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The California Department of Tax and Fee Administration (CDTFA) routinely conducts sales tax audits on California businesses and nationwide where appropriate, mainly focusing on sales tax compliance. These sales tax audits are especially critical for companies in Los Angeles that might not be charging the correct amount of sales tax or are failing to remit collected taxes to the state government. The CDTFA’s thorough approach includes demanding access to all relevant books and sales records to ensure reported sales and collected taxes align with actual transactions. They also employ undercover enforcement operations to verify compliance, especially targeting cash-based businesses suspected of skimming cash or utilizing zapper programs to evade taxes.
A CDTFA sales tax audit can be an intense and daunting ordeal for any business owner due to the exhaustive nature of the required documentation and the detailed scrutiny of business practices. It is not uncommon for an initial audit to culminate in a Notice of Determination, which, if not contested within 30 days, becomes final. This makes it imperative to have an experienced sales tax attorney to guide the preparation and response strategy for the audit, ensuring all filings are accurate and timely.
If you know you have cheated on your sales taxes, and the California Department of Tax and Fee Administration (CDTFA) or the IRS wants to speak with you, the situation can rapidly escalate. During a sales tax audit, the CDTFA may look for signs or badges of fraud that would allow them to initiate a criminal tax investigation. A poorly handled sales tax audit can result in significant tax liabilities, fines, and penalties, especially if the CDTFA uncovers evidence of underreporting or unreported sales. When facing high-risk tax audits from agencies like the IRS, FTB and CDTFA, certain red flags, such as destroyed records, underreported income, badges of fraud, or unfiled returns, can intensify the examination and may lead to high-risk eggshell and reverse eggshell tax audits. As such, residents and businesses must be aware of potential criminal tax violations and the signs indicating that they might be under a more rigorous criminal tax investigation by the IRS’s Criminal Investigation Division (CID) FTB or CDTFA. This is especially so when the taxpayer has a history of blatantly cheating on their tax returns and is now under audit and thus fears criminal tax prosecution. Even international tax evasion schemes that utilize remote tax havens are easily detected by the IRS, which works with tax and law enforcement agencies around the globe and throughout the United States. The CDTFA often shares highly incriminating information with other tax authorities, such as the Franchise Tax Board (FTB) and the IRS, making it essential to handle the audit with extreme caution.
The Tax Law Offices of David W. Klasing has decades of experience providing high-risk sales and use tax audit representation, including representation concerning eggshell audits and reverse eggshell audits to all kinds of businesses within the state of California and across the U.S. as to federal audits or criminal tax investigations. Our award-winning dual licensed Tax Attorneys & CPAs are uniquely equipped to protect your net worth and your liberty. David W. Klasing is a dually licensed tax attorney and CPA who has decades of experience as a former auditor himself, having worked for various public accounting firms. As such, he can often anticipate the approach auditors will take and can craft a strategy to meet these challenges. To schedule a confidential, reduced-rate initial consultation, call our Irvine or Los Angeles law firm at 888-564-1409 or schedule online today HERE.
Common Triggers for a CDTFA Audit
Several factors can trigger a CDTFA sales tax audit. Some of the most common triggers include:
- Inconsistencies in sales tax filings, such as discrepancies between reported sales and actual sales recorded in business records.
- Failure to file sales tax returns or filing late returns.
- High-risk industries such as restaurants, bars, and retail businesses, particularly those dealing heavily in cash, may raise suspicions of cash skimming or underreporting of sales.
- Third-party reports suggesting improper tax practices, such as vendors or wholesalers providing inconsistent information compared to the business’s sales tax filings.
In Los Angeles, businesses handling large cash transactions or operating within hospitality, retail, or entertainment industries may be subject to additional scrutiny due to the inherent risks of underreporting sales.
What to Expect During a CDTFA Sales Tax Audit
CDTFA audits are known for being comprehensive, often covering a look-back period of at least three years (eight years if fraud is suspected). Businesses under audit should be prepared to provide extensive documentation, which may include:
- Sales records and receipts for every transaction during the audit period.
- Federal and California Income and Sales Tax returns filed during the audit period, along with supporting documents such as invoices and purchase orders.
- Bank records and financial statements to verify the accuracy of reported sales.
In some cases, auditors may request third-party records from suppliers or wholesalers to cross-check sales data. Businesses in Los Angeles that operate primarily on a cash basis may face additional scrutiny, as auditors might send undercover agents to observe business operations and ensure accurate sales tax collection.
