CDTFA Audit Findings and the Exit Conference: The Last Stop Before the Notice of Determination

What the CDTFA audit findings are and why you received them

The audit findings are the auditor’s conclusion, schedule by schedule, about how much taxable measure went unreported in the audit period, and you received them because fieldwork is done and the auditor is required to explain the results before the report goes to review. The working papers state a measure, meaning the sales or purchases the auditor says were taxable and not reported; the tax is that measure multiplied by the rate for your location in each period. The method is usually one of five: a bank deposit analysis that treats deposits above reported sales as unreported sales, a markup analysis that rebuilds sales from inventory purchases, a sample of invoices projected across the period, resale sales with no valid resale certificate, and use tax on equipment bought without California tax. At the conference the auditor walks through each schedule and hands you the working papers, and what you say there goes into the auditor’s comments, so treat it as a working session on the numbers.

The deadline on the audit findings and what happens if nothing is done

There is no statutory deadline at the exit conference; the auditor sets a short window, often a couple of weeks, for anything you want added, and if nothing is done the report goes to the supervisor as written and comes back as a Notice of Determination with a 30-day petition deadline under section 6561 of the Revenue and Taxation Code. The supervisor can move the findings in either direction before the NOD issues. If no petition is filed within 30 days of service the determination becomes final, a 10 percent penalty is added under section 6565 if it is not paid then, and collection starts with a demand for payment, a Notice of State Tax Lien and levies. Interest runs from the month after each quarter in the audit period until the tax is paid, at a rate the CDTFA sets every six months. And if a waiver you signed is close to expiring, the CDTFA issues the NOD to protect its own deadline and the discussion moves inside the petition.

What to do in the first 30 days

The first 30 days are for checking the auditor’s math, getting the missing records into the file, and asking for the supervisor and principal auditor discussions before the report leaves the district. In order:

1. Get the complete working papers, every schedule and the auditor’s comments, in electronic form so the projection can be recomputed.
2. Trace each schedule to your own records; a bank deposit analysis often counts loans, transfers, refunds and the sales tax you collected as sales.
3. Recompute the sample: whether the period was representative, whether each error is real, and whether a one-time error was projected across three years.
4. Collect the resale certificates and vendor invoices the auditor could not match.
5. Answer with revised schedules in the auditor’s own format, with the documents behind each change, inside the window the auditor set.
6. If the auditor does not adopt the changes, ask for the supervisor and then the district principal auditor before the NOD issues.
7. Pay the part you agree with now if you can; payment stops interest on that amount without giving up the right to dispute the rest.

Your options at the findings stage

A set of CDTFA audit findings ends one of five ways, and the right one depends on how much of the number is wrong and what proof you have.

• Agree and pay. Pay the tax and interest, before the NOD or after it, and ask separately for reasonable-cause relief of any late penalty under section 6592.
• Agree in part. Pay the part you accept so interest stops on it and dispute the rest; a partial payment does not waive the petition.
• Correct it in the district. Revised schedules, the supervisor meeting and the district principal auditor discussion all happen before the NOD and cost nothing beyond the work.
• Petition the NOD. In writing within 30 days of service under section 6561, stating the grounds; it goes to an appeals conference before the CDTFA Appeals Bureau, and from there to the Office of Tax Appeals (OTA). No payment is required to petition, but interest keeps running.
• Settle. The CDTFA settlement program weighs the risk of losing at the OTA and opens once a petition or a refund claim is pending.

The negligence penalty is 10 percent of the whole determination under section 6484 when any part of the deficiency is due to negligence or intentional disregard of the law, and the fraud penalty is 25 percent under section 6485 when any part is due to an intent to evade. Negligence is argued on the facts; fraud is the CDTFA’s burden to prove by clear and convincing evidence, and a fraud finding also removes the three-year limit on the audit period, so contest it every time.

