CDTFA auditors are looking for mistakes. They’re looking at your data, they’re looking at how that data relates to each other, they’re looking at the returns that were filed and they’re looking for any errors that exist. The most common errors are discrepancies between primary source data and the sales tax returns that were filed. So for example, the sales on your federal income tax returns don’t match the sales that were filed on the sales tax returns. The auditor will find that error and figure out a way to calculate what the true percentage of sales were or at least true from the auditor’s perspective.
Key Takeaways
CDTFA auditors are looking for mistakes. They’re looking at your data, they’re looking at how that data relates to each other, they’re looking at the returns that were filed and they’re looking for any errors that exist.
The auditor is then going to look at different things. They’re going to look at purchases to make sure that the appropriate amounts of tax were charged and paid. They’re going to look for exemption certificates with any resales that were made.
the auditor going through and looking for a fishing expedition is to present something that’s very tight, very concise and to control the scope of information that you give to the auditor.
The biggest mistake that I see taxpayers make and the biggest area of risk that they have is the dangerous assumption made by taxpayers that because they “didn’t do anything wrong” in the sales tax audit, they don’t have anything to fear. The reality of the situation is that the auditors are looking for mistakes in the way that the taxpayers filed their sales tax returns and in the amount that they paid. The auditors are devoting a significant amount of time and energy to going through all the taxpayer’s data and verifying their taxable sales so the reality of the situation is is that even if you don’t feel like you made a mistake,
Key Takeaways
The biggest mistake that I see taxpayers make and the biggest area of risk that they have is the dangerous assumption made by taxpayers that because they “didn’t do anything wrong” in the sales tax audit, they don’t have anything to fear.
the auditor may well find something. If not, the auditor may resort to indirect methods of testing. When the auditor goes to indirect methods of testing, they’re using statistical samples to arrive at what the proper conclusion is.
Now for a lot of people, including companies that do a lot of actions, producing all the sales and purchase invoices, is quite a tall task.
Again, the more information you give the auditor, the more avenues of attack that you expose yourself to.
What type of documentation will I need in my sales tax audit? So if you’ve gotten an audit notice and you’ve read the auditor’s document request, you’ll have a pretty good idea of what they’re requesting. The auditor is looking at two things. They’re looking at sales that you made, obviously, it’s a sales tax audit, and they’re looking at purchases to make sure that sales tax was properly paid and charged on those invoices. That could affect either you or to be looking at your 1099Ks in certain cases with certain industries.
So those are what I call the big five. That’s the data that the auditor wants to see first because they want to make sure that all the big five data matches itself. The next thing they’re going to ask you for is they’re going to ask you for copies of your sales invoices and your purchase invoices for the audit period.
Now for a lot of people, including companies that do a lot of actions, producing all the sales and purchase invoices, is quite a tall task. So one of the big things that you’re going to want to do is agree with the auditor on perhaps taking a sample for sales and purchases so you don’t have to dig out and organize three years of records. This is a huge time saver.
And lastly, the auditor is going to ask for special items. These can include resale certificates. These can include exemptions. These can include other evidence that they might want to see, like the sales tax accrual account or any supplemental information. And so the key is, is in sitting down with the auditor and developing an audit plan, you can often streamline this document request down to something that’s much more manageable.
Again, the more information you give the auditor, the more avenues of attack that you expose yourself to. So you want to make sure that you control things and that you’re presenting things in a clean and consistent manner. That’s the best way to get through the document part of a sales tax audit.
Facing a California Sales Tax Audit?
CDTFA audits can result in significant assessments — especially if records are incomplete. The direction of the audit is largely set by how you respond to the initial document request. If you’re at any stage of a sales tax audit, a brief review can clarify what you’re facing.
Topic: Do I Have to Provide All the Documents the Auditor Is Requesting?
Do I have to provide all the documents that the auditor is requesting? Yes and no.
So, if the auditor wants to see the documents, they do have summons authority, and they can make your life quite difficult.
Do I have to provide all the documents that the auditor is requesting? Yes and no. So, if the auditor wants to see the documents, they do have summons authority, and they can make your life quite difficult. Alternatively, if the auditor doesn’t get all the documents that they want, the auditor can make a note of it in their audit report and resort to guessing.
