How Corporations Find Millions in Their Historical Accounts Payable Data
Reverse audits have been around for decades. Basically, an accountant knocks on your door and tells you:
"Send me your AP data, and if I can get the State Tax Department to refund you for any sales tax paid in error, you'll pay me one-third of that."
What the accountant will be looking for are 'exempt purchases': things bought and used that are considered exempt by the State in which the client resides. For us Ohioans, we see many companies overpay sales tax on items that go into manufacturing lines (if you're feeling super nerdy, check out the Ohio Tax Code on manufacturing exemptions here).
This is a really powerful model:
"If I don't find any money in your data, you don't have to pay me anything. But if I do, we both win.
Indeed, it sounds very similar to an injury lawyer.
Sales tax is only 5-8% per invoice, but given how many things corporations buy on an annual basis, it adds up... For medium- to large-sized companies, they are paying millions in sales tax annually.
Reverse auditors happily spend months digging through the data - typically 15-20% of tax paid is in error! Some invoices (e.g. on large manufacturing equipment) can have $50k in erroneous sales tax on it... That's !JACKPOT! for both the client and the accountant.
For large corporations, a Director of Tax or VP of Finance can be considered a hero when he/she brings in a large reverse audit check, perhaps timed perfectly in an otherwise disappointing quarter.
But what happens next?
After the State Tax Department receives a refund claim for a million bucks, the first thing they do is hit the claimant with a regular audit. So now you have a refund check in the mail for all your overpayments, but also an auditor digging through your AP data looking for underpayments.
This can get pretty costly: the average audit costs $114,000 to manage - and that doesn't include any liabilities! And given that the accountant who did the reverse audit has a conflict of interest to find any underpayments (which reduce the net refund and thus his/her 33% fee), the State will likely find some liabilities in the data.
IF ONLY:
- 0% contingency fee AP analyses existed, to give companies insights into both over- AND underpayments of sales tax, at no cost.
- Or even better: what if companies were able to catch any over- and underpayments before they even occurred (perhaps using machine learning?!).
We're a team of tax experts and data geeks - Follow us on our journey @Prophit.ai to create this ultimate sales tax killer app.