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While dealing with the fallout of a CDFA 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 have been selected for a sales tax audit, you can probably remember in excruciating detail the exact moment you opened that envelope. Chances are you are still reeling.
While receiving a sales tax audit proposal from the California State California Department of Tax and Fee Administration is a serious matter for any business, it is not 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.
The biggest problem that I see with most sales tax audits stems from the lack of proper control at the beginning of the audit. We encounter this problem a lot in our practice, so I will highlight this as an example. When people get notice that they are being audited for sales tax, the tendency is to take the notice and they give it to their CPA to deal with
The CPA is focused on this from a compliance perspective. They call the auditor and they ask, "What do you want?" and the auditor replies, "I want the documents that were issued on that notice."
The CPA gathers up three years of sales records and three years of purchase records on all the internal financials and the bank statements, and then they hand it over to the auditor. Then the auditor takes that information, they go off by themselves, and then they come back and they have a $100,000 bill, and then the CPA freaks out and the client freaks out. So the audit is done, and then somebody calls us and we get involved.
Most clients and most CPAs think about this from the angle of "We will just produce the documents that the auditor asked for. We did not do anything wrong. We do not have anything to worry about. There should not be any harm in just turning over the documents. Why get an attorney involved?"
The answer to that is even if you have not done anything wrong, there is always the potential for risk in a sales tax audit because of the way things are calculated. So an attorney's job in the sales tax audit is not just to hand over documents and push paper. The attorney should be, number one, controlling the scope of the audit.
They should be controlling both the documents that are being requested and the methods that the audit is being conducted under, and then the attorney is there to help move the process along.
The attorney will move the auditor through the analysis, supervise the analysis, make sure things are being done correctly, make sure the auditor is relying on the most accurate method of testing available, whether that is looking at source documents or conducting proper statistical tests, and then going from there.
So having an attorney who has a knowledge of audit procedure involved early in the process, sets the tone for the entire audit.
It is so much easier to deal with things at the beginning and do them properly than to go back and try and correct things. It is more of an exercise, and time, and effort, and money to get that done when a lot of it could have been filtered out at the beginning.
If you take control of the process at the beginning, control the documents and everything about the audit, you are going to end up with a much better result. That is why it is really important to get an attorney involved early in these audits versus later on.
Sales tax audits are notoriously tricky. They consume a lot of resources, both in time, and energy and money. The goal with us and with our clients is to get out of the process as quickly as possible for the least amount of damage.
When we look at a CDTFA audit, we are looking at the cost-benefit of the situation. What is the cost to the client, what is the benefit of a certain action, and how best can we get out of the audit with minimizing our expenditure and being as efficient as possible with our resources?
One of the best ways that we do this is prior to creating the audit plan, we will try and pre-audit the client.
Pre-auditing the client is very important because it gives us a roadmap for how the sales tax audit is going to go and what the areas of risk are for the client. Once we have had the benefit of pre-auditing the client, we can develop a plan for the audit with the auditor. We can navigate the client through the least amount of risk possible with our agreed-upon plan.
This is the best way to approach a sales tax audit. In the meantime, while we are going through the audit process, an eye needs to be kept on the appeals process in case the audit goes south. Disagreements with the auditor can and do happen quite frequently. Even the best well-made plan sometimes will fall apart.
Therefore, it is important for our firm to stuff the record as much as possible with things that are going to be beneficial to the client. To the extent we have control over the preliminary audit report, that gives us a better avenue going into appeals in advancing the ultimate resolution in the case.
Ideally, we want to try and avoid the appeals process, if possible, or use it as a means to get the liability down further after a successful audit. But, depending on the auditor, depending on the methods of testing used, and depending on the size of the fight that we have to engage in, sometimes, that is not always possible.
Whenever possible, we try to minimize expenditure, conserve resources and fight for the best possible outcome for the client.
Sales tax audits are one of the areas of practice that I am most proud of at our firm. We have dealt with some very difficult cases and gotten some really phenomenal results. I credit that to the hard work and diligence of our team. Brotman Law really understands sales tax audits.
