If you think the only tax audit that your business will face is from the IRS, think again! The California Department of Tax and Fee Administration (CDTFA) is known for its distinctive sales tax audits. The CDTFA generally reviews retailers who sell items at a retail price and the tax calculation is based on the gross receipts obtained from the retail sales. There are several reasons the CDTFA may audit your San Francisco business, including inconsistent tax reporting, late filings and a history of audits. If your San Francisco business faces an audit, you want to be as prepared as possible. Here are six tips for handling a CDTFA audit.
Have all the possible documents ready — Aside from general auditing documents, your CDTFA auditor will likely ask for specific business documents. These may include: resale certification, purchase orders, delivery receipts, and freight invoices. Have copies of these documents ready to present to the auditor upon request.
Understand tax obligations — Be aware of the specific tax obligations and regulations that apply to your business. Misunderstandings or misinterpretations can lead to costly penalties.
Maintain detailed records — Accurate and thorough records of sales, use taxes and other transactions are essential. This will help substantiate your reporting to the CDTFA.
Disclose any known errors to the auditor upfront — Don’t make the mistake of trying to keep information from your auditor if you fear it will put you in a bad light. Withholding information and errors will actually do more harm than good when it comes to a CDFTA audit.
Assign a company audit representative — It’s best to designate one person from your company to work with the CDTFA auditor to keep communication lines clear. That keeps the information streamlined for your company, as well as making it easier for the auditor.
Work with an experienced tax expert — The CDTFA audits are very aggressive and clients are presented with a very detailed Excel summary that can be difficult to understand. Do not try to navigate this by yourself. Reach out to an experienced CDTFA audit attorney to help you with a sales tax audit and advise you on your options if you obtain a large sales tax bill.
CDTFA audits are not easy to navigate. Make sure to maintain detailed records and present the auditor with any information they may need. Additionally, designate one company representative to work with the CDTFA auditor and disclose any errors or tax omissions up front. Finally, always work with an experienced CDTFA tax lawyer who can help you see your way through the audit.
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.
