Sales tax makes up an important part of revenue for the states and their governments. Through the imposition of a sales tax, state governments can require businesses operating within their borders to collect, hold, and turn over taxes on the government’s behalf. However, as a sour economy has continued to take its toll on consumer spending, sales tax receipts have dipped and many governments have scrambled to make-up for the reduced revenues.
Part of these efforts have been funneled into the stricter enforcement of California’s already existing tax laws. The state has redoubled its efforts to use the audit as a tool to encourage and spur compliance with all state and federal tax obligations. Unfortunately for California business owners, sales tax audits can lead to serious California tax issues and may even result in an additional federal tax audit.
What is the Purpose of a Sales Tax Audit and How Should a Taxpayer Prepare?
Sales Tax Audits are administered in California by the California State Board of Equalization. The audit will determine whether a business has properly taxed its revenue, collected appropriate amounts of tax, and remitted that amount to the government. Most businesses will face a sales tax audit at some point. If you find that your business is facing a sales tax audit, it is important not to panic. While the actions you took to maintain compliance with the tax code will largely define your experience with the audit process, working with an experienced tax attorney can help you address the concerns of the auditor and potentially mitigate the consequences you and your business face. Some of the ways an experienced tax attorney can provide guidance and perspective include:
- The audit notice – Many people – even sophisticated business owners — simply panic when they realize that they are going to face an audit. The taxpayer may decide to take rash action or may deny that a problem exists, however both approaches can actually cause more harm than good. While the audit notice will state the reasons behind the audit, it is always advisable to meet with an experienced tax lawyer before making contact with the agent.
- Audit response filing timing – The audit notice will contain information about the amount of time you have to reply. An experienced tax attorney can assist you in preparing and filing a response before your time has elapsed.
- Books and records – The business owner should make sure that his or her books and records are accurate and complete when filing a sales tax return, because filing may trigger an audit. Insufficient books and records often form the basis of serious tax problems. While it is ideal to review your records before an audit request is received, an attorney can still work with you to prepare for an audit if you have already received notice.
Some factors can make a company more likely to attract attention from the California State Board of Equalization. Companies that fail to report and pay sales tax, consistently file late, and report substantial exemptions face a higher than average risk of audit. Likewise, those with a business in an industry identified as one where substantial non-compliance is found face a higher audit risk.
A California Sales Tax Audit Can Lead to Additional Federal Tax Problems
Businesses that do not address their sales tax audit concerns or problems often find themselves in a rapidly deteriorating tax and financial position. This is not only because sales tax non-compliance can be prosecuted directly by the agency, but also because when the auditor looks at your books he or she may detect problems that go beyond sales tax issues. In some situations the auditor has discovered what appeared to be civil tax fraud or felony tax evasion. If these or similar fraudulent acts are suspected by the state auditor, he or she will then refer your matter to the IRS Criminal Investigations Division (CID) or the California Franchise Tax Board.
Even for those business owners who believe that they have no worry regarding criminal prosecution, some other concerns remain. Chiefly, the auditor can still share any information he or she may uncover in the sales tax audit with other state and federal agencies even if they are misinterpretations of the record. Therefore even if the state sales tax matter appears to result in a favorable disposition despite some adverse and inaccurate findings, those findings and tax audit adjustments should not be allowed to stand. Even if it may seem counterproductive or less than cost-effective at the outset, through information sharing these erroneous adjustments may become the basis for a referral and further tax enforcement measures.
California Sales Tax Audit Attorney
If your business is facing a tax audit in California, it is prudent to seek the guidance of an experience tax professional. The Tax Law Offices of David W. Klasing are dedicated to assisting taxpayers facing serious state and federal tax concerns. We work to mitigate the consequences you face and to prevent a limited audit from transforming into wholesale inquiry into you business’ tax activities. To schedule a reduced-rate consultation, call us at (800) 681-1295 or contact us online.
