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.
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.
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.
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.
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.
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.
