Arkansas Sales Tax Audit Readiness Checklist
Sales tax compliance represents a core filing requirement for Arkansas businesses that collect or owe sales tax to customers. The Arkansas Department of Finance and Administration regularly reviews sales tax accounts to verify that tax was collected properly, reported accurately, and paid on time.
A sales tax audit is an administrative examination of your sales tax records, returns, and supporting documentation. Audits happen for many reasons, including random selection, unusual activity patterns, missing filings, prior discrepancies, or changes in business classification.
Understanding what an audit involves and how to prepare your records can reduce confusion, help you organize your documentation, and support clear communication with Arkansas DFA staff. Ignoring audit requests or failing to provide records can lead to additional penalties, interest charges, and enforcement action.
What This Issue Means
A sales tax audit is a formal review by the Arkansas DFA to confirm that your business collected, reported, and paid sales tax correctly during a specific time period. The state examines your sales records, purchase receipts, sales tax returns, tax exemption certificates, and other documentation to verify the accuracy of reported taxable sales and taxes owed.
Why the State Issued This or Requires This
The Arkansas Department of Finance and Administration conducts sales tax audits to verify that sales tax is being collected, reported, and remitted correctly. Audits detect underreporting of taxable sales or tax liability and ensure compliance with Arkansas tax laws and rate changes.
What Happens If This Is Ignored
If an audit notice is ignored or you do not respond by the deadline stated in the notice, the
Arkansas DFA escalates the matter. The state may issue a second or final notice requiring immediate response, proceed with an audit based on available records without your input, estimate your sales and tax due using state formulas, or assess additional tax, penalties, and interest based on estimated liability.
What This Does NOT Mean
Receiving an audit notice does not mean you are being accused of fraud or criminal activity.
Audits are administrative reviews, not criminal investigations, and the notice does not mean you owe additional tax or penalties before the audit is complete.
Checklist: What to Do After Receiving an Audit Notice
- Note the audit period covered and identify the specific records the state is asking for.
- Write down the deadline for responding as stated in the notice.
- Find the contact name, phone number, and email address of the assigned auditor from
- Determine whether the audit is a desk audit conducted by mail or a field audit conducted
Step 1: Read the entire audit notice carefully
the Office of Field Audit. in person.
Step 2: Gather all required sales tax documents
Collect all filed sales tax returns using Form ET-1 for the entire audit period. Gather cash register tapes, point-of-sale system reports, sales journals showing taxable goods transactions, sales invoices, receipts, purchase orders, supplier invoices, bank statements, deposit records, and tax exemption certificates for resale sales or tax-exempt customers.
- Arrange sales documents in chronological order and group sales by category if your
- Create a summary of total sales, tax collected, and tax reported for each month.
- Label and index all documents so they are easy to locate.
- Keep originals in safe storage and prepare copies for submission.
Step 3: Organize records by month and category
system allows.
Step 4: Review your filed returns for accuracy
Compare the sales and tax amounts on your sales tax returns to your sales records. Note any months where reported taxable sales seem inconsistent with actual sales, look for any months you did not file a return when required, flag any corrections or amended returns you filed previously, and prepare a written explanation for any discrepancies you find.
Step 5: Verify your resale certificates and exemptions
Collect all tax exemption certificates from customers who purchase for resale. Confirm that certificates are signed, dated, and contain the customer’s tax identification number, verify that tax exemption documentation covers the products actually purchased, ensure no tax was charged on these sales, and document the names and tax identification numbers of tax-exempt customers.
- State enforcement actions and notices
- Payroll tax debt review and resolution
- Penalty and interest reduction options
- Payment plans and compliance solutions
- Representation before state tax agencies
Step 6: Prepare a cover letter and submit your response
Write a brief letter introducing your response and include your business name, sales tax account number, business information, and the audit period. List all documents enclosed, note any questions or concerns you want to discuss with the auditor, submit clear, legible copies by the deadline shown on the notice, and request a delivery confirmation.
What Happens After This Is Completed
After you submit your audit response, the Arkansas DFA acknowledges receipt of your documents and reviews them for completeness. A detailed examination of your records follows, with the Arkansas Department of Finance and Administration comparing reported sales to actual sales, tax collected to tax reported, and claimed exemptions to supporting documentation.
Your assigned auditor contacts you if additional information is needed or if discrepancies are found. Once the state completes the audit and prepares a formal audit report, you receive a deadline to pay or request additional review if the state determines additional tax is owed.
Common Mistakes to Avoid
Missing the response deadline is one of the most common mistakes. Not responding by the deadline allows the audit to proceed without your input or may result in estimated assessments being issued.
Submitting incomplete records forces the auditor to request them again and raises concerns.
Failing to respond to follow-up requests stops the audit process and increases the likelihood of estimated assessments or penalties.
Not keeping copies of your submission prevents you from tracking what information the auditor has already received. Mishandling resale certificates or tax exemption documentation is a common audit finding that can result in back tax assessments.
Frequently Asked Questions
What is the difference between a desk audit and a field audit?
A desk audit is conducted by mail or email when you send records to the auditor for review. A field audit is conducted in person at your business location and allows the auditor to verify records, review taxable goods inventory, and observe your business operations.
Can I request an extension to gather my records?
Contact the assigned auditor in writing before the deadline stated in the notice and explain why you need more time. The state may grant an extension at its discretion, but extensions are not automatic.
What if I disagree with the audit findings?
Appeals to the Arkansas Tax Appeals Commission must be filed within ninety days of the date of the Arkansas DFA action or decision. Some expedited cases have shorter deadlines, so review the specific deadline stated in your assessment notice carefully.
What happens if I cannot find all my records?
Explain what you have and why the records are unavailable. The auditor will use available records to conduct the audit, though estimated assessments may be used if records are too incomplete to verify actual liability.
Can the audit period be extended beyond the initial period listed in the notice?
Arkansas tax laws establish a three-year statute of limitations from the return due date or filing date, whichever is later. If a taxpayer understates tax due by twenty-five percent or more, the statute extends to six years.
What documents should I keep related to my business registration?
Maintain your current business license, registration documents, and updated business information throughout the audit period to demonstrate compliance with state requirements.
Facing State Enforcement or Payroll Tax Issues?
If you’ve received a state tax notice and aren’t sure how to respond, we can help you review your options and next steps.
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