxpayer’s finances to see if they’re properly collecting and remitting the sales tax to the Michigan Department of Treasury. If not, the audit will lead to the necessary corrections and sales tax adjustments.

Second, the fear of an audit motivates taxpayers to learn and understand their sales tax duties, whether it’s on their own or with the help of a tax professional. Knowing there’s a chance that financial books could get examined is a strong motivator for many business owners to take extra care in their financial recordkeeping and tax compliance.

What triggers a Michigan sales tax audit? 

It’s likely that the Michigan Department of Treasury primarily relies on some sort of computer algorithm to identify taxpayers who may be at higher risk of not collecting and paying sales tax. It’s also possible that there’s a bit of randomness to the selection in that the computer might use the algorithm to identify 50 taxpayers for potential audit, and then randomly choose 10 to be audited.

What goes into this algorithm is understandably not public knowledge, but it probably takes into account several factors such as: 

• The type of business – a lot of cash transactions or online sales may indicate risk.
• Numbers or values provided on a sales tax return – for instance, if numbers are out of line from previous returns or industry averages.
• Discrepancies – with the information provided on the sales tax return and the taxpayer’s income tax return or other tax documents.
• Whistleblowers – notifying the Michigan Department of Treasury about someone who’s allegedly shirking their sales tax obligations. 

How Michigan Sales Tax Audits Begin 

You’ll learn of the audit when you receive Form 4692, Audit Confirmation Letter and Records Request in the mail. This will ask you to provide some background information about your business’ finances, as well as documents you should produce during the audit. 

These documents will include things like purchase invoices, sales records, sales tax exemption certificates, business bank account statements, cash register tapes, inventory records, and profit and loss statements. Your audit notification will also explain your rights during the audit process and the time period the audit will focus on. 

The Sales Tax Audit Process 

After notifying you about the audit and requesting information, your auditor will work with you to schedule the audit. Most sales tax audits are field audits, meaning the auditor comes to your business location. This is because part of the audit doesn’t just involve reviewing financial documents, but also observing your business’s daily operations, financial record-keeping policies, and tax reporting procedures.

For example, the auditor may want to see: 

• how merchandise is scanned and checked out with customers, 
• what internal controls your business uses to ensure the accuracy of your financial records, 
• cash registers to make sure they’re operating correctly.
• how deductions from your income tax return compare to payments made to your suppliers or vendors. 
• which individuals who are involved in sales tax-related activities, such as the owner, bookkeeper, and/or manager.

When reviewing the financial records, your auditor will look to see if everything is being reported properly. This means cross-referencing various documents, such as profit and loss statements with vendor invoices or purchase orders. 

Most of the time, the auditor won’t examine every transaction or record from the time period subject to the audit. Instead, they’ll likely use a sample test method where data for the entire audit period comes from numbers extrapolated from just a few months’ worth of data.

During the audit, your auditor may ask for additional documents and information. If they find a discrepancy or issue, they may bring it to your attention and ask you to explain it. This could include explaining missing records or entries, as well as misclassified sales or records. 

Sales Tax Audit Outcomes in MI 

After completing the field audit, the auditor will review their preliminary findings with you and/or your tax professional representing you during the audit. If necessary, you may provide additional documents and information to the auditor.

Determined Audit Adjustments letter 

The auditor then creates the final audit schedules and summaries and attaches them to the Determined Audit Adjustments (DAA) letter. You should carefully examine this letter to see if you agree with the auditor’s determination and whether you’ve been asked to provide additional documentation.

Payment if you agree 

If you agree with the DAA letter (and the auditor found a deficiency), you can send payment to the MI Department of Treasury by the date provided. 

Preliminary Audit Determination letter

If you don’t provide any more documentation or haven’t paid the sales tax deficiency amount, then the Michigan Department of Treasury will send you a Preliminary Audit Determination (PAD) letter. This letter identifies the tax, penalty, and interest amounts due. If you’re owed a refund, that amount will be listed in the PAD letter.

If you agree with the PAD letter and you owe a sales tax balance, you can send payment at this time. 

