If you’re a business owner in California, you should be familiar with the CDTFA. The California Department of Tax and Fee Administration (CDTFA) is responsible for administering sales and use taxes, among other taxes and fees, which are vital to the state’s economy. The CDTFA focuses on sales tax audits to verify that businesses are accurately reporting and paying taxes. They generally review retailers who sell items at a retail price, and the tax calculation is based on the gross receipts obtained from the retail sales. I’m often asked by San Francisco business owners if they should be worried about a CDTFA audit? As a sales tax audit attorney, here’s what I recommend you know about a CDTFA audit.
The CDTFA is known for its distinctive audits, which are generally conducted every three years. The department carries out its audits by employing a variety of tests and techniques, and the test is influenced by the type of business being audited. The initial test carried out by the CDTFA is an in-depth comparison of the sales recorded in the business’ records and the sales reported on the sales tax return.
In addition, the CDTFA can perform a mark-up test, cash vs. credit test, use tax test, alcohol pour test, Amazon sales test, hot vs. cold, in-store and to-go test, etc. Each industry has its own set of standard tests. The CDTFA audits are very aggressive and clients are presented with a very detailed Excel spreadsheet summary that can be very difficult to understand. It’s generally advisable to work with a California sales tax lawyer to help you navigate a sales tax audit and advise you on your options if you obtain a large sales tax bill.
Common Triggers for a CDTFA Audit
While CDTFA audits can be routine, certain red flags may increase the likelihood of your business being audited. These may include the following situations:
- Inconsistent tax reporting: Discrepancies in reported sales or tax liabilities from year to year are common audit triggers
- High-risk industry: Some industries, such as restaurants, liquor stores and construction, are more frequently audited due to the complexity and variability of their transactions
- Frequent amendments or late filings: Regularly amending tax returns or consistently filing late are also red flags — not just to the CDTFA, but to the IRS as well
- Audit history: If your business has been audited in the past and discrepancies were found, CDTFA may conduct follow-up audits
- Third-party reports: Sometimes when customers, vendors or other third parties make reports that contradict your figures, those notifications may trigger an audit
If your business is selected for a CDTFA audit, you will receive an official notice in the mail informing you of the audit, including its scope and the period it will cover. The auditor will then request records, which may include sales receipts, invoices, tax returns and financial statements. The auditor may also conduct interviews with business owners and employees. If deemed necessary, the auditor may also visit the business premises to understand operations better. After reviewing the documents, interviews and information gathered, the auditor will present their initial findings and give the business owner the opportunity to discuss or dispute any discrepancies. Finally, the auditor will issue a final report, which could result in a determination of additional taxes owed, refunds due or no change.
Do not try to navigate a CDTFA audit on your own. Reach out to an experienced California tax audit attorney or CDTFA audit lawyer to help you navigate a sales tax audit and advise you on your options if you obtain a large sales tax bill.
Allison Soares is a partner and tax attorney at Vanst Law LLP. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits from San Francisco to San Diego.
