Understanding the CDTFA Audit Process
When it comes to tax audits, most people’s minds immediately think about the IRS. But if you’re doing business in California, the California Department of Tax and Fee Administration (CDTFA) is the agency responsible for state sales tax and potential audits. The CDTFA generally reviews retailers who sell items at a retail price; and that tax calculation is based on the gross receipts obtained from the retail sales. If you are a California business owner, you may find yourself in a situation where you need to work with the CDTFA on a potential audit. The CDTFA works in three areas: audits, appeals and collections. Let’s look at those areas and what you need to know as a San Francisco business owner.
The CDTFA carries out its audit 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 taxpayer’s records and the sales reported on the taxpayer’s 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 summary that can be very difficult to understand.
Many CDTFA audits are strictly routine. However, there are some red flags that may trigger the CDTFA to take a closer look at your business and start an audit. These situations include inconsistent tax reporting, including discrepancies in reported sales. High-risk industries, including restaurants, liquor stores and construction, are more commonly audited. Businesses with frequent amendments or late filings may also be red flags, as well as those with an audit history.
The second area the CDTFA is responsible for is appeals. Once you receive the audit report, take the time to read it thoroughly, preferably with an experienced sales tax attorney. The report will include detailed information about the findings, the basis for the assessment and any penalties or interest due. Gather documentation to support your appeal and then file a petition for reconsideration.
After reviewing your petition, the CDTFA may invite you to a pre-appeals conference, which is designed to help resolve the dispute before it proceeds further in the appeals process. If the pre-appeals conference does not lead to a resolution, you have the right to an appeals hearing. This formal hearing is conducted by the Office of Tax Appeals (OTA), an independent body that reviews disputes between taxpayers and the CDTFA.
Finally, if the audit is not challenged, or you’ve gone through the appeals process, you will then move on to paying what is owed. Generally after your audit, you can work with the CDTFA Settlement program. The CDTFA will allow the taxpayer an option for settlement and you can settle your case with the agency’s settlement division once the petition has been filed. Many audits arising from sales tax have been amicably resolved at the CDTFA settlement division. As a business owner, you want to avoid tax liens, levies and garnishments at all costs. Working with an experienced California tax attorney can help you find the best way to settle your tax burden with the CDTFA at the end of the audit or through the settlement program.
While a CDTFA audit may sound scary, it’s a common occurrence for many California business owners. Do not try to navigate a CDTFA audit on your own. It’s always best to work with an experienced San Francisco tax attorney who can help you see your way through the process.
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.
