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Sales Tax Audits: Part III, Appeals

In Parts I and II of this series on sales tax audits, we discussed some sales tax audit triggers, things to do to minimize the chances of a tax audit, what the auditor is looking for, and the audit process itself. In this final post in this series on sales tax audits, we will provide a brief overview of the sales tax appeals process. 

After the audit

Upon completion of a sales tax audit, there will be an “exit conference” with the auditor. At the exit conference, the auditor will explain their findings to you. You and your representative are entitled to receive a copy of their working papers and to ask questions. 

If you disagree

You will also have an opportunity to express any objections to the results of the audit, which should be taken into account by the auditor who may make adjustments on the spot, arrange for another meeting following further analysis, or arrange for a discussion with their supervisor.  

If you disagree with the supervisor as well, you should be given the opportunity to meet with a representative of the BOE. Note that there are very strict time constraints and arrangements must be made within 10 days or the BOE will assume that you agree with the auditor’s findings. 

Following the exit conference and any subsequent discussions, you will receive a letter and Report of Field Audit or Report of Investigation. 

The notice

You will then receive one of three notices:

  • A letter stating that the sales tax returns are being accepted as filed,
  • A Notice of Determination which is a bill stating the amount of sales tax due plus interest and penalties, or
  • A Notice of Refund 

If you disagree with the results of the audit, you have the right to appeal. 

Appeals procedures

A taxpayer may challenge any BOE assessment by filing a timely appeal. You may appeal the Notice of Determination by (1) filing a Petition for Re-determination or (2) paying the amount due in full (to avoid any additional interest accruals) and a Claim for Refund with the California Board of Equalization.  

It is crucial to timely respond to any notice or letter sent by the BOE or your appeal will be denied.

Note that there are very specific requirements for these documents, evidence that must be provided, and additional benefits (such as Board hearings and appeals conferences) will be deemed waived if not specifically requested. It is always advisable to have your tax representative complete all letters and forms for you.

Skilled tax audit representation

To learn more about appeals procedures, see Publication 17: Appeals Procedures: Sales and Use Taxes and Special Taxes or call the experienced San Francisco tax attorneys at Moskowitz, LLP today.

Sales Tax Audits: Part II, The Process

In our previous post, we provided some highlights of what Board of Equalization (BOE) auditors look for when conducting sales and use tax audits, and a few things that business owners can do to minimize their chances of such an audit.  In this post, we will review the actual audit process and make some suggestions as to how to make things go as smoothly as possible.

Initial Contact

The BOE will generally contact you by phone. If an auditor can’t reach you, they will send a letter or stop by your business location.  During this initial correspondence, the auditor will inform you what years are under scrutiny (usually 3-4 years), will ask what kind of business records you keep, and will request to see records such as sales invoices. 

At initial contact, you should alert your accountant and/or tax attorney to determine whether it is likely that a full scale audit will ensue and how best to proceed. 

Initial Meeting

At the initial meeting, the auditor will compare the amounts reported on your sales tax and federal income tax returns with your business records.  The auditor will also ask questions (verbally and in writing) to help them better understand your business and how best to examine it.  After this preliminary review, the auditor will determine whether or not to conduct a full scale audit.

It is very important to answer these questions accurately, and the assistance of a skilled tax attorney can be invaluable. The vast majority of audits can be averted if you know what the auditor is looking for and how best to answer their questions and refute their claims. 

The Audit

The information that the auditor will request depends on the type of business being examined. There are a variety of methods that may be utilized in the analysis of the taxable sales of a business. The two most utilized methods are:

  • Markup analysis.  Generally used for retail businesses, this method involves using a sample of the business’ products for sale and calculating an average markup percentage that will be applied to the reported cost of goods sold. The resulting estimate of retail sales will be compared to the sales tax returns to determine if there is a deficiency.
  • Credit card sales percentage. With this method, the auditor observes the business sales for a specific period of time and determines the average percent of receipts from credit cards and cash transactions. The auditor then reviews bank statements for the audit period and applies those percentages to determine taxable sales. 

Note that there are flaws inherent in each of these methods and having a skilled tax professional at your side can make a significant difference in the outcome. 

A heads-up on auditor questions 

Taxable sales are not the only thing that the auditor will be looking for. The BOE is very clear about what will be subject to scrutiny – the Appendix to Publication 76: Audits provides a detailed list of the questions that the auditor will be asking and what records should provide the answers they are seeking. It is prudent to review the Appendix with your tax advisor to best understand how this information will be used and why.

California audit representation

It is crucial to have legal representation whenever you receive notice of a government audit or investigation.  The BOE’s audit process is far from exact and taxpayers must be vigilant in disproving errors in BOE assessments – not only for sales tax purposes, but also because the IRS is likely to pick up on any sales tax deficiency.  For skilled, aggressive and efficient service, contact the San Francisco office of Moskowitz, LLP today.

In our final post in this series, we will discuss sales tax audit appeals.