Michigan Sales Tax Audit Readiness Checklist
Introduction
Michigan sales tax applies to most retail sales of tangible goods and certain services. The
Michigan Department of Treasury has the authority to conduct an audit to confirm the proper collection, reporting, and payment of taxes. An audit is a standard administrative review that examines your records, receipts, invoices, and tax returns over a specified period.
Understanding the sales tax audit helps you prepare your documentation, respond on time, and comply with your tax obligations while protecting your taxpayer rights.
What This Issue Means
A Michigan sales and use tax audit is an official review by the Department of Treasury to examine whether you collected, reported, and paid the correct amount of sales tax during a specific period. The audit may focus on a single tax period or cover multiple years. It can be conducted by mail, at your business location, or through a combination of both methods following established audit standards.
Why the State Requires This
The State of Michigan conducts sales and use tax audits to ensure businesses accurately collect and remit sales tax on taxable items. Audits are a routine part of tax administration and help verify the accuracy of filings. Missing returns may trigger audits, inconsistencies between reported sales and tax collected, changes in business structure, or random selection in accordance with audit standards established under the Michigan Administrative Code.
What Happens If This Is Ignored
If you do not respond to an audit notice within the stated deadline, the Michigan Department of
Treasury can proceed with the audit without your records or input. The state may estimate your sales tax liability based on available information, which often results in higher assessments and potential tax debt. The state can issue a notice of assessment for unpaid tax, plus interest and penalties determined under audit standards.
What This Does Not Mean
Receiving an audit notice does not mean you owe taxes or are being prosecuted. It does not automatically result in penalties or interest charges. An audit is an information-gathering process protected under the Taxpayer Rights Rules. You are not required to hire a tax professional or attorney for audit defense, though some businesses choose to do so.
Understanding Your Rights During an Audit
Michigan taxpayer rights protect you throughout the audit process under established Taxpayer
Rights Rules and Taxpayer Advocate guidelines. You are entitled to professional treatment, to understand the audit process, to representation through a power of attorney, and to request an informal conference if you disagree with audit findings. The Michigan Taxpayer Advocate can assist if you experience difficulties during the audit. Small business owners should familiarize themselves with these protections before responding to audit notices.
Checklist: What to Do After Receiving an Audit Notice
Step 1: Read the Audit Notice Completely
Review the entire audit notice to identify the tax types being audited, the specific time period covered, the assigned auditor's contact information, the response deadline, and the particular records requested per audit standards.
Step 2: Identify the Audit Type
Determine whether this is a desk audit or a field audit based on the notice to understand how you will organize and submit your documentation following the established sales tax audit process requirements.
Step 3: Locate and Organize Your Records
Gather all records related to the tax periods listed, including sales tax returns, sales invoices, receipts, bank statements, purchase invoices, exemption certificates for exempt sales, and any prior correspondence with Treasury offices.
Step 4: Calculate Your Sales and Tax Collected
Using the records you gathered, compile total gross sales, taxable items sold, exempt sales with proper exemption certificates, sales tax collected at the applicable sales tax rate, sales tax reported on returns, and any tax deductions claimed.
Step 5: Identify Any Discrepancies or Issues
Before submitting records, review your documentation for consistency and note differences between reported tax and records, months with missing documentation, unusual patterns in tax obligations, and changes in business operations or economic nexus status.
Step 6: Prepare a Transmittal Letter
Write a brief letter to accompany your submission that includes your business name, tax identification number, audit period covered, list of documents enclosed, contact information, and explanation of any discrepancies or missing exemption certificates.
Step 7: Submit Your Records by the Deadline
Follow the submission method specified in the audit notice, whether by mail using certified mail to designated Treasury offices, by email with confirmation, or through Michigan Treasury Online if available for your audit type.
Step 8: Prepare for a Field Audit
If this is a field audit, prepare your workspace by designating a clean, accessible area for the auditor, arranging documents, including exemption certificates and tax deduction records for easy review, ensuring access to relevant staff, and having accounting software available.
