Sales tax audits by the California Board of Equalization are among the most costly and time-consuming audits, particularly for businesses that have been lax with their recordkeeping. If your business is facing a sales and use tax audit, it is important to know what to expect and what steps you can take to ensure that the process goes smoothly and that you are not charged any more than you owe – or that you get the full refund that is due to you.
Sales tax audit triggers
While large corporations are accustomed to sales and use tax audits, for smaller businesses an audit may be somewhat of a shock. There are a variety of triggers for these audits. Although companies are usually selected for their size and sales volume, a large number of exempt sales, large deficiencies from prior audits and new internet sales in that state are also triggers. Closing a store or a business, late filing, or simply filing one fairly complicated return may also make your business subject to additional scrutiny. Although whistle blowing doesn’t trigger a large number of audits, reporting by disgruntled employees (and former employees) should also be taken into consideration, because these employees often have inside information which makes investigation fruitful for the State.
What the auditor is looking for
The purpose of a sales tax audit is to determine that the sales and use tax returns filed by your business are accurate. Here is some of the information that the auditor will be seeking:
- All gross receipts from sales were reported
- All deductions reported on the returns were properly claimed
- Proper taxes were applied to sales and uses of tangible personal property
- Local taxes were properly allocated on the returns
- The correct tax rate was utilized when reporting sales in special tax districts
- The cost of business equipment and supplies purchased without tax (and that would be subject to use tax) have been reported
The California Board of Equalization notes in Publication 76, the BOE’s manual on audits, that it is the goal of a sales and use tax auditor to clearly answer these questions in as little time as possible.
Things you can do to minimize the chances of a tax audit
There are a few things that business owners can do that may minimize the chances of sales and use tax audit:
- Always file your sales and use tax returns on time
- Make sure that your returns are accurate
- Consider forming a corporation (sole proprietors are audited more frequently than C and S corps)
- Use software to manage your sales and use tax records
- Consider outsourcing to an accounting firm
The extra cost of software and/or outsourcing may well be worth the additional cost in the long run.
We assist our clients with a variety of tax issues
Moskowitz, LLP is a full service tax law firm that assists taxpayers with a variety of local, federal and international tax issues. If you are facing a sales or use tax audit, contact us today to learn what we can do for you.
In our next post in this series, we will go through the sales and use tax audit process and what kind of information the auditor may request.