CALIFORNIA SALES TAX AUDIT & BOE AUDIT: expert san diego tax attorneys help prevent costly problems
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.
What Triggers a California Sales Tax Audit?
CDTFA has a few reasons to suspect that the business is understating their sales tax. This occurs when there is a discrepancy between the sales tax returns filed with CDTFA and IRS. Another reason is if you are paying sales tax but are not registered with the CDTFA. The CDTFA also pays close attention to significant increase or decrease in sales. Lastly, the CDTFA might want to look at your books if there was a major change in your business, like new owners or you sold off the business. The goal is to make sure there is compliance with the laws and to collect all the tax that is due.
Some common triggers the CDTFA looks at to determine if they will conduct an audit are:
- Unusual Discrepancies in Tax Returns: If there are sudden drops or spikes in reported sales and/or frequent amendments to the tax returns, this could give cause for the CDTFA to warrant a closer look into your books. In addition, if you consistently file or report late, this is a major red flag for the CDTFA.
- Random Selection: The CDTFA has the power to randomly audit business to ensure there is an overall compliance across various industries.
Informant Tips and Whistleblower Reports The CDTFA receives anonymous tips regarding potential tax evasion; the CDTFA will conduct a validity assessment of the claim before acting. The CDTFA takes these tips very seriously.
- Complex Business Structures: Complex business structures (including multiple business entities or subsidiaries) could also trigger an audit, because intercompany transactions require a more thorough examination. Furthermore, if one of your vendors gets audits, you might be on the list as well. This is called an audit by association.
- Not Registering Your Company: This is a critical aspect of tax compliance, as tax authorities rely on accurate and up-to-date records to assess and collect taxes.
- High Volume of Cash Transactions: High cash volume businesses are at a higher risk of an audit, because the possibility of unreported cash transactions are higher.
Other Industry-Specific Triggers
Certain industries could trigger an audit. Some industries are known to not comply with sales tax laws. These industries usually involve cash transactions One example is E-commerce and online retailers businesses. CDTFA worries that sales could be underreported, because sales move across state lines. In addition, auditing E-commerce helps ensure compliance by third-party platforms. Another industry is hospitality and food services. These audits help the CDTFA enforce compliance with special food tax rates and tips/gratuities are reported correctly.
The CDTFA also closely monitors construction and contracting businesses. The goal of the audit is to confirm workers are classified correctly and materials are labeled correctly as taxable or non-taxable. The last industry is manufacturing and wholesale. These industries have a lot of moving parts; the CDTFA audits these industries to monitor certificates and track exempt sales.
Data Analysis and Technology
Another reason your company can get audited is due to technology forensics. The CDTFA has automated data matching software; the software will cross-reference sales data with other sources and identify inconsistencies and anomalies. Another tool the CDTFA uses is predictive analysis. The CDTFA looks at historical data and identifies high-risk businesses. These tools allow the CDTFA to allocate the audit resources effectively.
Reducing the Risk of a California Sales Tax Audit
You can reduce the risk of a California Sales Tax Audit by filing and reporting your sales tax on time. In addition, you should keep an accurate and organized record. In addition, you can protect yourself by keeping digital records in storage and/or backups.. If you need help, you can always contact the professional tax advisors here at Dallo Law Group.
To reduce the risk of an audit, you should be transparent with your communication. You should respond promptly to state inquiries and demonstrate a willingness to cooperate.
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
Form CDTFA–503 – ABC Letter Procedure
What happens when CDTFA during an audit believes a certain item is taxable and you do not think so? Well, the answer is the Form CDTFA–503 — ABC Letter procedure. The CDTFA developed this procedure for you to prove that the item is not taxable. Some reasons that you do not need to pay include the vendor already paid the tax, the item is not subject to taxation, and/or the item is reported somewhere else.
When applicable, the auditor will sit down and explain the “ABC Letter procedure.” The auditor will inform you that the procedure alone does not relieve you of your duty to pay tax, but other evidence might be considered. After the meeting, you will have four weeks to reach out to the vendors and gather documentation to be sent to the CDTFA. The vendor will have ten days to reply to your request. You should plan on having all the documents from the vendor sent directly to the CDTFA. In California, you will be allowed to customize your “ABC” cover letter, so long as the format adheres to the CDFTA rules.
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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.
Can I still be audited even if I am no longer in business?
Yes, you can! The IRS/state-agency can still conduct audits. Generally, the federal statute of limitation runs for three years and California statute of limitation runs for four years. During these times, you can still be held liable for any tax owed.