A managed tax audit is not a federal IRS program. Rather, it’s a state-level, voluntary self-audit arrangement most notably offered by the California Department of Tax and Fee Administration (CDTFA) through its Managed Audit Program (MAP). Under MAP, qualifying businesses perform defined audit procedures on their own books under an agreement and auditor oversight in exchange for a statutory 50% reduction in interest on any additional tax found and other practical benefits (flexible timing, targeted scope). Participation is voluntary, the agency decides eligibility, and you retain full protest/appeal rights on the results. By contrast, the IRS conducts standard correspondence/office/field examinations and does not offer a statutory “managed audit” program.
How California’s Managed Audit Program Works (Eligibility, Agreement, and the 50% Interest Rule)
CDTFA screens for MAP suitability and has sole discretion to approve participation. Statute and guidance make eligibility narrower where transactions involve numerous exemptions or complex issues; the statute lists criteria and confirms that no taxpayer is required to participate. If approved, you and CDTFA will sign a Managed Audit Program Participation Agreement (CDTFA-526), which outlines the period, procedures (including sales, purchases, or both), deadlines (typically up to ~90 days), the circumstances under which CDTFA may void the agreement, and the payment due date. Upon timely completion and verification by CDTFA, interest on unpaid liabilities for the covered period is computed at one-half the normal rate. If you start but do not complete the work or CDTFA terminates the agreement for cause, the full interest rate applies, and CDTFA may proceed with a conventional sales tax audit. MAP can also be used in specific special tax/fee programs administered by CDTFA. Your decision to use MAP does not affect your right to protest or appeal the result.
Where a Managed Sales Tax Audit Helps and Where it Can Hurt
MAP is attractive when issues are straightforward, records are available and organized, and management can devote time to perform the agreed procedures accurately. You gain schedule flexibility and, most importantly, the statutory 50% interest reduction. That said, a managed sales tax audit is not a free pass. If your business has complex exemption issues, significant changes in systems or product mix, poor records, or potential badges of fraud, it may be unwise to self-audit. CDTFA retains discretion to void the agreement if you do not follow instructions or meet deadlines, and it may expand examination by reviewing transactions outside the self-audit where complexity warrants. A mismanaged self-audit can simply give CDTFA a more precise roadmap to assess more tax, without the benefit you sought. Moreover, while MAP is a civil program, a California sales and use tax examinations can create criminal tax exposure where suppression devices, skimming, or willful sales tax evasion appear; in those scenarios, you should treat the situation as a high-risk eggshell or reverse-eggshell audit and escalate immediately to privileged legal representation.
Contact the Tax Law Offices of David W. Klasing if You Are Considering or Have Been Offered a Managed Audit
First, do not default back to your original preparer to “explain” the numbers. Communications with non-lawyer preparers are not protected in criminal tax matters and can become evidence. By engaging our dual licensed Civil and Criminal Tax Defense Attorneys & CPAs at the Tax Law Offices of David W. Klasing, you place strategy inside the attorney-client and work-product privileges; where specialized accounting is needed, we retain CPAs under a Kovel arrangement so their analytics and workpapers remain within the privilege umbrella. This insulates candid discussions and enables rigorous, defensible computations.
Substantively, we insist the MAP Participation Agreement narrowly define the scope, test periods, procedures, and deadlines to fit your operations. We then execute the self-audit to CDTFA specifications but with advocacy: (1) reconcile reported sales with bank/POS and purchase streams; (2) verify exemption documentation; (3) apply the correct local/district rates and tax-inclusion rules; (4) document sampling methodologies; and (5) prepare clear schedules that anticipate CDTFA review. Where CDTFA wants to carve out complex transactions for its own review (as its guidance contemplates), we coordinate that track while preserving your 50% interest benefit on the managed portion and protecting your right to appeal. If CDTFA threatens to void the agreement, we work to cure promptly or transition to a conventional audit without conceding issues that are better resolved at Appeals.
If CDTFA (or another California state tax agency) has offered you a Managed Audit, you are in a tactically sensitive moment: done right, MAP can cut interest by half and streamline the process; done poorly, it can magnify exposure and invite broader scrutiny. Our dual licensed Civil and Criminal Tax Defense Attorneys & CPAs are experienced in guiding businesses through CDTFA disputes, conventional state audits, and high-risk federal/state eggshell and reverse-eggshell examinations. Start with a confidential, reduced-rate initial consultation with the Tax Law Offices of David W. Klasing: call (800) 681-1295 or reach us through our online contact form HERE today.
