When it comes to tax audits, the IRS is not the only organization that can investigate you. The California Department of Tax and Fee Administration (CDTFA), formerly known as the State Board of Equalization (SBOE), focuses on sales tax audits among California residents and tax payers. Their efforts tend to review retailers with gross receipts obtained from the retail sales. Let’s look at how the CDTFA carries out its audits and whether your business is likely to face one.
For a retail audit, CDTFA starts with comparing a business’ sales recorded in the taxpayer’s records with the sales reported on the taxpayer’s sales tax return. The auditor will then determine the perimeters of their audit, which includes the time period being investigated and the CDTFA has three years to start an audit.
When the auditor begins the audit, he will generally ask for specific records from the business owner. These may include balance sheets, ledgers, accounting expenses and revenue, federal and state tax returns, invoices, sales receipts, bank statements, and any other financial documents. Once the auditor has reviewed the financial statements and makes comparisons, it will determine (if any) how much gross revenue has gone unreported and the taxes that are owed on that amount. You will then receive a bill for the amount due, plus interest and penalties.
The CDTFA may conduct a sales tax audit and a payroll tax assessment. Both have similarities and differences. But one of the biggest differences is sales tax liability can be carried out against a responsible individual; not just the company. For example, the CEO, CFO or business owner could be personally response for unpaid taxes; not just the company itself. This is called a “dual determination.”
If the taxpayer or business owner does not agree with the CDTFA’s audit finding, they can appeal the decision to the Office of Tax Appeals (OTA) within 30 days. It is very important to work with an experienced tax attorney or tax expert when appealing an audit decision. If you and your tax attorney decide to settle with the CDTFA, you have the option of using the CDTFA Settlement program. The agency reviews the audit and allows the taxpayer an option for settlement. Many audits that determine the business owes sales tax are being amicably resolved as part of this settlement program.
Dealing with a California Department of Tax and Fee Administration tax audit can be confusing and scary. Knowing what to expect and working with a tax attorney will help assure your business will survive the audit process.
Allison Soares is a partner and tax attorney at Vanst Law. 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.