How Do Sales Tax Audits Work in California?

So here's how the sausage is made with respect to a sales tax audits. The state decides to audit you, California sends you a letter that says "hey you're being audited" and then you will respond to that letter and that kicks off the audit process. So from a practical perspective what happens is the government will usually issue an audit request for three years of information or in the case of a sales tax audit, they're doing it over twelve quarters. So from the outset of a sales tax audit, you need to understand what your risk is. You ideally want to go through the twelve quarters, maybe not in full at the beginning, but at least have a general understanding to know where the pitfalls are in the audit and then depending on where your pitfalls are, that's going to determine what the plan is with the auditor. 

I'd like to review the records and then there's negotiating as to the scope of the records that they're being requested so you don't actually have to give them all three years of records just because they say you have to and there's negotiation as to what the plan is for the audit. So this is highly fact-specific and it's highly fluid depending on what's being audited and why it's being audited, so on and so forth. But generally speaking the idea here is you want to agree with the auditor on a scope of documents that's being audited and why. You also want to agree on a general audit plan for making sure that this is being handled appropriately, it's being handled efficiently and that progress is being made to move the audit forward and then based on that agreed-upon plan, the auditor will give you a period of time, usually 30 days to get your documents together to present them to the auditor. So within that 30-day period, the initial 30-day period in any audit is probably the most critical time. The reason it's most critical is because this is the time that you have to pre-audit the client, to get access to information and to go through and analyze what your risk is and work on what the initial presentation is going to be. If you've managed to streamline documents or you've managed to limit sampling in the course of a sales tax audit, this is your best opportunity to really present that information. So the nice thing about narrowing the scope of the audit is to get to choose the hill that you charge up to fight the battle on. So within that, you make a presentation to the auditor. The auditor will likely have more questions, particularly in a sales tax audit, and then you kind of go back and forth until all the questions have been resolved and then the auditor will make a decision and it's either a good decision and you agree with it, it's a decision that you disagree with or you continue to go back and forth until you refine it to your satisfaction. So in the event that you don't like the decision, you go to the appeals process and the event that you do like the decision, you sign the audit and the audit is concluded. So that's a basic walkthrough about how the audit process works and I've really condensed it. The sales tax audits usually take a lot of time. They're usually at least a six-month process. There's usually multiple rounds of back-and-forth, particularly with sampling. It gets complicated but that's generally the way that things will flow during the course the audit. So again the most important time in the audit is the beginning because you're setting the tone for the way that the audit's going to go, moving through things, you're creating a plan and then it's just about executing that plan and if you do that, the process hopefully should work. Again my advice in sales tax audits is always retain an expert. It's always a value to have somebody in your corner. I'm going to go through these issues with you, I'm going to help you develop your plan, go to negotiate with the auditor, we are going to make sure the statistical sampling is fair and that's really important and really critical for a variety of reasons. What you don't want is when the audit starts to get off-track. That's where a lot of the problems are and chances are the clean up for will be much more expensive, much more time-consuming and much more of a headache than if you just did it right in the first place. So I'd really encourage you get it done first, get it done right and then never do it again.


Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law