For example, auditors may use industry-specific methods to assess compliance. In bars and restaurants in Los Angeles, auditors may conduct an undercover pour test to monitor the amount of liquor served in each drink to ensure the correct sales tax is paid on total sales. They may also look for signs of cash skimming or zapper programs to hide cash sales.
If your Los Angeles business is selected for a sales tax audit, it’s crucial to stay calm and immediately seek the assistance of our dual-licensed Los Angeles Sales Tax Attorneys & CPAs. At the Tax Law Office of David W. Klasing, our innovative, forward-thinking team of tax attorneys and accountants provides sales and use tax audit and appeals representation, criminal tax defense representation, and business bookkeeping and tax planning and compliance services for all kinds of businesses statewide. Whether you are facing a sales or use tax audit, are concerned about criminal tax exposure, or have questions about best practices for bookkeeping and accounting, tax planning, or tax compliance, rely on our dual-licensed California Tax Lawyers and CPAs for clear and trustworthy guidance.
Criminal Exposure in Sales Tax Audits
These audits are widespread among cash-intensive businesses in Los Angeles, such as restaurants, bars, and companies operating in the California Underground Economy. Businesses that use zappers or other sales suppression devices are especially vulnerable to criminal tax exposure. A poorly handled audit or an eggshell sales tax audit that uncovers discrepancies can result in significant additional tax assessments, fines, and penalties.
Furthermore, the CDTFA is known to report violations uncovered during an audit to other government agencies. For businesses like bars that require licenses or for licensed professionals, this could lead to a suspension or loss of the business’s ability to operate. For many, this marks the beginning of a series of events that can be described only as a nightmare.
Applicable CDTFA Criminal Tax Statutes
The California Department of Tax and Fee Administration (CDTFA) has several applicable criminal tax statutes that businesses should be aware of. Under Section 7153, any person who submits a false or fraudulent return with the intent to evade tax liability is guilty of a misdemeanor. Penalties for this violation include fines ranging from $1,000 to $5,000, imprisonment of up to one year in county jail, or both.
Under Section 7153.5, if the unreported tax liability exceeds $25,000 over 12 months, the offense is elevated to a felony, punishable by fines ranging from $5,000 to $20,000, imprisonment for 16 months, two years, or three years, or both.
Additionally, under Section 7153.6, using automated sales suppression devices or zappers to defeat or evade sales tax obligations is also a misdemeanor. The law requires any person using such devices to pay all taxes, interest, and penalties due to their use. Any prosecution for violations of these criminal tax provisions must be initiated within five years from the commission of the offense or within two years after the violation is discovered, whichever is later.
Consequences for Licensed Professionals and Businesses
A criminal conviction for tax fraud can have devastating consequences for licensed professionals and businesses in Los Angeles that depend on state permits. For instance, under California Business and Professions Code Section 24205, an alcoholic beverage license can be suspended if a business falls more than three months behind on sales and use tax payments. In cases where an alcoholic beverage license is tied to a delinquent seller’s permit, the suspension can be immediate.
Similarly, licenses for the sale of cigarettes and tobacco products can be suspended or revoked for the sale of untaxed products, further amplifying the potential negative consequences of a poorly managed audit.
Do California Auditors Coordinate with the IRS & FTB in Los Angeles?
In Los Angeles, when conducting a sales tax audit, the California Department of Tax and Fee Administration (CDTFA) often uncovers more than just discrepancies in sales taxes. There’s a significant risk that these audits can lead to the discovery of California or Federal income tax fraud or evasion. If such issues are detected, the auditor may discreetly refer your case to the Franchise Tax Board (FTB) or the IRS’s Criminal Investigations Division, potentially recommending prosecution. Direct prosecution for sales tax fraud is also a viable outcome.
Information Sharing Among Tax Authorities:
Interagency Cooperation
Even if a sales tax audit in Los Angeles does not initially reveal factors that warrant criminal tax prosecution, the CDTFA frequently shares information gleaned from audits with the IRS and FTB. This collaboration underscores the necessity for disputing any incorrect sales tax audit adjustments. If the CDTFA proposes a sales tax liability for unreported revenue, corresponding income tax penalties and interest from the IRS or FTB could logically follow due to the routine information sharing between these entities.
Government Vigilance
In a challenging economic climate, where government revenue shortfalls are expected, Los Angeles sees an intensified effort by the state to enforce tax laws. This is evident in the aggressive conduct of sales and use of tax audits by the CDTFA, which aims to maximize tax collection.
If your Los Angeles business is subjected to a sales tax audit, it’s crucial to handle the process meticulously:
- Preparation is Key: Ensuring thorough preparation and having all your records in order can mitigate the risk of adverse outcomes. Questions to consider include:
- How can I ensure the audit runs smoothly?
