The State of California is notorious for its complex tax regulations and burdensome filing requirements. Unsurprisingly, some businesses periodically file untimely returns or have discrepancies between federal and state filings. When this occurs, the State of California can audit the business to verify the amount of tax owed. If you’ve received an audit notice, you should seek legal representation immediately. Call the Law Office of Jin Kim at (916) 299-9913 for a free tax consultation.
CDTFA Sales Tax Audit
Certain businesses in California are at high risk of CDTFA sales tax audits. Cash-based businesses (such as liquor stores and marijuana dispensaries), retail, and car dealerships are often targeted with adjustments in the six figures. (Just look at the CDTFA’s top 500 sales and use tax debtors). Likewise, the Franchise Tax Board audits businesses and individuals for underreporting taxable income, and the EDD audits businesses for misclassifying employees and payroll tax violations.
If a California tax agency is auditing your business, your should contact an experienced tax attorney. A sales tax audit attorney can represent you throughout the audit and work towards mitigating your sales tax liability.
California tax attorney Jin Kim represents businesses being audited by the CDTFA, FTB and EDD. To learn more about strategies to resolve your tax liability call her office at (916) 299-9913 for a free consultation.
What Triggers A California Sales Tax Audit
There are a number of things that can trigger an audit from the CDTFA or IRS. However, most audits are triggered by failing to file returns or consistently underpaying tax liability.
The following lists the factors the CDTFA auditor should consider when deciding whether to perform or waive an audit. (See CDTFA Audit Manual, Chapter 4 Audit Selection, 0401.01)
- Are accurate and complete records kept?
- Does the markup on cost of goods sold appear adequate?
- Are the persons preparing tax returns familiar with the law and the rules and regulations pertaining to their particular business?
- Are the reported amounts reasonable considering the type of business, nature of the premises, the location in the community, etc.?
- Do the reported amounts vary materially from period to period?
- Is there a good system of internal control?
- Is the taxpayer’s past reporting record good?
Preparing For A California Tax Audit
Your preparation begins even before you receive your audit notice. Business tax audits rely on records, and you should have a good system for record-keeping already in place before receiving notice of an audit. If some records are missing, you can reconstruct them with the help of an experienced business tax lawyer and CPA. A tax lawyer will also be able to assess on your behalf whether or not your records are adequate.
Once you receive notice of the audit, you should note the applicable tax years and deadlines. The notice will usually inform you of the period for which you’re being audited, allowing you to prepare the necessary records for those periods. Some notices will also require you to respond within a given time. Usually, business owners are allowed thirty days to prepare for their audit. The process of the audit itself can last from six months up to nine months.
During The Audit
The auditor is on the lookout for any and all mistakes on your tax returns, so it’s important to present an impeccable record (or at least, as close as can be to impeccable). While the IRS and the California Franchise Tax Board don’t really operate together, the FTB might inform the IRS if it finds suspicious entries on your tax returns. To avoid this, it’s best to consult with a tax lawyer early in the audit process.
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