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CALIFORNIA SALES TAX AUDIT & BOE AUDIT

The California State Board of Equalization (BOE) is the agency responsible for enforcing the sales tax laws of California.  If you operate a retail establishment which engages in taxable sales with your customers, you have a duty to withhold those sales taxes from your customers in trust for the California government and to remit those taxes to the State Board of Equalization (SBE).

While all tax audits can be extremely burdensome and nerve-racking for any taxpayer, sales tax audits pose additional concerns for a business person.  The failure to maintain adequate books and records can prove disastrous and costly for the taxpayer as the SBE may determine that you owe an exorbitant amount of sales taxes and you may find it difficult to prove the contrary. Furthermore, the State Board of Equalization (SBE) has the power to shut down your business for failure to pay sales tax as well as imposing criminal penalties for doing so.  Finally, the State Board of Equalization (SBE) can seek to obtain payment of sales tax liability from the responsible individuals of the business and can levy their personal assets if payment can’t be obtained from the business.

THE CALIFORNIA SALES & USE TAX AUDIT PROCESS

When it comes to running a large and intricate state like California the right amount of revenue and management is necessary. The public agency that has the authority for the state’s sales, use, and excise tax administration and collection is the California Department of Tax and Fee Administration. Vital California programs such as the state’s public parks, playgrounds, roads, and schools all rely on the funds that the CDTFA generates and collects through sales and use taxes, property taxes, and other special taxes.

Because so many of the state’s essential programs rely heavily on these tax funds, it is easy to understand why enforcement of the laws that help maintain the tax revenue is crucial, as such the CDTFA’s primary goal is in regularly enforcing the tax code. This task is accomplished by carrying out audits to ensure that retailers are properly and accurately collecting, recording, reporting and paying sales and use tax. You can be assured that a CDTFA sales tax audit means serious business and the agency is ruthless in its pursuit to uncover any wrongdoings, omissions, errors, or fraud in the area of retailers’ sales and use tax.

Once your business is contacted (likely by mail), you will be asked to respond to an audit engagement letter where the terms of the process will be explained. You will also be requested to attend a call or meeting. During that time, you will be supplied with a list of the documents and records that you need to provide for examination.

Next, you will be given a timeframe to gather the materials requested for the investigation. If you need more time, you may be asked to sign a waiver: the California sales tax audit statute of limitation. This document extends legal requirements if the auditor finds additional tax liabilities owed. Additionally, you may also be asked to sign a Waiver of Credit Interest which can clear the CDTFA of interest owed if the auditor finds a refund or credit owed to you. It is always a good idea to have such documents reviewed by a tax attorney before signing to determine if you should sign it.

PREPARING FOR THE BOARD OF EQUALIZATION AUDIT

Your preparation for the CDTFA audit is paramount to having the process go as well as possible. Carefully follow directions and thoughtfully consider supplying the documents which were requested of you. Some typical records include:

  • general ledger

  • sales and use tax returns and worksheets

  • state and federal income tax returns

  • sales invoices

  • purchase invoices

  • cash register receipts

  • property tax statements

  • documentation supporting any exempt sales

WHAT TO EXPECT DURING THE CALIFORNIA TAX AUDIT

During the CDTFA sales tax audit you can expect a certain process. Namely, the auditor will be trying to find any discrepancies between your records and your tax return. There will be different ways the auditor will try to draw comparisons and come to reasonable conclusions with the evidence provided combined with industry standards. Furthermore, investigations typically begin with intentions of uncovering simple mistakes and may lead to blatant and willful evasions or even fraud, depending on the circumstances

AFTER THE BOARD OF EQUALIZATION AUDIT

Upon review and final completion of the California sales tax audit an exit meeting will be scheduled and during that time you will be given a Report of Field Audit. This document will outline the investigation and findings. At this point you may choose to accept the conclusions or you may raise issue with any points. If you disagree with any details you are welcome to provide more records or evidence to counter and ask for further review. The final report will then be drafted by the auditor and documented in A Notice of Determination which will state the taxes you owe. On the other hand, if the findings uncover a refund you are due, you can expect a check with 4-6 weeks, unless you have an outstanding tax debt where it will be applied. You may also file an appeal, which must be done within 30 days.

CALIFORNIA SALES TAX AUDIT HELP

BOE sales tax audits can be extremely complex and technical.  To adequately represent you in a sales tax audit, you need the technical and tax experience of a certified public accountant to properly determine the amount of sales tax you are responsible for, as well as the creativity, analytical abilities, and negotiation skills of a tax lawyer with a Masters of Law in Taxation.  Dallo Law Group has qualified tax professionals who can help you resolve your sales tax dispute.

Contact us today for a free consultation!

CALIFORNIA SALES TAX AUDIT FAQS

What triggers a California tax audit?
A sales tax audit occurs when the California CDTFA suspects a business’s reported sales have not been reported at all or have been understated. Particularly, this inconsistency occurs in situations where there is an incompatible number between the sales tax returns filed with the state and what was reported to the IRS. In addition to such discrepancy with reported sales, random audits can be scheduled as well. The CDTFA has stated that it will audit nearly one percent of active accounts each year.

How far back can California audit?
In California, the general statute of limitations is three years for taxpayers who have filed tax returns. That means the CDTFA has three years within which they can audit those returns. However, if you fail to file tax returns, the statute of limitations is ongoing.

What should I expect from a sales tax audit?
After notification of your upcoming audit, you will need to supply records. The auditor’s intention is to be able to trace transactions and, if taxable, trace the tax paid or collected on the transaction. Proper recording, matching, and payment of taxes is also important. If there are any issues with records you may be asked for alternative options which will be discussed with the auditor.

How long does a sales tax audit last?
Typically a CDTFA sales tax audit may last from one to six months. The duration depends on a number of variables, including, the level of activity in a particular jurisdiction, deliberation on audit schedules, assessment and potential appeal. In some extreme cases the audit may even extend to years if the retailer is very large and has an extensive scope of activities.