California law requires businesses to collect and report sales taxes to the CDTFA. It also requires the submission of sales tax returns. The CDTFA’s purpose in conducting sales tax audits is to check whether businesses are collecting and reporting sales tax liability correctly. If you run a cash-based retail business in California, there’s a significant risk of a sales tax audit, no matter how aboveboard your operations may be.
California tax attorney Jin Kim represents business owners in CDTFA sales tax audits. If your business has received notice of a sales tax audit, call the Law Office of Jin Kim at (916) 299-9913 for a free tax consultation.
What Triggers A Sales Tax Audit?
There’s no clear-cut answer to this question. However, there are certain factors that can increase your chances of a CDTFA sales tax audit:
- A supplier or vendor of yours getting audited.
- Constant and consistent late filing of your taxes.
- Failure to report sales tax
- Claiming substantial exemptions in your taxes.
- The presence of past tax issues
- Non-compliance is common in your industry. (for example, the cannabis industry and liquor stores may underreport cash transactions, thereby triggering an audit).
As mentioned above, as a business owner you should be prepared for the possibility of a sales tax audit. There are steps that you can take to avoid triggering an audit and improve your chance of winning your audit should you receive notice.
Record Keeping
One common weakness found in sales tax audits is faulty record-keeping. As a business owner, one way of being proactive is to ensure that you keep complete and systematic records regarding your business. If you end up being audited by the CDTFA, good record keeping will help you substantiate your sales and reported tax liability.
If you’ve already received notice of a sales tax audit, then you should prepare by assessing whether or not your records are adequate. A professional’s perspective on whether or not your records are adequate will be helpful, so it’s a good idea to consult with a tax lawyer who can assess the adequacy of your books and record. If ever your books and records are found to be inadequate, you can always reconstruct them with the help of a tax lawyer or CPA.
Notice of A Sales Tax Audit
If you’ve already received notice of a sales tax audit, one important but often overlooked step is to read the notice thoroughly. The notice will be your first insight into the CDTFA’s mind during your audit process. It will inform you of the items which the auditor might review. The notice might sometimes require you to send a response, which you should submit within the indicated time. If there are some things that don’t make sense to you on the notice, then you should seek advice from your tax lawyer.
Talk With The Auditor
The auditor will typically request books and records within the three-year statute of limitations. It’s important to remember that you don’t have to hand over all the records being asked for at this point. An experienced tax attorney may be able to negotiate with the auditor regarding the scope of the audit. Since the auditor is on the lookout for mistakes, then you should try to limit your exposure as much as possible. The narrower the scope of the audit, the fewer opportunities for mistakes.
An audit will usually take anywhere between six to nine months, and your preparation at the start will affect the outcome of your audit. If you come prepared and ready, you’ll be able to limit the chances that the auditor will find any fault and assess additional taxes and penalties.
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