For small business owners with everything on the line, facing down a sales tax audit is a hugely intimidating prospect. In spite of all the possible complications during the audit process, we still see many people attempting to represent themselves before the Board of Equalization. When you are facing a frighteningly large sales tax determination and desperately trying to cut the costs associated with handling the matter, the temptation to tackle the audit yourself rather than investing in a qualified tax attorney can be strong. It is an understandable instinct, but it may not be in your best interest.
The truth is that it is easy for small business owners to fall into trouble with the BOE (even through no fault of their own) and exceptionally difficult to correct the problems that they create for themselves without a knowledgeable expert to navigate them through the process.
A brief intro to the California sales tax process
The California State Board of Equalization, also known as the BOE or sometimes the SBOE, is the State body responsible for issuing and administering sales licenses, permits and use accounts, as well as overseeing sales tax audits and the collection of any unpaid sales and use taxes. Anyone who sells goods or services in California is required to:
- Obtain the correct sales permit from the BOE
- Collect sales and use tax at the appropriate rate at the point of sale
- File regular self-reported sales tax returns to the BOE on a monthly, quarterly, or annual basis
- Pay any sales and use tax due at the close of each reporting period
In theory, reporting and paying sales tax is a simple process, but in practice it can be anything but. There are a thousand small ways that businesses can miscalculate or underpay the sales tax due to the Board of Equalization. All it takes to put you on shaky ground with the BOE is a bookkeeping oversight or a moment of crisis where funds set aside for sales tax are spent to cover payroll or pressing invoices. Often times, liabilities and mistake, once started, continue to snowball and become much worse than the original error. .
What happens in a sales tax audit and appeals?
Sales tax audits and the appeals process that follows them are extremely complicated due to the technical nature of how the Board of Equalization assesses sales tax. The arsenal of audit techniques used by the BOE to investigate sales tax compliance is powerful and includes everything from a general overview of accounts and markup calculations in retail shops to undercover operations, such as pour tests in restaurants and bars. The Board of Equalization can even conduct surprise inspections of your business during business hours. Even the general preparation of your books and records for inspection is a huge task because of the sheer volume of transactions: a basic list of materials requested by the BOE during an audit can be overwhelming, including (but not limited to) any or all of the following:
- Accounts receivable
- Balance sheets
- Bank statements
- Cash receipts
- Disbursement records
- Exemption certificates
- General ledgers
- Inventory records
- Physical inventory
- Purchase journals
- Purchase orders
- Register tapes
- Resale certificates
Once the BOE completes their audit review and sends the taxpayer a copy of the Board of Equalization audit work papers, there is a complex and lengthy series of appeals to get through. A basic sketch of a sales tax appeals process includes:
- Exit conference. At the end of the audit, there is a meeting where the auditors will present their case. If you disagree with their findings you will be expected to produce a detailed answer with evidence and documentation to support your disagreement. Additional evidence may be presented or the audit results can be disputed at the audit level.
- Meeting with the BOE Audit Supervisor. Once you have registered your dispute of the audit findings, your case will be escalated to the supervisor. At this point in the discussion, you will have another chance to discuss the audit. A Report of Field Audit or Report of Investigation will be filed by the auditor after this meeting to summarize the final findings of the audit, and will include a note about your disagreement.
- Meeting with a California Board of Equalization Representative. You will receive a letter giving you ten days to meet with a member of the Board, where again, you’ll need to discuss your issues with the audience and present a compelling case with documentation and evidence.
- Notice of Determination. After the Notice of Determination is issued, you’ll have just 30 days to prepare and file your first Petition.
- Board of Equalization Settlement. Prior to an appeals conference, you will be given an opportunity to attempt to settlement the matter with the Board of Equalization Settlement Division.
- Appeals conferences. This is an “informal” series of meetings where you will be asked to present all of your evidence and documentation to an Appeals Division attorney or auditor, also known as the conference holder.
- Decision and Recommendation. After the conference, the conference holder will prepare a document with analysis of the case and recommendations
- Hearing before the Members of the California State Board of Equalization. If you still do not agree with the recommendations, you may request a hearing before the board, where you will once again be required to resend your case and evidence.
- Settlement or Judicial Proceedings. At this point, you will need to come to some agreement on the payment of the determined sales tax owed, or proceed to court
The consequences of an audit gone wrong
If you attempt to represent yourself in an audit and make a single misstep at any stage, things can go south very fast. Once you lose control of the audit process and are left with the deficiency, serious consequences can start stacking up:
- Additional taxes. The determination made by the auditor may be much higher than you’d anticipated.
- Seller’s permit revocation. The BOE has the power to take away your seller’s permit if they determine that you are delinquent. It’s a crime to continue to sell without a permit, so this can effectively shut down your business overnight.
- Other license revocation. Thanks to a recent bill, the broad powers of the BOE allow them to revoke or suspend the professional permits and licenses of severely delinquent taxpayers, including the contractor, medical or driving licenses.
- Information sharing with other governmental bodies. The BOE will send an audit report to the State income tax body, the California Franchise Tax Board (FTB), which then reports to the IRS. This can lead to cascading tax audits from several agencies at once.
The benefits of hiring a tax attorney
While dealing with the fallout of a BOE sales tax audit is rarely pleasant, it is possible to mitigate the effect on your business, if you have the right help. When you confront an audit on your own, you are dealing with the complexities of the system for the first time and navigating your way through this process without a map.
Hiring a qualified tax attorney is like choosing an experienced guide to lead you through a hazardous landscape. They know the territory like the back of their hand, and can steer you away from pitfalls and back onto solid ground. Here’s what you can expect from your tax attorney:
- True qualifications. A law degree, admission to the State bar and subsequent education in the specifics of tax law have uniquely equipped your attorney for all the complexities of a BOE audit.
- Confidentiality. Unlike conversations with your bookkeeper or accountant, everything you discuss with your attorney is protected under attorney/client privilege. You can be completely frank and open in your meetings, which will allow your attorney to advise you with greater clarity.
- Thorough knowledge of California Tax law and understanding of BOE procedures. They understand the many intricacies of the law and are able to analyze complicated tax information with a clear and practiced eye. Unlike the auditor, who only knows the audit procedure, your attorney can look ahead to the appeals process, which gives you a strategic edge in negotiations. Please note that California sales and use tax law is a particularly complex area and it is best to hire a specialist or someone with a broad understanding of BOE audit procedure.
- Complete understanding of State court rules and procedures. If your case ends up in court, your attorney knows the rules of evidence and all the other requirements and processes of court cases.
- A barrier between you and stressful encounters with tax authority agents. Once you’ve hired an attorney, the tax agents are required to deal with the attorney and not with you. For most clients, this is an incredible relief: no more stressful phone calls or meetings to cope with. You can relax, knowing your case is in good hands.
- A tireless advocate. Tax issues can be extremely isolating, and it is terrible to feel alone when you are confronting a huge government agency. Your attorney is unconditionally on your side, every step of the way. They can negotiate for you in meetings and board appearances, help you towards a settlement, or stand up for you in court. They will walk you through the audit and appeals to get you out of trouble and allow you to get on with your life.
If you’ve been selected for a sales tax audit, you can probably remember the exact moment you opened that envelope in excruciating detail. Chances are you’re still reeling. While receiving a sales tax audit proposal from the California State Board of Equalization is a serious matter for any business, it isn’t a reason to panic. The best thing that you can do is stay calm and contact a qualified tax attorney. With the right representation by your side you can find a clear path through this process and come out the other side with your business and your sanity intact.