Chances are, if you get into a fight with them over documents and they have to resort to guessing, they’re not going to guess very much in your favor. The good news is that audits are negotiable, particularly when coming up with the audit plan. The CDTFA has, in its goals, a goal to be as efficient as possible because of the amount of time that sales tax audits take. So one of the biggest things for clients is negotiating with the auditor ahead of time to reduce the scope of the documentation that you’re being asked to provide. If the auditor samples a year of sales invoices, for example, out of a three-year audit, and that year of sales invoices comes out perfect, then you have a great argument to make that there’s no reason to dig up an entire two more years of records to go through the same exercise. Same thing with purchase invoices. These are the things that are often most cumbersome.
So, what I would do in the beginning is, again, create a plan for the audit, analyze and understand your risk going in, and then steer the auditor towards the direction of producing only the documents that you need for them to verify sales and to get through the audit as quickly and as cleanly as possible. This will avoid any conflict with the auditor and will move your audit through a lot more efficiently and much faster.
Have a Tax Question or Notice?
If you’re dealing with an IRS audit, collection action, California state tax matter, or any other tax issue, we can review your situation in a free 15-minute call.
Unlike other forms of audits, serious errors on sales tax audits are usually pretty easily discoverable. One of the biggest mistakes that people make is they underreport their sales tax returns but their federal income tax returns show the true amount of sales. The auditors take what I call here big five data points: sales tax returns, your federal income tax returns, your internal accounting, your bank statements and your 1099Ks. They line up all that data together, that’s a pretty good indicator out the gate of whether or not there’s a discrepancy or whether or not your reported taxable sales are accurate. So anyway, this is a big problem because it’s very easy to see serious errors out of the gate. So the first thing you need to do is understand how serious
Key Takeaways
Unlike other forms of audits, serious errors on sales tax audits are usually pretty easily discoverable. One of the biggest mistakes that people make is they underreport their sales tax returns but their federal income tax returns show the true amount of sales.
the error is and understand whether or not there was any intent behind it. So if there was intent and potentially you fraudulently filed the sales tax return, that’s a different issue.
Topic: Can I Go to Jail for Errors on My Sales Tax Returns?
If the CDTFA thinks you’re willfully under reporting sales tax and/or fraudulently filing returns, you can and will receive a criminal referral.
One of the biggest jobs that we have at the beginning of an audit when somebody comes to me and says I’ve underreported on my sales tax and now I’m getting caught is to mitigate….
Yes you can. If the CDTFA thinks you’re willfully under reporting sales tax and/or fraudulently filing returns, you can and will receive a criminal referral. One of the biggest jobs that we have at the beginning of an audit when somebody comes to me and says I’ve underreported on my sales tax and now I’m getting caught is to mitigate any evidence that there is any willful conduct on behalf of the client. The goal with any potential criminal matter is to keep it civil and to minimize the damage as much as possible. So you can trigger a CDTFA fraud referral based off of that but also even if you’re not going to go to jail for the errors that you caused on the sales tax returns, you have to be mindful of penalties. CDTFA has a very rigid penalty scheme particularly with respect to fraud penalties and sales tax that was collected but never paid over to the state. So in addition to worrying about going to jail, you need to be worried about the escalating liability, because an escalating liability once it gets into collections can create a huge problem for the taxpayer. While you’re in the examination phase of a CDTFA audit, you want to make sure you can make the biggest adjustments possible and eliminate any notion that there was any willfulness behind your actions.
Facing a California Sales Tax Audit?
CDTFA audits can result in significant assessments — especially if records are incomplete. The direction of the audit is largely set by how you respond to the initial document request. If you’re at any stage of a sales tax audit, a brief review can clarify what you’re facing.
In a sales tax audit, as I’ve mentioned before, sales tax audits are very cumbersome processes. They involve a lot of documents, they involve a lot of data and they take a while to get through and our firm efficiency is one of our key factors in the work that we do. We want to make sure that the work and the value that we’re providing for clients are in a line with their cost expectations. With that said, sales tax audits are a lot of work. There’s a lot of organization and presentation and the materials. There’s a lot of tendency for disagreements in sales tax audits, particularly when they’re using statistical samples. Oftentimes those statistical samples come out wrong on the CDTFA side and we have to correct them and it gets tough when you have an auditor and you get into a conflict with that auditor and the auditor won’t back down. So with that said, sales tax law does have the ability to drive cost. One of the things that we do to mitigate cost is by sticking and trying to minimize cost in three key areas.
