On November 13, 2014, the owner of software company was arrested for failing to remit sales taxes that his company collected between 2004 and 2011. The taxpayer had been investigated over the course of several years and was charged with theft when it was discovered that he had forged tax documents and pocketed $1.4 million in taxes.
Triggers for Sales Tax Audits
The following acts are seen as red flags for the Board of Equalization (BOE) to investigate businesses for sales tax evasion:
- A customer reports that the business did not use a cash register to record a purchase and/or did not issue a receipt for the sale
- An employee reports that the business did not report all sales taxes collected
- The business has not registered in a state in which it has a “nexus” (a connection such as a physical location in that state, employees working or soliciting business there, etc.)
- The business advertises at prices far below its competitors for the same and/or comparable products
- The business reports a large number of exempt sales
- The business is consistently late in reporting and paying sales tax
- Schedules or supporting information are missing from the business’ tax returns
- A restaurant’s Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips falls below 8% (IRS trigger)
- The business or its owner was recently audited by the BOE or the IRS and a deficiency was discovered (this is commonly referred to as a “piggy-back” assessment tax audit)
In California, noncompliant businesses have cost the state an estimated $2 billion. In order to collect much-needed state revenue and protect honest businesses from being subjected to a competitive disadvantage, the BOE recently sent out letters to nearly 6,000 California business owners in select zip codes, informing them that they should expect an in-person visit soon from one of numerous Statewide Compliance and Outreach Program (SCOP) teams.
Potential Consequences of Sales Tax Investigations
IRS audit. The state may share its findings with the IRS, and a business is likely to find itself facing additional taxes and penalties based on the BOE audit.
Loss of business license. Business licenses cannot be obtained or renewed in California if the owner is not up to date with their taxes. Our office recently handled a case in which a small business owner who had not filed or paid sales tax in quite some time was arrested for operating without a license.
Criminal penalties. Intentionally failing to report and pay sales taxes that you have collected is a misdemeanor, but evasion of $10,000 or more may be charged as a felony. In all cases, noncompliance with sales tax rules and regulations may subject you to high interest rates on the amount owed, hefty penalties and/or jail time.
Strategic and Cost Effective Representation
The State Board of Equalization is very aggressive in its efforts to collect delinquent sales taxes. If you are facing an audit or investigation with the BOE, consult with a tax attorney immediately. The tax lawyers at Moskowitz, LLP provide the firm’s clients with skilled, efficient and aggressive personal service in tax audits and appeals. Contact our San Francisco office today for a consultation.