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How Are Sales and Use Tax Audits Different?

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Key Takeaways

  • Topic: How Are Sales and Use Tax Audits Different?
  • Companies are selected for sales tax audits in a variety of different ways but the one thing I want to highlight is that the state has very limited resources in terms of which c….
  • Sales tax audits in particular are tremendously resource consuming activities, so the state has to be very careful about which companies it selects for audit and which it doesn’t.


Companies are selected for sales tax audits in a variety of different ways but the one thing I want to highlight is that the state has very limited resources in terms of which companies it chooses to audit. Sales tax audits in particular are tremendously resource consuming activities, so the state has to be very careful about which companies it selects for audit and which it doesn’t. So for example the way

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How Are Companies Selected for Audit? Why Am I Being Audited?

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VideoBG46

Companies are selected for sales tax audits in a variety of different ways but the one thing I want to highlight is that the state has very limited resources in terms of which companies it chooses to audit. Sales tax audits in particular are tremendously resource consuming activities, so the state has to be very careful about which companies it selects for audit and which it doesn’t. So for example the way

Key Takeaways

  • Companies are selected for sales tax audits in a variety of different ways but the one thing I want to highlight is that the state has very limited resources in terms of which companies it chooses to audit.
  • the process works is headquarters will identify certain accounts.

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What Are the First Steps I Should Take in a Sales Tax Audit?

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VideoBG45

These audits are very complex and the reason that they’re complex is they involve a very large degree of data. So for example, when you’re dealing with an income tax audit you can go through a company’s bank deposits and determine pretty quickly how much income they had or didn’t have. With a sales tax audit you’re dealing with taxable sales so if you picture a restaurant, for example. Say your average restaurant does a hundred transactions in a day over

Key Takeaways

  • These audits are very complex and the reason that they’re complex is they involve a very large degree of data.
  • the course of 365 days where the restaurant is open. That’s over 36,000 transactions. You take that over a three-year period and it just presents an immeasurable amount of data for an auditor to measure.

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What Does the CDTFA Sales Tax Audit Process Look Like?

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VideoBG44

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. For example the sales on your federal income tax returns don’t match the sales that were filed on the sales tax returns.

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 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. The auditor is then going to look at different things.

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What Do CDTFA Auditors Look for in a Sales Tax Audit?

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VideoBG43

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.

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What Are the Risks for Tax Payers in a Sales Tax Audit?

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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.

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What Do I Do If There Is a Really Serious Error on My Tax Returns and I Get Audited?

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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.

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Brotman Law Featured in Inc. Magazine - Fastest Growing Law Firm in California