Key Takeaways
In a sales tax audit, as I’ve mentioned before, sales tax audits are very cumbersome processes.
The first one is with decisions. We’d like to put our clients in the position to make quick and accurate decisions. The easier decisions come, the easier it is to deal with the sales tax audits and the lower the cost to the client. Number two is documents.
Unfortunately playing let’s make a deal with the Auditor is not really possible. It’s not possible to just throw out a number, let’s say $25,000, to make the auditor go away. However in the context of any sales tax audit, there’s a certain amount of horse trading that happens in order to get to a result from the CDTFA’s perspective. CDTFA would rather close the audit as agreed than have an audit going into appeals. The more cases they close out at the audit level,
Key Takeaways
Unfortunately playing let’s make a deal with the Auditor is not really possible. It’s not possible to just throw out a number, let’s say $25,000, to make the auditor go away.
the less likely they have to do any work and the less resources that they have to allocate. Those resources at CDTFA are precious.
Topic: What Is a Managed Audit? Is it a Good Idea?
A managed Audit is when you sit down with the auditor and agree to basically perform a self audit.
A managed audit formulates a plan that’s kind of a contract.
A managed Audit is when you sit down with the auditor and agree to basically perform a self audit. A managed audit formulates a plan that’s kind of a contract. A managed audit can be a good idea in certain situations because what you’re doing is essentially filling out the auditor’s work papers for them. You submit the work papers to the auditor along with some documentation for them to verify and if everything turns out okay, then the auditor will bless the audit. In doing a managed audit you have the potential to cut your interest rate in half. That can be pretty good savings depending on how much your liability is. However the savings in terms of the interest can be outweighed by the length of time and the resources it takes to complete the audit. Managed audits take a lot of work and if a client lacks the internal resources to do the audit for the auditor, it can be a huge waste of time, cost and energy. The management decisions should only be made with a tax representative in terms of discussing the strategy for the audit. Agreeing to a managed audit is a significant burden and can be a huge amount of work. That decision shouldn’t be made lightly but if you do the managed audit properly and you fill it out and turn it in and it reduces the amount of time that the auditor takes to look at the audit, you can set yourself up for success in certain situations.
Have a Tax Question or Notice?
If you’re dealing with an IRS audit, collection action, California state tax matter, or any other tax issue, we can review your situation in a free 15-minute call.
Topic: What Are the Types of Penalties That I Could Face in a CDTFA Sales Tax Audit?
Sales tax audits have different types of penalties.
Some penalties are more severe and some penalties are less severe.
Sales tax audits have different types of penalties. Some penalties are more severe and some penalties are less severe. Generally penalties will range anywhere from 10 to 50 percent but the biggest kicker with sales tax penalties is that sales tax penalties can stack on top of one another. So let’s say for example that the client didn’t turn over all the sales tax that they collected and they failed to file a return. Well this client could be looking at a 40% penalty for the failure to turn over sales tax and a 10% penalty for each return that wasn’t filed. As you can see this can stack up pretty quickly and it leads to a lot of problems in the context of the audit. Usually CDTFA will reduce the penalties down to a manageable level. So for example, if you have 12 quarters of sales tax returns that you didn’t turn in, they’re not going to hit you with a hundred and twenty percent penalty but at the same point, sales tax penalties are pretty severe and the CDTFA often leans towards the stronger end of the penalties at least at the district level. One of the biggest areas for negotiation when we handle a sales tax audit is what the ultimate penalty structure is going to be for the client and we push on behalf of our clients for zero or very low penalties. This is contrary to a lot of the behavior that you see in a sales tax audit but if you play your cards right you can mitigate penalties or avoid them entirely during the course of the offer.
Facing a California Sales Tax Audit?
CDTFA audits can result in significant assessments — especially if records are incomplete. The direction of the audit is largely set by how you respond to the initial document request. If you’re at any stage of a sales tax audit, a brief review can clarify what you’re facing.
