California Sales Tax Audit: Help, I'm Being Audited!
The California Tax and Fee Administration routinely audits sales tax returns for accuracy. A tax audit is not an accusation that you did something wrong. It's simply a mechanism that the state uses to ensure accuracy and compliance.
But it can also be a scary and complicated process. This guide explains the sales tax audit process in California. Then, it outlines how to get help with a tax audit.
What Is a California Sales Tax Audit?
A California sales tax audit is when the CA Tax and Fee Administration double-checks your sales tax returns for accuracy. The agency uses sales tax audits to ensure that businesses have reported all of their sales and paid sales tax correctly. It also checks if you have paid use tax as required.
What Is the Purpose of a California Sales Tax Audit?
Sales tax audits are designed to ensure that businesses report and pay sales tax correctly. A sales tax audit tries to answer the following questions:
- Were all of your total sales reported for tangible personal property and taxable labor and services?
- Did you pay use tax as required on taxable purchases of business equipment or supplies that were not taxed at the point of sale?
- Did you properly claim deductions? Did you calculate your sales tax liability correctly?
- Did you correctly allocate local taxes on the business's reported sales?
- Did you use the correct tax rate for special tax districts?
The role of the sales tax auditor is to answer these questions as quickly and efficiently as possible. They do this by looking at your gross receipts, general ledger sales, and other sales reports. Then, they review your sales and use tax returns to ensure that you paid the sales tax correctly.
What to Expect With a California Sales Audit
Here is an overview of what to expect if facing a California sales tax audit.
Initial Contact: When the CDTFA decides to audit your sales tax returns, a California Department of Tax and Fee Administration representative will contact you over the phone. If the sales tax auditors can't reach you over the phone, they may send you an audit notice letter or come to your place of business.
The auditor will explain what taxes are going to audit. They may focus on sales and use tax or audit other special taxes or fees. They will tell you what records you need to ensure the tax is accurate. They will also give you a timeline of when you need to have everything ready.
Scheduling the Sales Tax Audit: Generally, you get two or three weeks to prepare, and the auditor should be flexible with scheduling the audit. If you need a lot of extra time, the auditor may request that you sign a waiver to extend the statute of limitations.
Records for the Audit: You will need a range of business tax records for the audit. The exact records vary based on the type of tax being audited or the scope of the sales and use tax audit. For instance, you will need records that show all of your sales of tangible personal property or taxable services. You may also need to show information about exempt sales.
By law, you should keep your business sales records for four years. If you don't have them, talk with your auditor. They may help you reconstruct the records. If you end up owing additional tax liabilities due to missing records, you may incur a 10% accuracy penalty.
Exit Interview: To review the audit results, the auditor has an exit interview with you or your representative. During this interview, they go over the audit results and explain if you owe any additional sales and use tax. They also outline any next steps that you need to take.
If you disagree with the results, you should bring up your concerns. A tax attorney with audit experience or another tax professional can be extremely helpful during this interview. They understand the tax laws and can ensure that the auditor respects your rights.
Audit Determination: At the close of the audit, the auditor will let you know if you owe any additional sales tax liability. In rare cases, you may even get a refund if you have overpaid your sales tax. Any additional sales tax assessment will come to you in the form of an Audit Determination Letter.
Types of California Sales Tax Audits
In some cases, you will work directly with an auditor from the California Department of Tax and Fee Administration, but in other cases, you may do a managed audit or computer-assisted audit. Those are mostly self-managed processes. Here is an overview of the three main types of California Sales tax audits.
Traditional Sales Tax Audits California
A traditional sales tax audit is when you work directly with a sales tax auditor. They can do a remote or mail-based audit where they tell you what they want to see, and then you mail or fax in your records. Alternatively, they may do a field audit of your sales and use tax returns. This audit occurs in your place of business or at an audit engagement center.
CDTFA Managed Sales Tax Audit
A managed audit is where you complete the audit by yourself. You look over your sales records to ensure you calculated the sales tax correctly, and you review your purchase records to make sure you've paid sales and use tax correctly. You will also provide supporting documentation to back up your claims.
Any business that is selected for an audit can request a managed audit, but the CDTFA must approve your request. To request a managed audit, file Form CDTFA-526 (Managed Audit Program Participation Agreement).
Managed Vs. Traditional Sales Tax Audit
With a managed audit, you go through the paperwork yourself rather than working with a state auditor. This allows you to complete that audit at the time most convenient to you. In contrast, traditional sales tax audits typically happen during working hours in your place of business.
Additionally, if you end up owing tax, the department will add interest to your tax debt. However, with a managed sales tax audit, you pay half the interest as you do with a traditional audit.
Computer-Assisted Sales Tax Audit California
A computer-assisted sales tax audit is when the California Department of Tax and Fee Administration performs the audit using computer programs. The sales tax audit occurs remotely. You simply upload the documents as requested.
