Failing to Report Sales and Use Tax
This one is pretty obvious, and it is not that hard for the CDTFA to find out. If you have a website or phone number for your business but are not in the CDTFA’s system, or if you are paying payroll tax or other tax in California but have not registered for sales and use tax, you have a big red target on your back.
Any time you are selling goods in the State of California or purchasing goods from out of state and bringing them into California (even if it is just passing through) without paying sales or use tax, you can be audited.
If you or your vendors are audited by the CDTFA, it can trigger follow-up investigations by other agencies. Even if you are located outside the state, if you sell anything in California, or it makes a stop in California while being shipped elsewhere, you may be assessed a tax and could be targeted for audit.
Consistently Reporting or Filing Your Taxes Late
If you have a history of failing to report, file or pay sales tax, the CDTFA becomes suspicious of your bookkeeping practices. It also understands that if you are struggling to pay the tax, there is an incentive to under-report sales as well.
Reporting Substantial Exempt Sales
As mentioned above, reports of exempt sales cause the spotlight to head your way. The rules and regulations governing exempt sales are complicated, and there is a high tendency towards misunderstandings and mistakes. The CDTFA looks for innocent oversights and negligence as well as willful fraud.
To reiterate, if you are in the business of exempt sales, the CDTFA will likely audit you.
You Have Been Audited in the Past
This is especially true if you have been audited in the past for a specific issue that you have not yet cleared up. If you have been audited once, you are likely to be audited again. If you have not fixed the problem, you will be charged again until the CDTFA is satisfied you are doing things right.
One of Your Vendors Was Audited
This is called audit by association. A few paragraphs ago we said an audit at one of your vendors could trigger an audit of your business. If you learn that one of your vendors or suppliers is being audited, do not be surprised to find an audit letter addressed to you in the near future.
Large companies get audited regularly, and these can trigger “whipsaw audits” on all its clients. This is how smaller businesses that previously flew under the radar attract notice.
Your Business Had a Major Change
If you acquired a business, opened a new location, or closed one, the CDTFA may become interested in your sales tax record. It also pays attention to when there is a sudden increase or decrease in sales. This is why new businesses may be at risk for an audit.
Your Industry is Known for Substantial Non-Compliance
Some industries just have a reputation for sales tax non-compliance, especially businesses dealing in cash:
- Grocery stores
- Gas stations
- Liquor stores
Cash is easily “lost” or hidden, but the CDTFA wants every bit of it recorded and reported.
Audits are common for industries that tend not to adhere to sales and use tax law as a matter of course. There may be a lack of internal controls, or the requirements are not understood. This often happens with exempt sales and reporting consumer’s use tax.
An audit is nobody’s idea of fun, but it happens. Sometimes, the reason for the audit is out of your control. Sometimes, you just made a mistake. If you are in a cash-intensive industry or have been audited before, you can take it as a given that you will be audited at some point.
Be sure to read the next post that explains how audits are announced, the records that may be requested, and other details surrounding the next segment of the audit process.