May 24th 2010
If you work at a corporation or at an accounting/consulting firm, then you probably know what I mean by "reverse audit." Usually an outside accounting/consulting firm would approach a company, and propose to conduct a reverse audit of a company's state income tax or sales tax returns, etc. on a contingency fee basis. Meaning, the firm would review the company's records to identify refunds. If the firm finds refund opportunities and files claims, the consulting firm would get paid a percentage of the refund claims filed. If the firm finds nothing, the firm gets paid nothing. Do You See A Problem With This? Well, I recently heard another practitioner state that consulting firms should not only look for refund opportunities, but they should also look for deficiencies. Why? Well, when the company files the refund claims that the firm has identified, most likely the company will get audited. If the company has any major deficiencies, then the deficiencies could reduce or eliminate the refund opportunities the consulting firm identified. Solution? The consulting firm should be a true "state and local tax partner" and identify both refund opportunities and deficiencies. The firm's fee should be based (if done on a contingency fee basis) on a percentage of the net refund after audit. Does that make sense? I am not suggesting that all work or any work should or should not be done on a contingency basis. In some cases, a contingency fee is allowed and appropriate. However, my point is that when firms engage in "reverse audits" where their fee is based on a percentage of the refunds received by the client, the consultant may acquire "tunnel vision" and not provide the client with the best all around advice. SALT consultants should be their client's "partners" and not "one-hit wonders." What do you think?