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.
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:
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. .
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:
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:
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:
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:
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.
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