California Tax Audits
BOE AUDITS follow pretty much a standard course. Typical Issues in most California sales tax audits:
- Whether your business reported all gross receipts from sales of tangible personal property and taxable labor and services?
- Whether your business reported the cost of all business equipment and supplies that the taxpayer purchased without tax either from out-of-state vendors or for resale?
- Whether your business claimed deductions properly?
- Whether your business allocated local tax properly?
- Whether your business used the correct rate of tax when reporting sales in special tax districts?
- Whether your business applied tax to the taxpayer’s sales and uses of tangible personal property in the proper amounts?
In general, California sales tax returns are subject to audits in three-year intervals, or at the time a permit or license is closed out, or in connection with an audit of another permit or license held by the taxpayer or fee-payer. Audits may also be initiated as a result of information received from outside sources.
It is important to remember that the conduct of California sales tax audits is governed by law and Board of Equalization (BOE) policy. In particular, you should keep in mind that;
- Board auditors will impartially determine whether you have reported the correct amount of taxes or fees. Over payments, as well as underpayments, are considered during a California sales tax audit.
- The Board’s audit program is intended to correct errors that result in under-reporting or over-reporting and to inform you how to properly report your taxes or fees. During an audit, you may ask any questions you have about the law governing taxes or fees or your reporting requirements.
- BOE auditors are expected to conduct audits in a professional, courteous and helpful manner.
- Frequently, audits do not result in any change in tax or fee liability.
Examination and Testing
The BOE auditor usually starts the audit with a preliminary examination of your records. This examination gives the auditor some idea of what records are available and the procedures you use to record your transactions.
The auditor then performs some tests to determine if a complete audit is needed. For a sales tax audit, for example, the auditor may compare:
- The total sales recorded on your books to the total sales reported on your sales tax returns
- The total sales recorded on your books to the total sales on your income tax returns
- The sales tax reimbursement you collected to the tax reported on your returns
- Claimed sales for resale to resale certificates
The auditor might also check your purchase invoices for equipment or supplies purchased without tax or might test your achieved markup on cost.
Notice of Audit Results
If it is determined that you do not owe taxes or fees, or you are not entitled to a refund, you will receive a letter stating that your returns have been accepted as filed.
If the auditor determines that you owe taxes or fees, or are entitled to a refund, he or she will prepare a Report of Field Audit or a Report of Investigation that summarizes those findings. If you have indicated you agree with the audit findings, the report will be reviewed for accuracy and sent to the BOE’s Sacramento headquarters for action. Based on the audit findings, you will later receive:
- A Notice of Determination (billing), or
- A Notice of Refund
If You Disagree with the Audit Results
If you indicate you disagree with the audit results, the auditor will generally defer preparing the final audit report until you have provided additional information to support your argument. You should clearly explain why you disagree and ask the auditor about the documentation you need to support your position. Once the auditor has considered your reasons and documentation, he or she may:
- Adjust the audit results.
- Request more information and arrange for another discussion, or
- Recommend the next step in resolving the dispute: discussion with the audit supervisor.
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