Request for reconsideration

If you disagree with the PAD letter and want to provide more documentation to support your position, then you will need to file Form 5244, Request for Reconsideration of a Preliminary Audit Determination.

Final Audit Notification and Bill for Taxes Due

If you provide additional information for the audit, any proposed adjustments will be analyzed and a Final Audit Notification (FAN) will be issued. If you didn’t contest the PAD letter and still haven’t paid any outstanding sales tax balance, then the Michigan Department of Treasury will send you Form 168, Bill for Taxes Due –Intent to Assess. If you disagree with the amount listed in this document, you have 60 days to make a written request for an informal conference to discuss this disagreement.

If you don’t request an informal conference or file Form 5244 and still haven’t sent payment for the unpaid sales tax balance, then the Department of Treasury will send Form 169, Final Bill for Taxes Due – Final Assessment.

Filing an appeal

If you disagree with the results from the informal conference or reconsideration (from filing Form 5244), you can file an appeal with either the Michigan Court of Claims (you have 90 days) or the Michigan Tax Tribunal (you have 60 days). Decisions from these courts are appealable to the Michigan Court of Appeals and from there, the Michigan Supreme Court.

What if you don’t pay the tax liability from the audit? 

The failure to make any required sales tax payment can result in liens and levies which parallel the liens and levies used by the IRS to collect unpaid federal taxes. The Michigan Department of Treasury also has the authority to offset any income tax refunds with the unpaid sales tax balance, as well as freeze business assets and restrict their transfer to others. 

What To Do if Your Michigan Business Gets Audited 

While not required, it’s recommended to seek the counsel of a tax professional. If you decide to have a CPA, tax attorney, enrolled agent, or other tax resolution professional represent you during this audit, you’ll need to complete Form 151, Authorized Representative Declaration (Power of Attorney).

Hiring a tax pro is important because they can help you identify any potential mistakes, inaccuracies, or discrepancies before the auditor finds them. The tax pro can also advise you on what that could mean for you, how you can mitigate the consequences of that problem, and the best way to address it during the audit. If it turns out that one or more sales tax payments weren’t made on purpose (or someone purposely falsified a sales tax return), it’s highly advisable that the services of a tax attorney are retained given the possibility of criminal charges.

Regardless of whether you hire someone, one thing you’re almost guaranteed to need to do is to gather documents and records that the auditor is likely to request. You may also want to write out any operating procedures or policies if they’re not already memorialized in a formal document or handbook. The key here is to have good record-keeping procedures in place to ensure you have the information readily available during the audit. 

Michigan Sales Tax Audit FAQs 

How does the Michigan Department of Treasury choose who to audit? 

They usually use computer software to analyze a taxpayer’s financial and tax information. But an audit is also possible if a whistleblower claims a business isn’t meeting its sales tax compliance responsibilities. 

What sort of documents do I need to provide during a sales tax audit? 

There is a plethora of documents potentially subject to review during a Michigan sales tax audit. Some of these include:

• Business ledgers
• Daily sales records
• Federal income tax returns for the business
• Profit and loss statements for the business
• Copies of Michigan tax returns and accompanying schedules
• Vendor invoices
• Inventory reports
• Exemption certificates 

Could a sales tax audit lead to criminal charges? 

It’s unlikely, although possible if you intentionally choose not to collect or pay sales taxes. You might also get into criminal trouble if you falsify information on your sales tax return. 

How long do I need to keep sales tax records? 

The Michigan Department of Treasury recommends that you keep copies of all applicable sales tax forms and related documentation for at least six years. This is even though most sales tax audits only go back four years.

Get Audit Representation From the W Tax Group

Sales tax problems are among some of the most tedious and complicated tax problems to deal with. Add the possibility of criminal charges and it’s easy to see why hiring a tax professional is usually a good idea. If you’ve just been notified that the Michigan Department of Treasury wants to audit your sales tax returns and records, contact the W Tax Group. You can use our online contact form to schedule a free consultation where we can advise you on the best course of action during your upcoming audit.

Lead Tax Attorney at The W Tax Group

Stephen A Weisberg