CDTFA SALES TAX AUDITS
The CDTFA conducts sales tax audits generally in three-year intervals, at the time a permit or license is closed out, or in connection with an audit of another permit or license held by the taxpayer. A CDTFA sales tax audit may also be initiated as a result of information that the CDTFA has received from outside sources. If you have been selected for a sales tax audit, you will receive a notice in the mail. The notice will indicate who the auditor is and what tax periods are subject to the audit.
In a sales and use tax audit the auditor will generally attempt to determine the following about the returns you have filed:
- Did the taxpayer report all gross receipts from sales of tangible personal property and taxable labor and services?
- Did the business report the cost of all business equipment and supplies that you purchased without tax either from out-of-state vendors or for resale that would be subject to use tax?
- Did the taxpayer properly claim deductions?
- Did you properly allocate local tax?
- Did the taxpayer use the correct rate of tax when reporting sales in special tax districts?
- Did you properly apply tax to your sales and uses of tangible personal property?
The auditor will generally ask for the business’ books and records to examine things like cost of goods sold, returns, spoilage, and markup.
STATUTE OF LIMITATIONS FOR ASSESSMENT IN A CDTFA SALES TAX AUDIT
The statute of limitations in general, for all taxpayers, is three years. However, if you do not file a tax return, the statute of limitations is eight years. In addition, the statute can be extended as well by mutual agreement. If the statute for assessment is coming up, the CDTFA may propose an estimated tax assessment if they don’t have sufficient time to examine the books and records.
WHAT DOCUMENTS WILL THE CDTFA AUDITOR REVIEW?
The CDTFA auditor will review business documents pertaining to cost of goods, gross receipts, and mark up. The CDTFA typically will contact third-parties. The CDTFA may obtain information about taxpayers from various sources including other state agencies, businesses, wholesalers, and data houses. Some of this information may include third-party proprietary data that cannot be shared with the taxpayer who is under audit.
Generally the auditor will conduct a sample examination to determine if a more detailed audit is required. For a sales tax audit, for example, the auditor may compare:
- The total sales recorded on your books to the total sales reported on your sales tax returns.
- The amount of sales on your books to the total sales on your income tax returns.
- The amount for tax you collected to the tax reported on your returns.
- Claimed sales for resale to resale certificates
The CDTFA auditors use several unique statistical methods to assess a tax liability. These unique methods include a markup test. The mark up test compares total sales reported with a total sales figure that the auditor creates by marking up your cost of goods. Another statistical method used is a ratio of cash versus credit card transactions to determine if there are underreported cash transactions.
If the auditor determines that you owe additional taxes or fees, the CDTFA auditor will issue a notice of determination letter to you. Thereafter, you have 30 days from the date of the letter to file a petition for redetermination. A tax attorney can help you file all the necessary paperwork and prepare a vigorous defense.