The Sales Tax Audit Meeting
If the preparation gets handled correctly and issues are as refined as possible, the first meeting with the auditor should go pretty smoothly. You are going to want to make the materials produced to the auditor as clean and as easy to work with as possible, even if it requires a bit of extra effort on your part.
Auditors prefer electronic data because it is easy to work with and manipulate into their audit reports. We recommend not handing over everything (keep within the scope of the request, but if it is possible to provide electronic data, you want to do so in most circumstances.
Is it a good idea to meet with your sales tax auditor?
Yes, 100 percent.
Go meet your sales tax auditors, spend as much time as possible with them and drive them completely crazy. In all seriousness, the way that we have had the most success in the firm is by face-to-face contact. The more time you spend with these auditors as individuals, the more you get to know them, the more they will like you and the more latitude they will give you.
People naturally do business with people. Once you get to know, like, and trust somebody, then you start to develop a relationship with them.
One of the big reasons we are successful is because we deal with these cases over and over and over and over and over again.
We deal with the same people repeatedly. I might not know every auditor in the San Diego office of the CDTFA but I know a ton of them.
It is really important and we have developed that relationship because of face-to-face contact and because an auditor or manager who I am having a disagreement with is not going to take an unreasonable position.
They know they have to see me again and again and again and again and again. It is not like we are going to take a hard line on this case and hope this person never shows up again because there is a level of contact and a level of familiarity.
If you decide to represent yourself in the CDTFA audit — which I do not recommend — but if you do, you want to have as much contact and as much touch point with your auditor as possible.
You are not going to be able to influence them or buy them dinner, or bribe them under that table, but just having that familiarity, developing trust and developing rapport is a very important strategic tactic.
I would absolutely recommend that you go and meet with your sales tax auditor. I would not recommend that you bring them into your business, though. I recommend that you actually go to see the TFA. The meetings will be a lot shorter. You will get the time to interact with them in the conference room, you can walk them through your documents, and you just give them a much better presentation by doing that.
The Alternative to Meeting with the Auditor - CDTFA Managed Audits
A managed audit is when you sit down with the auditor and agree to basically perform a self-audit. A managed audit formulates a plan that is a contract and it is found under CDTFA Form 526.
A managed audit can be a good idea in certain situations because what you are doing is essentially filling out the auditor's work papers for them. You submit the work papers to the auditor along with some documentation for them to verify and if everything turns out okay, then the auditor will bless the audit.
In doing a managed audit, you have the potential to cut your interest rate in half. That can be pretty good savings depending on how much your liability is. However, the savings in terms of the interest can be outweighed by the length of time and the resources it takes to complete the audit.
Managed audits take a lot of work and if a client lacks the internal resources to do the audit for the auditor, it can be a huge waste of time, cost and energy.
The managed audit decisions should only be made with a tax representative in terms of discussing the strategy for the audit. Agreeing to a managed audit is a significant burden and can be a huge amount of work, so the decision should not be made lightly.
If you do the managed audit properly and you fill it out and turn it in and it reduces the amount of time that the auditor takes to look at the audit, you can set yourself up for success in certain situations.
How Long Will My California Sales Tax Audit Take?
How long does it take to complete the review of all of the documentation and tests? Sales tax audits take a lot of time; at least six months. Sometimes, they can stretch out to nine months.
There are usually multiple rounds of back-and-forth particularly with statistical sampling, when things get complicated. That is generally the way that things will flow during the course of the audit.
Again, the most important time in the audit is the beginning, because you are setting the tone for the audit. You are creating a plan and then it is just about executing it.
If you do that, the audit process hopefully should work in your favor. Again, my advice in a sales tax audit is to always retain an expert.
You need to have somebody in your corner who is going to go through these issues with you, help you develop your plan, negotiate with the auditor and make sure the statistical sampling is fair. That is really, really critical for many reasons.
What you do not want is when the audit starts to get off-track, because that is where a lot of the problems get kicked up. The clean-up for that is much more expensive, much more time-consuming, and much more of a headache than if you just did it right the first place.
Challenging the Tax Auditor’s Findings - After the Sales Tax Audit
Once the auditor has finished their investigations, there will be an exit Exit Conference where the findings are reviewed, and the auditor will prepare a Report of Field Audit or a Report of Investigation. A CDTFA supervisor may be in attendance as well.
Once the findings are presented, you have the chance to disagree with the findings and explain why. You will be given time to gather documentation and present any information you think supports your case.
After you have made your argument, the auditor may do one of three things:
- Adjust the findings
- Request more evidence
- Arrange another meeting to discuss your case
After the official report is filed, you will later receive A Notice of Determination (billing), which will outline the taxes and/or fees you owe or A Notice of Refund.
If the CDFA owes you a refund, they will first check to make sure that you do not have any other outstanding tax liabilities with any state agency. If you do, the refund will be applied to that tax debt. If you do not, they will issue a refund warrant usually within four to eight weeks of the Report of field audit.
If you do have a sales tax liability assessed against you and do not plan to appeal, you will need to pay the amount due within 30 days of the assessment.
If you fail to pay within that time period, you will be charged a penalty of 10 percent of the amount owed. Interest is also charged on the amount owed and the interest rates vary.
Persistent failure to pay will expose you to aggressive collection actions by the CDTFA such as liens, levies or seizure of property and assets.
If you still disagree with the findings, you will need to file an appeal (“petition for redetermination”) within that 30 day period. The CDTFA has a long appeals process, and at each stage you will be required to make your case.
In an audit situation, the reality is that you are generally assumed guilty until proven innocent.
Meeting with the CDTFA Supervisor
If the supervisor was not present at your exit conference, you may now request a meeting with that person if you and the auditor are unable to reach an agreement about the audit findings.
You will again have the opportunity to present your information and reasoning while the auditor prepares a Report of Field Audit or a Report of Investigation. The CDTFA supervisor will analyze both sets of data.
If you are still unable to reach an agreement on the outcome of the audit, you may meet with a CDFA representative within 10 days of your meeting with the CDTFA supervisor. Otherwise, you may consider meeting with the District Principal Auditor (DPA) to discuss your disagreement with the audit.
The DPA is actually relatively helpful in resolving issues or clarifying the CDTFA’s position on them.
Afterward, you will have a follow-up meeting with the California Department of Tax and Fee Administration representative and make your presentation once again. At this point in the process, if you and the CDTFA continue to disagree about the audit and the case remains unresolved, the CDTFA will issue a Notice of Determination, and you may enter the Appeals process.
Appeals Process and Settlement
Once the Notice of Determination has been issued, you have 30 days to file a Petition for Redetermination using Form CDTFA-416. You may, instead, file your own petition but it must contain the following elements:
- It must be in writing
- Identification of the amount or amounts you are contesting
- Statement of the specific grounds or reasons you believe the tax is not owed
- Your signature as the taxpayer or the signature of your authorized representative
If you prefer, you can also request an oral hearing in front of the CDFA. You may also request an appeals conference where you can present your case.
At this point, you have the option to make a Settlement Review Request instead using Form CDTFA-393.
If you are not proposing a settlement and the case remains unresolved, there is a final step you can take.
You must go to court and attempt to prove your case. However, at this point, you are required to pay the proposed tax in full, although you will not be asked to pay any interest now.
The request for a judicial proceeding is a request for the court to review your information and the results of the audit. If the court finds in your favor, you will be refunded the tax you paid. If not, you will now be asked to pay the interest and any penalties as well.