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California Sales Tax Audit Procedures and Techniques

The purpose of a California sales tax audit is to correctly measure the tax. The Board of Equalization (BOE) auditor conducts preliminary probing and testing in order to see if there is a potential area of misplaced tax. Sometimes preliminary testing reveals that California sales tax audit of business is not warranted. When deciding whether to waive or perform an audit, the auditors consider the following points:

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  • Are accurate and complete records kept?
  • Does the markup on cost of goods sold appear adequate?
  • Are the persons preparing tax returns familiar with the law and the rules and regulations pertaining to their particular business?
  • Are the reported amounts reasonable considering the type of business, nature of the premises, the location in the community, etc.?
  • Do the reported amounts vary materially from period to period?
  • Is there a good system of internal control?
  • Is the taxpayer’s past record good?

In the course of a California sales tax audit, the auditor prepares Audit Memorandum of Possible Tax Liability. Government Code sections 15618 authorizes an auditor to examine records of the taxpayer and of persons doing business with the taxpayer. Revenue and Taxation Code (RTC) section 7054 provides additional authority for the examination of records pertaining to the sales and use tax. Similar provisions are found in other tax and fee programs administered by the BOE (Board). Government Code section 15613 authorizes the Board to issue a subpoena for the attendance of witnesses or to produce books, records, accounts and papers.

Auditor or supervisor can request records and documents from taxpayer but must explain to taxpayer why records and documents are requested. If taxpayer refuses to provide records – BOE can subpoena them. Auditor can not review records if access denied by taxpayer, unless auditor has a subpoena. If the taxpayer insists on video or audio taping the auditor as a condition of making the records available, the Board may issue a subpoena for the records.

Most of the time taxpayer's request for video and audio taping is not approved anyway. The Board may allow a taxpayer to audiotape audit discussions with the auditor provided the Board makes its own audio recording.

In cooperation with Department of Justice, BOE can provide assistance in the enforcement of money laundering violations by reporting suspected violations to DOJ. To accomplish this, BOE will pay attention to suspicious transfers of over $5000.

Once the taxpayer has filed a claim for refund and has requested or suggested determining the amount of refund by means of sampling, the claim will be assigned to an auditor who will contact the taxpayer to determine if sampling is feasible and, if so, develop a mutually agreeable sampling plan. If a refund situation arises in the course of the audit, the auditor normally secures a claim for refund from the taxpayer utilizing the form BOE–101, “Claim for Refund or Credit.” The taxpayer should always be allowed a reasonable time in which to support a claim for refund during a California sales tax audit.

Under most circumstances, ninety days is considered reasonable. For extension of the 90 day period, BOE will usually require waiver of credit interest, as a condition to deferring action on a claim for refund (Revenue and Taxation Code section 6908(b)). Taxpayer will have to sign the form BOE–146, Waiver of Credit Interest (can be signed by partner, corporate officer, or holder of proper power of attorney). On occasion, BOE can give 90 more days without waiver if the size of claim and amount of supporting detail required is large. Maximum extension time taxpayer can obtain to compile all necessary data is usually 12 months.

If the taxpayer does not provide the supporting data within the twelve-month period, the claim for refund will be denied for failure to support the grounds upon which the claim was based. Extensions over 12 months are very rare and must be approved by high-ranking BOE officials.

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