Step 9: Document What You Submit
Create a detailed record of your submission, including date of submission, method used, list of documents submitted covering all taxable items and use tax obligations, total number of pages or items, and confirmation number or receipt.
Step 10: Monitor for Auditor Follow-Up
After your submission, the auditor typically reviews the records in accordance with audit standards and may contact you with questions about specific transactions, exemption certificates, tax deductions claimed, or clarification of your sales tax framework and internal controls.
Step 11: Keep Records of All Communications
Save all correspondence with the auditor, including the initial audit notice, your response, and transmittal letter, confirmation of receipt, email, and phone call notes regarding tax obligations, and any interim notices or preliminary findings.
- Missing the submission deadline: The audit notice specifies a deadline for providing
- Submitting incomplete records: If the auditor requests specific documentation, such
- Failing to respond to follow-up requests: After your initial submission, the auditor may
- Not maintaining proper exemption certificates: Many small business owners fail to
- Altering or destroying records: Once an audit notice is issued, do not destroy, alter, or
- State tax notice review and response
- Penalty and interest reduction options
- Payroll and trust fund tax assistance
- Payment plan and relief eligibility review
- Representation with state tax agencies
Step 12: Request an Extension if Needed
If you cannot locate all records, including exemption certificates, or need more time to organize documentation, contact the auditor before the deadline to request a written extension that specifies the new deadline.
What Happens After This Is Completed
After you submit your records, the Department of the Treasury reviews your documentation to verify that sales tax was correctly calculated, collected, and reported under applicable audit standards. The auditor will provide an Audit Report of Findings explaining the results. If adjustments are proposed, you will receive a preliminary audit determination outlining additional sales tax, interest, and penalties owed, along with information about requesting a
Reconsideration of a Preliminary Audit Determination.
Understanding the Informal Conference Process
If you disagree with the audit findings, you are entitled to request an informal conference under the Taxpayer Rights Rules. This process allows you to present additional documentation, explain discrepancies in exemption certificates or tax deductions, and discuss the audit determination with Treasury officials. You may appear personally or designate representation through a power of attorney. The informal conference is not subject to formal administrative procedures but follows guidelines established under the Michigan Administrative Code for
Hearings and Appeals.
Common Mistakes to Avoid records per established audit standards, and submitting documents after this date may result in an assessment based on incomplete information affecting your tax obligations. as exemption certificates for exempt sales or records supporting tax deductions claimed, explain why documents are missing and provide available records rather than estimates. ask additional questions about taxable items, use tax obligations, or internal controls, and delays in responding can extend the audit timeline. collect and maintain valid exemption certificates for wholesale or resale transactions, resulting in disallowed exemptions and additional tax assessments during audits. discard any records, including exemption certificates, sales tax permits, or documentation of tax deductions, as this may be viewed as obstruction.
Frequently Asked Questions
Does an Audit Notice Mean I Owe Taxes?
An audit notice means the Department of Treasury is requesting records to verify your tax obligations and compliance with sales and use taxes. The outcome depends on what the examination reveals.
Can I Refuse to Participate in an Audit?
Michigan tax law authorizes the department to examine books and records to determine tax liability in accordance with established audit standards, and refusing to cooperate typically results in an assessment without your input affecting any tax debt owed.
What Records Should I Keep After the Audit Is Closed?
Michigan tax law requires businesses to retain records, including sales tax returns, exemption certificates, and documentation of tax deductions, for 4 years after the tax is due or the return is filed, whichever is later.
Can I Request Help from the Taxpayer Advocate?
The Michigan Taxpayer Advocate assists taxpayers experiencing difficulties with Treasury offices during audits and can help resolve issues related to the sales tax audit process, informal conference procedures, or protecting your taxpayer rights under established guidelines.
What Is the Voluntary Disclosure Program?
The voluntary disclosure program allows businesses that have not registered for sales tax permits or have unfiled returns to come forward voluntarily, potentially reducing penalties and limiting the audit lookback period for past tax obligations.
Received a State Tax Notice?
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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