We understand the tax law surrounding why sales are taxable and why they are not taxable. We understand the tax procedure in terms of understanding the interactions with the auditor, their manager, and the district principal auditor, and then through the appeals process, and up through the Office of Tax Appeals.
Finally, we understand statistical sampling which is a very rare quality in attorneys. Most attorneys do not have a strong knowledge of statistics. It is not something that they teach you in law school. Statistical sampling and being able to sustain a data fight in the context of a sales tax audit is a very admirable quality.
We want to be on not only equal footing with the auditor, but we want to have the superior advantage during the entire audit because in our experience that is the way you get results for the client.
We use a very measured approach. We measure twice and we cut once, but our methods are strategic. They are designed to make the process as least burdensome for our clients as possible. They are designed to move them through the sales tax audit process quickly and with as little exposure as possible. We are very good at what we do in the course of sales tax audits.
We fight. We have a strategic tenacity and we do the best we can to leverage our efforts to get you the best result. I encourage you to sit down with us and give us the facts. Let us look at your documents and let us start formulating a strategic plan. Whether or not you ultimately choose to retain us, at least take advantage of the benefit of our knowledge so that we can look at your facts and guide you specifically through your situation.
Sales tax audits have the potential for a great amount of risk for people going through them. Even clients who make the mistake in thinking that because they have not done anything wrong they do not have any risk in an audit. The good news is with our help, strategic planning and expertise with the execution process, you can minimize your liability as much as possible.
As I have mentioned before, sales tax audits are very cumbersome processes. They involve a lot of documents and a lot of data and they take a while to get through. At our firm, efficiency is one of our key factors in the work that we do. We want to make sure that the work and the value that we are providing for clients are in line with their cost expectations.
With that said, sales tax audits are a lot of work. There is a lot of organization and presentation of the materials. There is a lot of tendency for disagreements in sales tax audits particularly when the auditor is using statistical samples.
Oftentimes, those statistical samples come out wrong on the CDTFA side and we have to correct them. It gets tough when you have an auditor and you get into a conflict with that auditor and the auditor will back down.
With that said, sales tax audits have the ability to drive cost. One of the things that we do to mitigate cost is by trying to minimize cost in three key areas. The first one is with decisions.
We would like to put our clients in the position to make quick and accurate decisions. The easier decisions come, the easier it is to deal with the sales tax audits and the lower the cost to the client.
Number two is documents. We work with the client and our team to streamline the document gathering, organization and presentation process. A lot of times, we can put the burden on the client and the client has internal resources to handle document organization and delivery much more efficiently than our staff or at least at a lower cost.
If that is not the case, we have a very talented team of junior staff members who have done a lot of sales tax audits and who can work through the process very quickly, assembling exactly what our senior team is going to need to defend the audit.
The third avenue is bureaucracy. Unfortunately, with most agencies, bureaucracy goes hand-in-hand. Occasionally, you are going to have good people in the CDTFA, who are going to move the audit through quickly and without hassle but also occasionally, you are going to have some bad people.
Most CDTFA auditors will fall within the middle but the goal, at least at our end, is to organize the audit to come to terms with the auditor at the beginning and to agree on an audit plan to move the audit forward as efficiently as possible. With those caveats said, what I tell clients is sales tax audits usually range between $5,000-$15,000.
Obviously, that is a pretty big range but it depends on the client, it depends on the amount of data that we are dealing with and it depends on the difficulty that we are having with the auditor. Rest assured, we are going to try and minimize the cost in the process.
We certainly are cognizant of the fact that a sales tax audit is a marathon and not a sprint and we want to save and allocate resources for when we are actually going to need them. We also want no illusions coming in about how big the process is and how much risk it is to you if it does not get completed properly.
That is the best estimate that I can give you about the cost of your matter. If you want to know more, the best way for me to give you a cost projection is by understanding the facts about your particular situation. When I can apply your facts to the situation at hand, I can give you a much better estimate of what the cost would be in your particular matter.
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