- What steps can I take to prepare effectively for an audit?
How to File an Appeal and Dispute a CDTFA Sales Tax Audit Finding
In California, tax disputes are generally addressed by the California Office of Tax Appeals (OTA). This unbiased and autonomous appeals body handles tax disagreements involving the CDTFA (formerly BOE), FTB, and EDD, interest charges, and/or penalties associated with income taxes, sales and use taxes, and other state taxes. Following is the process of filing an appeal for CDTFA sales tax audit findings:
Step 1: Filing the Petition
- If the CDTFA determines that you owe additional taxes or penalties, you will receive a Notice of Determination displaying the amount owed.
- To dispute the Notice of Determination, you must file a petition for redetermination within 30 days of the notice.
- Meeting the deadline: It is crucial to meet the 30-day deadline. If you miss it, your liability will become final and due immediately, with no further recourse except paying the amount owed and then filing a refund claim.
- The petition must contain specific criteria set by the CDTFA, the most important being a clear, detailed, and factual basis for your disagreement.
- The petition can be filed online, via fax, or by mail.
Step 2: Appeals Conference
- After filing your petition for redetermination, the Business Tax and Fee Division (BTFD) will review it and issue a decision.
- If you disagree with the decision, you must request an appeals conference within 30 days. Failure to do so will result in issuing a Notice of Redetermination, and your appeal will end.
- The appeals conference is an informal discussion of the relevant facts and applicable law regarding your appeal. The Appeals Bureau will review any evidence or information you present at this stage, provided it meets specific standards. The BTFD will also be able to argue its case, making skilled legal representation critical at this stage.
Step 3: Appeals Bureau Decision
After reviewing both sides’ arguments and evidence, the Appeals Bureau will issue a decision in writing. Depending on the Appeals Bureau’s findings, your appeal may be granted, denied, or partially granted.
Our dual-licensed Los Angeles tax attorneys & CPAs provide skilled representation before an appeals officer. An essential element of having a successful outcome in the appeals process is to have detailed and organized records. Utilizing our extensive training and experience, we make sure your documents are in order and that you are in the best position to prevail at the appeals stage. Dealing with the OTA can seem daunting, but we bring strategic insight to the process. Whether you’re dealing with an IRS or California state tax audit, challenging a tax assessment, or seeking relief from IRS collection actions, our meticulous approach ensures you’re well-prepared for every step of the appeals process. From handling trust fund recovery penalties to disallowed business expenses, we will ardently fight for you, keeping you informed throughout the process.
Recently, the CDTFA issued updated guidance on protocols and procedures for disputing, or “appealing,” CDTFA determinations. 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 our experienced CDTFA Audit Attorneys before filing an appeal or petition for redetermination due to the legal and financial complexity involved.
Get Back into Tax Compliance without Facing Criminal Tax Prosecution in Los Angeles
Should you find yourself in a situation where you’ve not fully complied with tax-related responsibilities, voluntarily disclosing this can be an essential step toward rectification. Proactively revealing missteps or intentional evasion before an audit or criminal tax investigation is underway offers a significant opportunity to return to compliance and avoid criminal prosecution for tax crimes. It’s important to understand that even if your disclosure doesn’t tick every box, your proactive and prompt action can yield positive results. Throughout this process, adhering to the advice of trusted legal professionals is paramount in effectively navigating this complex terrain. It offers a systematic and secure avenue to rectify their tax status while avoiding criminal tax prosecution. Like the IRS, the State of California’s Franchise Tax Board (FTB) and the California Department of Tax and Fee Administration (CDTFA) provide a method for non-compliant taxpayers to regain compliant status by coming forward with the details of their failure to comply with the California state tax code. The path to voluntary disclosure to the FTB depends on whether you are an in-state or out-of-state filer.
Our dual-licensed Los Angeles Voluntary Disclosure Attorneys and CPAs navigate the complexities of various federal and California state voluntary disclosures, including domestic, offshore, CDTFA, and FTB voluntary disclosures, streamlined procedures, and delinquent FBAR and international information return submission procedures. As long as a taxpayer who has willfully committed tax avoidance (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the federal tax non-compliance through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation/prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
Call (310) 492-5583 or contact us online today to schedule a reduced rate initial consultation at our Los Angeles tax law offices or one of our other convenient locations across California.
Our Los Angeles Office is Conveniently Located at:
10940 Wilshire Blvd 1600
Los Angeles, CA 90024
(310) 492-5583
