How Dentists Can Avoid Costly Audit Mistakes
November 14, 2022
At a glance
- The main takeaway: Audits can be both time-consuming and complex — but with proper preparation, dental practice owners can avoid mistakes and save tax dollars.
- Impact on your practice: Know what types of audits to expect and enlist the help of a professional team to conduct ample preparation and avoid surprises.
- Next steps: Aprio’s National Dental Team has both the technical and industry-specific expertise dentists need to navigate audits seamlessly.
The full story:
The word, “audit,” can strike fear in the heart of any practice owner, and it’s easy to understand why. Audits can happen at any time, and they can be complex and time-consuming. But I am here to debunk that myth and hopefully ease the stress that comes with the process. With the right, proactive preparation and processes in place, dental practice owners can have a streamlined audit experience and ultimately save headaches and tax dollars.
Here are a few best practices to keep in mind when thinking about your next audit.
First, know what types of audits you may face
In the dentistry world, there are several different types of audits to be mindful of and prepare for, including:
- Worker’s compensation audits: This audit happens once a year and is typically handled by the insurance company that holds your worker’s compensation policy. The insurance company compares their estimates for the premium cost with actual scenarios involving workers in your practice over a given time frame. This audit helps the insurance company true up what your premium cost should be and renew the price for the following year.
- Employee and payroll audits: These audits are less common and typically happen once every few years. Your state will audit employment records for a certain percentage of operational businesses in a calendar year. If your business is chosen, the state auditor will contact you via a letter in the mail and request documents (for instance, proof of hours worked within the year) to verify employee-type compliance. The best way to prepare for a payroll audit is to work closely with a third-party payroll provider, one who can handle and organize the process on your behalf. In addition to reviewing essential payroll documents, the state auditor will also review any contract laborers your practice employs (contract laborers typically use their own tools, make their own hours and don’t need to be directly supervised). If you employ contract laborers, make sure you understand your state’s expectations, especially from a payroll perspective.
- State sales tax audits: These are often the most cumbersome audits that dental practices face. Your practice can be audited for up to seven years’ worth of sales tax, and everything you have had to pay sales tax on will be reviewed — including equipment shipping (depending on the state), medical and office supplies, miscellaneous purchases of tangible goods, and subscriptions or services from which you receive a physical item.
Know what to expect
I will use the state sales tax audit as an example of what you should expect from the process, since it is unfortunately the most laborious audit in which both advance preparation and organization matter immensely. At Aprio, our dental tax and audit professionals typically approach the process in three phases:
Phase 1: The introduction
A state sales tax audit begins with the information document request (IDR), which you will receive from your state sales tax auditor. At this point, our team gathers all of the information requested by the IDR, which usually includes additional information about your practice, historical tax information, purchase invoices and accounting reports, among other documents. Our clients will typically send us a variety of financial documents we can use to glean this information, such as bank statements, credit cards and any sales tax filings they have completed in the past. We send all of this information back to the state auditor for review.
Phase 2: Review the state’s findings
After you provide the IDR documentation, your state auditor will spend a few weeks going through the records and comparing the data they have on file with expectations. For example, if the auditor sees you purchased equipment for your dental practice, they will verify that you paid the correct state sales tax for those items.
Once the auditor has reviewed the IDR documentation, they will send back their “findings,” which is essentially a list of vendors and transactions they feel you didn’t correctly report for sales tax. This is where the help of a specialized team is essential. Professionals like Aprio have deep expertise in state sales and use tax laws and are able to apply that critical thinking to auditors’ findings. At Aprio, our team reviews the state’s findings and not only provides education on the state tax code, but also informs clients about the nuances of dental-specific vendors that render them exempt from sales tax.
After taking our first pass at narrowing down those transactions and providing detailed arguments, we work with our clients to collect invoices or receipts substantiating that they properly collected sales tax. One of the best ways to be certain of proper sales tax collection is to work with local or extremely reputable vendors. We have worked with clients in the past who have used smaller vendors with a strictly virtual presence who don’t understand the nuances of sales tax for the client’s particular state. Keeping detailed records and working with reputable vendors from the outset will save you a lot of headaches and money in the long run.
Once this phase is complete, we send all supporting documents to the state auditor so they can update their findings.
Phase 3: Accept the state’s findings and prepare next steps
The state will send you a final bill that includes tax, penalties and interest. These amounts are all based on the number of findings collected by the auditor. Once you receive the bill, you may decide to submit a penalty waiver to your state, so long as you pay the tax and interest due in full at the time of billing.
The bottom line
Being current on all of your sales tax filings and double-checking all of your invoices for appropriate sales tax are just two proactive steps you can take to get ahead of a potential audit. The third step you can take is enlisting the help of a qualified, professional team to coordinate the process, minimize risk and identify opportunities to save tax dollars.
With both industry-specific and audit expertise spanning decades, Aprio’s National Dental Team can be the trusted advisor you need on your team in the event of an audit. We know what auditors look for and can help you prepare for requests far in advance so there are no hectic surprises come audit time.
Schedule a free consultation with our team today to learn more.