Connecticut Sales Tax Audit Readiness Checklist
Introduction
Connecticut sales tax is collected at the point of sale, and the Department of Revenue Services reviews tax filings to confirm proper reporting under state taxes and sales and use taxes rules.
The audit process can span several tax return periods and may encompass sales records, sales tax payments, and exemption documentation.
An audit notice does not imply wrongdoing, yet it signals that the State of Connecticut expects timely cooperation and organized documentation. Preparation reduces estimated assessments
and supports accurate review under tax laws and relevant guidance, including SN 91(17) and
SN 92(6).
What This Issue Means
A sales and use tax audit is a structured review conducted by the Connecticut Department of
Revenue Services to verify the accuracy of sales tax returns and ensure the proper application of sales tax rates. The auditor may request documents for sales and use taxes, resale of services, and taxable categories, such as motor vehicle rentals or luxury items.
The review commonly compares reported totals to supporting sales records, bank activity, and bookkeeping services outputs, then tests exemption documentation tied to a sales and use tax permit. When documents are incomplete, the state may estimate liabilities using available information and state sales tax rate benchmarks.
Why the State Issued This or Requires This
The Department of Revenue Services selects accounts for audit based on risk indicators and routine compliance reviews tied to tax obligations and business activities. Triggers can include economic nexus concerns for out-of-state sellers, inconsistent tax filings, unusual sales tax payments, or mismatches with reported property tax or corporation business tax data.
Some cases originate from whistleblower complaints, referrals, or broader program reviews, including oversight themes similar to those found in performance audits led by state auditors and Auditors of Public Accounts. Selection does not mean fraud, yet it places the business within a formal review channel governed by state rules and administrative procedures.
What Happens If This Is Ignored
Ignoring the audit notice typically results in an estimated assessment based on incomplete documentation, often leading to an increased sales and use tax exposure beyond the actual liability. Interest and penalties accrue, and the state may move toward collection steps that complicate future operations under a seller’s permit.
Nonresponse can also increase scrutiny on internal control practices, including how invoices are retained and how transactions are coded in accounting systems or CORE CT-facing documentation. Continued inaction may result in enforcement steps affecting permits and registration, which are separate from Internal Revenue Service matters, such as federal income tax.
What This Does Not Mean
An audit notice does not mean the Department of Revenue Services has determined that fraud or criminal conduct has occurred, and it does not automatically involve certified fraud examiners. It also does not mean the Internal Revenue Service is auditing federal income tax,
Payroll Tax, Schedule C activity, or Federal Form 1040 filings.
The notice does not automatically suspend the sales and use tax permit, and it does not require hiring a sales tax attorney or Tax Preparation Service provider. Many businesses conduct audits using internal staff, although audit support services and certified public accountants can provide valuable assistance to the organization.
Checklist: What to Do After Receiving an Audit Notice
Step 1: Read the notice and confirm the scope
Confirm the audit period, requested tax return types, and response deadline. Record the auditor’s contact details for follow-ups and extension requests.
Step 2: Confirm registration and filing profile
Verify the sales and use tax permit status and confirm Form OS-114 filings posted for the period.
Check for economic nexus exposure tied to sales thresholds and out-of-state sellers.
Step 3: Assemble core sales records
Gather invoices, receipts, point-of-sale exports, and schedules that reconcile to reported totals.
Include both taxable and nontaxable sales, as well as any scenarios involving bundling rules.
Step 4: Organize exemption and resale support
Compile exemption certificates and resale documentation supporting tax-exempt sales and resale of services, if applicable. Confirm completeness, consistent customer identifiers, and alignment with sales and use tax rules.
Step 5: Reconcile payments and ledger activity
Match sales tax payments to bank statements and accounting entries to confirm timing and amounts. If bookkeeping services are used, request an exportable audit package.
Step 6: Flag special transaction types
Maintain separate records for motor vehicle rentals, shipping charges, and luxury items that frequently draw audit attention. Document any tax credits and retain support for offsets or adjustments.
Step 7: Build a submission index and short narrative
Create an index listing each file, period, and record type, following the auditor’s request list.
Explain any gaps, such as system changes or document loss, with supporting notes.
Step 8: Preserve copies and proof of submission
Submit copies unless originals are required, and keep identical backups for internal control.
Save tracking numbers or portal confirmations with file names and timestamps for easy reference.
Step 9: Submit correctly and manage follow-ups
Use the required delivery method and respond quickly to auditor questions with targeted support. Track each request by date and tie responses to sales tax return line items.
- State enforcement notices and responses
- Sales tax audits, assessments, and collections
- Payroll & trust fund tax enforcement issues
- Penalty and interest reduction options
- Payment plans and state tax relief eligibility
- Representation before state tax agencies
Step 10: Maintain current compliance during the audit
Continue to file taxes and make sales tax payments on time for the current periods while the review is active. Keep Payroll Tax and other state taxes separate to avoid confusion or misapplied payments.
What Happens After This Is Completed
After submission, the auditor reviews sales records, tests exemptions, and reconciles reported amounts against account history. They may then request additional documentation before issuing a written report of findings. If additional liability is assessed, the business receives a notice explaining the amounts due and the appeal timelines. Overpayments may be credited, subject to refund limits and the required documentation.
Common Mistakes to Avoid
Missing the deadline can trigger an estimated assessment that is difficult to reverse without complete records and a clear explanation. Incomplete exemption support often leads to avoidable adjustments. Treating audit requests like tax preparation services intake instead of a legal documentation requirement, or mixing property tax and corporate business tax details with sales and use tax records, can delay review and create confusion.
Frequently Asked Questions
Does an audit mean wrongdoing was found?
No, an audit notice starts a review and does not mean fraud or that a final decision has already been made. Many audits end with minor changes or no change when the records are complete.
Can a business use outside help?
Yes, a business may use certified public accountants, audit support services, or a sales tax attorney, though it is not required. Some companies also utilize bookkeeping services or accounting outsourcing to enhance their financial records.
Will the Internal Revenue Service be involved?
Not necessarily, since Connecticut sales tax audits are separate from federal income tax and
Internal Revenue Service review processes, federal issues, such as ITIN application, Form
8843, or Form 1042-S, are unrelated unless they are separately opened.
What records matter most?
Sales records, exemption documentation, Form OS-114 filings, and proof of sales tax payments carry the most weight in the audit process. Clear reconciliation to reported totals is usually the key to reducing adjustments.
Can the state expand the scope of the audit?
Yes, if patterns suggest broader issues, the auditor may extend the lookback or request additional periods, as per standard practice. Maintaining current compliance helps reduce the likelihood of a more extensive review.
Closing
Sales tax audits are manageable when records stay organized, deadlines are met, and communication remains consistent with the Department of Revenue Services, supported by accurate tax filings, traceable sales tax payments, and complete exemption documentation.
When the audit process is treated as structured verification, strong internal controls and ongoing compliance reduce future audit risk and support stable operations in Connecticut.
Facing State Enforcement Action?
If you’ve received a notice related to sales tax or payroll tax enforcement and are unsure how to respond, our team can help you understand your options and next steps.
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