Awards & Recognition
Like many states, California observes sales tax. When businesses collect sales tax from their customers, they assume liability for the remittance of those taxes back to the appropriate state government agency, which in this context is the California State Board of Equalization (BOE). If a business collects tax which it fails to remit, or if its revenue is not appropriately taxed, it may be selected for a California sales tax audit by the BOE. Other common reasons which can lead to selection include having a known association with previously audited entities, being in a cash-based and therefore high-risk industry (e.g. bars and restaurants), or even being selected entirely at random.
However, no matter why your company was chosen, it is critically important for you to recognize that audits are serious matters. The BOE publicly acknowledges that the vast majority of its revenue — more than 80% — is dependent upon use and sales tax, and as a result, the organization pursues audits very aggressively. Even if you believe you are in full compliance with all federal, state, and municipal laws and regulations, it is nonetheless very important to approach the examination with the help of an experienced Irvine sales tax audit lawyer and accountant to minimize your risk of being overtaxed. Furthermore, should the audit yield allegations of fraud or evasion which subsequently lead to litigation, a criminal tax defense attorney can advocate for you in court.
Deadlines are paramount when it comes to tax compliance, so if your company has been selected for an audit, you need to act fast. Depending on the severity of any errors which are uncovered and whether criminal charges enter the equation, you could be fined with tens or hundreds of thousands of dollars, and could even be sentenced to prison.
How to Prepare for a BOE Sales Tax Audit
Audits have gained a very negative and intimidating reputation over the years, and feelings of dread, stress, and anxiety are common after receiving a selection notification. There are three important points to remember going into the process: try not to panic, immediately contact a qualified accountant and attorney, and do not make the mistake of attempting to ignore the audit away. No matter how unresponsive you are, the audit will never disappear into oblivion, and you will simply aggravate your situation.
Generally speaking, the process begins when you receive a phone call from the BOE. (If you cannot be reached via phone, you will eventually receive a letter.) When the auditor contacts you, he or she should tell you:
- The time period the audit will cover, typically three years.
- Which records will be subject to examination.
He or she should also ask you about:
- The best time and place for the process to begin.
- Your general operative and bookkeeping procedures.
Additionally, at this time you should let the auditor know that you will be involving an authorized representative, who will then be contacted by the auditor.
Understanding the Sales Tax Audit Process
The purpose of a sales tax audit, in the BOE’s own words, “is to verify that you have correctly reported taxes or fees on your returns.” Should the auditor uncover apparent instances of fraud or evasion, he or she may refer your case to the Franchise Tax Board (FTB), or even the Criminal Investigations Division of the IRS.
In order to make an assessment about your compliance, the BOE auditor may compare the total sales noted in your bookkeeping against what you reported on your sales tax returns, as well as your income tax returns, or compare your purchase invoices against recorded purchases. It is also very important to be aware of the following BOE confidentiality policy: “All records, even those you consider confidential, must be made available for review if they have information about your tax or fee amount due. If you refuse to provide your records, we may issue a subpoena.”
There are several special alternative types of audits which may apply to your business in Orange County. For example, if your records are primarily electronic, the BOE may opt for a computer-assisted audit, or CAA, which is generally more rapid than the standard process. If your records appear to contain errors, you may be chosen for a more in-depth review, which could be conducted on either a sample basis, which of course evaluates samples, or the more thorough actual basis, which evaluates each and every individual transaction.
When the sales tax audit examination is finished, you and/or your representative will attend an exit conference with the auditor, and possibly his or her supervisor. While your representative can attend this conference in your place, the BOE recommends that you personally attend, as doing so both grants you an opportunity to review the findings, and to clarify any remaining questions you might have.
You may either agree or disagree with the BOE’s findings. If you agree, the auditor’s report will be reviewed, and you will ultimately receive either a Notice of Determination (i.e. a bill) or a Notice of Refund. You then have 30 days from the date of the Notice of Determination to pay what you owe, or risk:
- A penalty equivalent to 10% of the unpaid fees or taxes you owe, called a finality penalty.
- Collection actions like property liens and bank account levies.
If you disagree, one of three things can happen. The auditor may:
- Adjust your results, if your disagreement is supported by documentation.
- Ask for more information.
- Refer you to his or her supervision for a continued discussion.
If your business has been chosen for a BOE examination, don’t wait to get help until it’s already too late. To schedule a reduced-rate initial consultation with an experienced combination CPA and Irvine sales tax audit attorney, call The Tax Law Offices of David W. Klasing at (949) 681-3502 or (800) 681-1295, or contact us online.
