The California Department of Tax and Fee Administration (CDTFA) is a relatively new agency, forming in 2017 under the Taxpayer Transparency and Fairness Act. The purpose of the CDTFA is to administer various California taxes, including alcoholic beverage taxes, cannabis taxes, fuel taxes, taxes on insurers, and – most notably for the purposes of this article – sales taxes. Like the IRS and other tax agencies, the CDTFA periodically audits taxpayers – sometimes at random, but more often, because the taxpayer’s records indicate some sort of anomaly or problem (such as inaccurate or unfiled returns). Fortunately for taxpayers, the CDTFA has adopted policies enabling businesses to dispute CDTFA audit findings, such as determinations that delinquent sales taxes are due and owing. Recently, the CDTFA issued updated guidance on protocols and procedures for disputing, or “appealing,” CDTFA determinations, which our California sales tax audit attorneys will review in this article. If you disagree with a CDTFA finding and wish to file an appeal, read on to learn the basics about the California tax appeals process – and be sure to consult with an experienced CDTFA audit lawyer for assistance.
How to File an Appeal and Dispute a CDTFA Sales Tax Audit Finding
In the interest of brevity, the instructions contained in this article are necessarily condensed from the original report (CDTFA Publication 17), which readers may view in full here. For additional information, readers may refer to the CDTFA Sales and Use Tax page, browse our sales tax FAQ archives, or simply contact our offices to speak confidentially with a CDTFA lawyer regarding any sales tax issue.
Step 1: Filing the Petition
If the CDTFA determines that you owe additional taxes or penalties, you will receive a letter called a “Notice of Determination” displaying the amount owed. To dispute the Notice of Determination, you must file what is called a “petition for redetermination” within 30 days of the date on the notice.
It is crucial to meet the 30-day deadline, after which time “your liability will be final and will be due and payable.” In such a scenario, the only way to proceed is to pay the amount due, then seek a refund by filing a refund claim. Needless to say, it is more efficient simply to meet the deadline and proceed ahead to step two: the appeals conference.
The contents of the petition must meet specific criteria set by the CDTFA. Though all criteria must be satisfied, the most important is your ability to provide a clear, detailed, and factual basis for your disagreement. The petition may be filed online, sent via fax, or mailed.
Step 2: Appeals Conference
Your petition for redetermination will be reviewed by the Business Tax and Fee Division (BTFD), which will issue a decision to you. If you disagree with the decision, you must request an appeals conference within 30 days. “Otherwise… a Notice of Redetermination will be issued to you based on BTFD’s conclusions,” Publication 17 explains, “and your appeal will end.”
At the appeals conference (which may be recorded at your request), which is “an informal discussion of relevant facts and applicable law concerning your appeal,” the Appeals Bureau will review any evidence and information you present, providing it meets certain standards. However, the BTFD will also be permitted to argue its case against you, making skilled representation essential.
Step 3: Appeals Bureau Decision
After reviewing both sides’ arguments and evidence, the Appeals Bureau will issue a decision in writing. Your appeal may be totally granted, totally denied, or partially granted, depending on the Appeals Bureau’s findings.
What if I Disagree with the Appeals Bureau Decision?
If you disagree with the Appeal Bureau’s decision, there are two basic courses of action you may choose to take:
- One course of action is to submit a request for reconsideration to the Appeals Bureau, effectively restarting the process. (Once again, you will have 30 days to submit a written statement detailing your position, supported by facts and evidence.) The resulting determination is known as a “supplemental decision.”
- An alternative approach is to have a tax litigation attorney help you file an appeal with the Office of Tax Appeals (OTA), the California agency which handles tax appeals involving the CDTFA, Franchise Tax Board (FTB), and other state agencies. If you opt to go this route, you will need to present your case before a three-member panel of Administrative Law Judges (ALJs), who will issue a decision following review of the evidence.
How Does a California Department of Tax and Fee Administration (CDTFA) Audit Work?
As noted above, the California Department of Tax and Fee Administration (CDTFA) is tasked with auditing any issues related to the payment of state sales taxes. This can be an issue related to your business failing to charge a proper amount of sales tax or charging the sales tax and not properly remitting it to the state. If the CDTFA believes that your business is underpaying sales taxes, they will request to look at your books and other documents and compare the information in your business records to the amount of sales tax revenue remitted to the state.
CDTFA audits can be very thorough. You may be required to produce records and receipts related to every sale you have made, going back at least several years. Generally, the sales tax auditor will begin the process by comparing the total sales recorded on the taxpayer’s books to the total sales reported on the sales tax and income tax returns. They will also compare the California sales tax reimbursement collected to the amount reported on your sales tax returns.
CDTFA auditors are known to get creative and to switch up their tactics depending upon which industry they are investigating especially where an audit involves a cash intensive business. For example, one of the industries where sales tax audits are common is the bar and restaurant industries, because these businesses predominantly deal in cash transactions where it is easier to fudge the numbers without getting caught. When performing a sales tax audit for a bar, the auditor will often conduct what is known as the undercover “pour test.” The auditor will come into the bar posing as a normal patron and ask for a series of drinks. They will then actually examine the amount of liquor poured into each drink to ensure that sales taxes are properly being paid on the full amount and use this information to assist them in conducting their audit.
How Can a dual licensed Tax Attorney & CPA Assist Me with my CDTFA Audit?
An experienced sales tax attorney & CPA can help you collect the proper documents and communicate with the CDFTA on your behalf. Once the audit is complete, they can challenge any issue they see at the exit interview with the auditor and their supervisor through the process explained below. Most times, if you get in touch with us quickly, we will be able to come to some sort of deal where you pay what you owe and possibly some fines without any more serious civil penalties or criminal tax exposure.
However, the best way to deal with any potential issues with the CDTFA is to hire an experienced dual Tax Attorney and CPA like those at the Tax Law Offices of David W. Klasing before you file your returns. Especially if you own a bar or restaurant or another business where CDTFA audits, including undercover audits, are common, you will need to keep extensive records in order to comply with your sales tax reporting obligations. Our CPAs can help you keep such records and our Tax Attorneys will make sure that everything is properly reported so that you do not face trouble down the line.
California State Sales Tax Audit Lawyers + CPAs for Small Businesses
Though the CDTFA makes efforts to provide clear instructions for taxpayers, it is not recommended to attempt handling an appeal without professional tax representation. It is in your best interests to consult an experienced California tax audit attorney before filing an appeal or petition for redetermination, due to the legal and financial complexity that is involved. As the CDTFA cautions taxpayers, “An appeal can be referred back to a prior step. As a result, you may go through some steps in the appeals process more than once.” Working with a tax attorney streamlines and facilitates the process, making appeals more efficient while increasing your odds of success. To set up a reduced-rate consultation, call the Tax Law Office of David W. Klasing at (800) 681-1295, or contact us online today.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento.
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