Sales Tax Audit Results Review By Tax Attorneys and CPAs

If you are subject to a California sales tax audit you should have a firm that has both tax attorneys and CPAs to assist you. If the sales tax audit results in tax payable, the state will take aggressive collection action including tax liens, levies and asset seizure.

The best protection against a tax audit or defense during an audit would include these basic actions being implemented as senior company policy:

  • Clear, written guidelines for all personnel involved in purchasing and sales.
  • Definitions of exactly what sales are taxable and which ones are not. As needed get advice in advance from a tax attorney or CPA
  • Exact procedures for making exempt sales such as out-of-state sales or sales to exempt organizations like the US government
  • Bookkeeping system adequate to determine taxable sales, non-taxable sales and tax payable
  • System in place to pay sales tax on taxable items purchased, tax exempt purchases such as out-of- state purchases or Internet purchases
  • Budget procedures in place to ensure that the sales tax collected does not get spent on general operating expenses but rather is treated as trust funds. A best practice would be to transfer the funds to a separate bank account once the sales taxes are collected.
  • Automatic reminders, such as electronic calendars, to ensure the tax is paid within the due dates
  • Accurate completion of the sales tax returns
  • Filing and archiving of sales tax returns, sales tax records and supporting documentation

If you have deficiencies in any of these areas the sales tax auditor will likely find them which could result in tax payable plus penalties and interest.

When you are notified of a pending audit you have a short timeline to get your records in order. You want to give the auditor a high level of confidence that you have your house in order and that your records are accurate. There are many actions that you can undertake in advance of the auditor appearing on your doorstep.

Before the auditor arrives:

  • Tell the auditor that your company is represented by a tax attorney and he or she should contact them
  • If you are not sure about something, contact your tax professional before providing anything to the tax auditor
  • Designate your tax professional’s office as the meeting place

When the auditor arrives:

  • Take him/her to a private office. Have your tax professional there to assist you
  • Have one employee assigned to act as liaison with the tax auditor
  • Never let the tax auditor “get friendly” with the general staff. The sales tax auditor should have no communication with anyone except your tax professional and your designated employee.
  • Provide the requested information in a timely and efficient manner
  • Do not originate any communication—only answer questions
  • Be pleasant but very business like
  • Keep in mind that the auditor is there is find errors so they can collect more taxes

The audit results

California State Board of Equalization audits are based upon statistical sampling. In other words, an individual error rate will adversely affect the entire audit period.

Once the audit has been completed, the auditor will present his findings before tax assessments are issued.

  • This is a crucial time to get errors corrected
  • It is much more difficult to get an official tax assessment corrected or cancelled than it is to get corrections made during the field audit

If you find errors and the sales tax auditor will not correct them, document the details for later appeal.

Once you receive the tax assessment notice, contact your tax professional. Sales tax audits can result in substantial taxes owing, penalties and interest. John Spurgeon & Associates are both tax attorneys and CPAs with broad sales tax experience. We can provide effective counsel to avoid tax liens or asset seizure.

Please call today 626-440-9518 for a free 15 minute phone consultation.