Chapter 07

Should I Hire a California Sales Tax Lawyer to Help Me With My Sales Tax Audit?

The Benefits of Hiring a Sales Tax Lawyer

While dealing with the fallout of a CDTFA sales tax audit is rarely pleasant, it is possible to mitigate the effect on your business, if you have the right help. When sales tax problems arise you will want to have a qualified sales tax lawyer to help you deal with your tax issues.

When business owners confront an audit on their own, they are dealing with the complexities of the system for the first time and navigating your way through this process without a map. Having an attorney client relationship during the state sales tax audit process is like hiring a guide to help you up a mountain. 

This is not intended to be a sales pitch for our services, although we are always happy to explain the benefits of working with our firm. Rather, we understand the challenges that sales tax problems can cause to business owners who are working to stay in tax compliance. The complexities in a sales tax audit

Although we are generally big proponents of self-help for legal issues, such as with income tax matters that are generally easier to deal with, a sales tax matter is another challenge entirely.

In our experience, sales tax audits being one of the key practice areas at our law office, sales tax lawyers and tax professionals are usually worth the cost of services and you will usually see significant savings in form of taxes due.  

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 CDTFA audit.
  • Confidentiality. Unlike conversations with your bookkeeper or accountant, everything you discuss with your sales tax lawyer 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 CDTFA 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 sales tax lawyer 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 CDTFA 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 have 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 CDFA 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 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.

Tax Lawyers vs. CPAs - Why a CPA Is NOT Your Best Defense in a Sales Tax Audit

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.

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.

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Sales Tax Audit Defense Strategies from Brotman Law

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.

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