With computer-assisted sales tax audits, the California sales tax auditor looks at taxable sales and exempt sales to ensure that you have completed your sales tax returns correctly. Generally, you don't have to provide supporting documentation such as bank statements or paper sales invoices.
How to Appeal a California Sales Tax Audit
If you disagree with the sales tax audit results, you have the right to appeal. When the results of the sales tax audit have been finalized, you will receive a Notice of Determination or a Notice of Jeopardy Determination. The notice will let you know how much additional sales tax you owe plus any penalties or interest.
Deadline to Appeal California Sales Tax Assessment From Audit
You need to appeal within 30 days of the date on the notice. To appeal, you or your authorized representative can write a letter saying that you are petitioning for recertification. Alternatively, you can file Form CDTFA-416, Petition for Redetermination, or appeal through your online account.
Where to Send Your Sales Tax Audit Appeal
You can email your sales tax audit appeal to [email protected], fax it to 1-916-324-0678, or mail it to:
MIC:38 California Department of Tax and Fee Administration
PO Box 942879 Sacramento, CA 94279-0038
Note that you should use a different email, fax number, and mailing address if you're dealing with a California Department of Tax and Fee Administration audit for special taxes, special fees, or special tax districts.
You can ask your California sales tax auditor or the CDTFA audit supervisor for tips on how to appeal. But for best results, you should work with a CA tax professional.
What If You Miss the Deadline to Appeal a Sales and Use Tax Audit
If you miss the deadline to appeal, you can pay the tax and request a refund. When you request the refund of your sales and use tax payment, you need to explain why the amount paid was incorrect, and you will also need to provide supporting documentation.
Other Types of CDTFA Tax Audits
The California Department of Tax and Fee Administration doesn't just deal with sales taxes. This department also administers about 20 special taxes and fees, including Alcoholic Beverage Tax, Cannabis Tax, and Diesel Fuel Tax. The California Department of Tax and Fee Administration also has the right to audit any of these other taxes.
The general tax audit process is the same, but there are slight differences depending on the tax being audited. For instance, if the CDTFA auditor is doing a California Tire Fee Audit, they will specifically look at your sales records related to tires. They generally won't need to see any other business records. Similarly, if the California government is auditing your Covered Electronic Waste Recycling Fee, the auditor will look at transactions specifically related to display devices.
In contrast, with a CDTFA sales tax audit, the auditor will need to know about all of your gross sales. They will want to look at your point of sale records, cash register tapes, cash receipts, and any other records of taxable transactions. Then, they will compare this info to the sales reported on your sales tax returns.
CDTFA Sales Tax Audit Vs. California Franchise Tax Board Audit
The Franchise Tax Board administers personal and corporate income tax in California. The FTB also does audits, but if you receive an audit notice from that agency, it won't be about sales tax. It will be about your personal income tax or your franchise/corporate tax.
How Does the CDTFA Select Sales Tax Returns to Audit?
The California Department of Tax and Fee Administration looks at numerous details when deciding which businesses to audit. In some cases, it selects businesses to audit automatically. In other cases, it selects businesses due to red flags on their returns or inconsistencies compared to similar businesses in similar tax districts.
For example, the department may compare details from federal income tax returns to sales tax returns. Say that the computer notices that the sales from your federal income tax returns are significantly different from the sales reported on your sales tax returns. The department may flag your account for a sales and use tax audit in this case.
The CDTFA may also select you for an audit if you run an inherently risky business for tax fraud. This particularly applies to cash-intensive businesses such as restaurants or convenience stores that accept a lot of payments in cash.
Statute of Limitations for California Sales Tax Audits
Generally, there is a three-year statute of limitations for sales tax audits. This means that the state has three years from the date the return was due or the date it was filed to audit your return. The state uses the latter of these two dates. However, if you didn't file a California sales tax return, there is an eight-year statute of limitations.
Do You Need a Sales Tax Audit Attorney?
In some cases, you may need a sales tax attorney. In particular, you need an attorney if you're dealing with a criminal tax investigation or if you're worried about criminal charges.
A sales tax audit attorney can provide a criminal tax defense, but they can also help you with all of the other aspects of dealing with a CA Dept of Tax and Fee Administration auditor.
When to Get Help With California Sales Tax Audits
A tax attorney, a Certified Public Accountant (CPA), or an enrolled agent can help you deal with a sales tax audit. If any of the following statements apply, you should consider getting help for your sales and use tax audit.
- You want help with the audit process.
- You are confused by the audit notice.
- You have questions about the tax laws.
- You don't have the right records about your sales and use tax.
- You're worried that you didn't complete your sales and use tax returns correctly.
To get help with a sales and use tax audit, use TaxCure to search for a local tax professional based in California. A local tax pro has the experience you need to deal with the CDTFA, and when you search for help using TaxCure, you can narrow down the results to look for someone with the exact experience that you need.