Checking your tax accrual process for accuracy is something that every company needs to make a habit and that is why blog number 7 is crucial for your success.
Performing periodic vendor reviews is a great way for tax departments to mitigate audit surprises and increase their value within the organization. The frequency for these reviews can vary, based on the size of the organization, the complexity of the industry, the integrity of the procurement data, and the number of vendors regularly used for purchases. However, they should generally be performed at least once or twice a year.
The best way to start these reviews is to pull together some general analytics on your vendors. Try to compile a schedule to illustrate the following for each vendor over the last 12 months:
- The spend that occurred;
- The sales tax paid;
- The use tax accrued; and
- The total transaction volume.
Having the above information in a single spreadsheet should allow you to efficiently identify the vendors for your review. Depending on the size of your organization, try to select the top 5 to 10 vendors that appear in each group. This should ensure your review contains a good cross section of the different factors that may come into play under audit.
Upon compiling your vendor review list, pull at least 5 invoices from each vendor on your list. Attempt to include invoices with different periods, types of purchases (merchandise vs. services), purchasing methods (PO vs. Non-PO), and buyers. Much like the methodology described above for selecting specific vendors, this methodology should also provide a good cross section for potential error identification.
When reviewing invoices, pay particular attention to each vendor’s taxability determinations, rate calculations, and shipping locations. Focusing on these three areas should allow you to identify the major problems your vendors may be making on your purchases. Time permitting, it’s also good to track the invoices from procurement to payment in your system. This should allow you to further identify if any internal coding issues were the root cause of an error.
The final steps in the review process is education and correction. Internally, you should educate buyers and/or the individuals responsible for accruals on the type of issues you identified. You should also attempt to book corrective journal entries to resolve as many errors as possible. Externally, you should contact those vendors with significant errors and discuss the following:
- Specific process changes that may be warranted;
- Resolution options for the identified invoices;
- Proactive invoice planning to mitigate future errors; and
- Suggested protocol for future issues or follow up.
There’s obviously a significant time commitment in performing these reviews. However, the tangible and intangible benefits you should receive will be extremely valuable to both you and your organization.