A sales tax audit is a sobering ordeal, but it is one that many (if not most) California businesses will face eventually.
If you are selected for an audit by the California Board of Equalization (BOE), you will have to prepare a wide range of documents and records for your auditor to review, but how far back will the BOE want to look, and what are your rights?
Today, we will take a look at the California tax audit statute of limitations within the California sales tax audit process and what this means for your business.
In general, statutes of limitations are laws that determine how much time can pass between an event and any legal filings related to that event. It's the time period within which the BOE must audit your business.
Once that time period has passed, they cannot assess or collect taxes or penalties for those years, or are likely to be dismissed if they are filed.
In criminal matters, after the statute of limitations has passed, the courts no longer have jurisdiction.
Different legislative bodies set different statutes of limitation which will vary by event, crime or location.
In terms of California sales tax audits, the statute of limitations refers to how many years the BOE has to assess any unpaid taxes, fines, and penalties you may owe.
The California sales tax audit statute of limitations is 3 years for taxpayers who have filed tax returns. That means the BOE has three years within which they can audit those returns. However, if you fail to file tax returns, the statute of limitations is 8 years.
There are some exceptions that could extend California tax statute of limitations:
California sales tax is charged state-wide at a standard rate of 7.25%, but local jurisdictions have added additional district taxes in many areas, which can range from 0.10% to 2%.
The money raised by sales taxes is the main source of funding for state parks, roads, law enforcement and other public services.
California’s Board of Equalization (BOE) is the body responsible for administering and collecting many of the state’s taxes, including sales and use tax.
The BOE regularly conducts audits of California businesses to ensure that they are complying with state tax law.
The goal of an auditor is to find misreported or unpaid taxes which have been neglected either in error or through tax evasion.
Exactly how an audit is conducted varies depending on the type of business being audited. At a minimum, they include an examination of records, such as:
A sales tax audit can happen for any reason, whether it's in relation to California onlines sales tax or sales tax for a brick-and-mortar business: sometimes, it is just your turn to be audited.
However, there are many circumstances which may make it more likely that you will be selected, if any of these apply:
If you have recently gone out of business, you can still be audited, and the BOE will attempt to hold you and anyone else directly involved personally responsible for found liabilities.
The process for appealing a BOE sales tax audit begins at the exit conference after the auditor has finished their investigation.
If you disagree with the auditor’s report, you will generally be given a time period within which to collect evidence and make your case.
The BOE appeals process is lengthy, so you will have several opportunities to prove that you do not owe the assessed liability.
If your appeal is denied at every level, you can eventually appeal to the courts, although California law requires that you must pay the assessed tax (minus interest) before you can file.
If the court finds in your favor, then you can request a refund.
While nothing can guarantee that you’ll never undergo an audit, preparing now will make any future audit as painless as possible.Reviewing your sales tax record keeping on a regular basis and making sure that you have good systems and internal checks and balances in place is your best defense.
Having a tax professional perform a “reverse audit” of your records from time to time is a great way to ensure that your bookkeeping is impeccable and ready for review by the BOE or the IRS at any time.
If you are selected for an audit, consider speaking with one of our qualified tax attornies early on.
Your attorney will be able to determine whether the BOE is operating within the California tax statute of limitations, as well as:
A sales tax audit is a stressful process for any business, but understanding the California tax statute of limitations and having an experienced tax lawyer on your side can smooth the way and give you true peace of mind.
While a California sales tax statute of limitations feels like the end of the world and can be stressful, there might not always be a trigger for it.
Keeping on top of your financial records is key, in any situation.
As a recap, the CA state tax audit statute of limitations is:
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Last updated: March 25, 2023
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