What Brotman Law does with CDTFA audit findings

For audit findings our work is to take the auditor’s schedules apart, put the corrected schedules and the proof back in the auditor’s own format, and get the penalty off the table before the report leaves the district. The first step is the CDTFA power of attorney, form CDTFA-392, so the auditor deals with us and sends us the electronic working papers. We rebuild the bank deposit analysis from the statements, tag every deposit that was not a sale, and compare reported sales against the federal return and the merchant statements. We rerun the sample and the projection, chase the resale certificates and vendor invoices the auditor could not match, and look for the credits the auditor did not: tax paid to vendors on goods you resold, sales shipped out of state, bad debts. We write the penalty argument from the file. Then we sit in the supervisor and principal auditor meetings, and if the NOD issues anyway we file the petition inside the 30 days, because the same work becomes the appeals conference file.

Do you need a lawyer for CDTFA audit findings?

Sometimes not: a sole proprietor with a one-year audit period, a small proposed measure and a records question can often finish this with the accountant who keeps the books. The findings become a lawyer matter when the audit period runs more than one year, when the number turns on resale certificates, when a negligence or fraud penalty is proposed, or when the owner of a corporation or a limited liability company could be held personally liable for the tax after the business closes. We would rather say which one you are on the free 15-minute call than sign you up for work you do not need.

How the monthly flat fee works for CDTFA audit findings

Many matters like this one run as a monthly flat-fee engagement: one number, agreed up front, that covers agency contact, deadlines, document responses and strategy until the matter resolves. It does not include an appeal before the OTA, a refund suit, or a criminal referral, each of which is scoped and priced on its own. The engagement ends when the findings are agreed and paid or placed on a plan, or when the NOD issues and the petition is filed under a new scope.

Documents to gather

Eight items answer nearly every question the audit findings raise.

• The complete working papers and the auditor’s comments.
• The engagement letter and any statute waiver you signed.
• The sales and use tax returns for the audit period and the worksheets behind them.
• The invoices, register tapes or point-of-sale exports for the periods the auditor sampled.
• Bank statements for the whole period and your own reconciliation of deposits to reported sales.
• Resale certificates for the questioned sales and vendor invoices for the use tax items.
• The federal income tax returns and the merchant or 1099-K statements.
• Any prior CDTFA audit report and any written advice from the CDTFA.

What is a CDTFA exit conference?

The exit conference is the meeting at the end of a sales tax audit where the auditor explains the findings, hands over the working papers and says what happens next. It is not a hearing and nothing is decided there, but it is the point where a corrected schedule gets into the file with the least effort.

Can I bring new records to the exit conference?

Yes, and it is the best time to do it. Resale certificates obtained after the sale, vendor invoices showing tax paid, and a reconciliation of deposits that were not sales all count, and the auditor can revise the schedules before the report goes to review.

Do I have to sign the audit findings at the exit conference?

No, because a form confirming that the findings were explained to you is not an agreement with them, so read anything the auditor asks you to sign. Disagreeing at this stage costs nothing and preserves every step that follows.

How is the CDTFA negligence penalty removed?

By showing on the facts that the underreporting was not negligent, because the 10 percent penalty under section 6484 applies only where part of the deficiency is due to negligence or intentional disregard of the law. A first audit, adequate records, an error on an unclear rule, and reliance on a preparer who had full information all weigh against it. Reasonable-cause relief does not reach this penalty; it is argued in the district and then in the petition.

Does paying the proposed tax before the Notice of Determination stop interest?

Yes, interest stops on any amount on the date it is paid, and a payment made before the NOD does not give up the right to dispute the findings. If the dispute later goes your way, the overpayment comes back as a refund.

How long after the exit conference does the Notice of Determination arrive?

Usually weeks to a few months, depending on the supervisor’s review, any district discussions, and how close the statute of limitations is. Once it is served, the 30 days under section 6561 run from the date of service, so calendar it from the notice date.

Related pages

The other pages in the CDTFA audit series:

• CDTFA audit attorney, the parent page
• CDTFA audit engagement letter
• CDTFA audit records request
• CDTFA Notice of Determination and the 30-day petition
• CDTFA responsible person liability
• CDTFA collections
• Should I hire a California sales tax lawyer for my sales tax audit?
• What triggers a sales tax audit in California?
• CDTFA seller’s permit revocation