A California sales tax audit is conducted by the California State Board of Equalization (BOE). The objective of the audit is to determine if you have paid the correct amount of sales taxes.
The main question the auditor is attempting to answer is: Did you report all gross receipts from sales of taxable personable property? Businesses that have cash transactions are often targeted for sales tax audits. You are required to provide records during the audit process.
How an Auditor Looks for Sales Tax Problems
The sales tax auditor will examine the following business records:
- the total sales recorded in the taxpayer’s books, which is then compared to the total sales reported on the taxpayer’s sales tax return
- income statements, balance sheets, and general ledgers
- federal and state income tax returns
For a more detailed list of records that a sales tax auditor may inspect, read this article.
How a Sales Tax Audit Affects Other Tax Returns
If a sales tax audit results in a finding that you have underreported the amount of taxes you owe, it can then create other types of tax problems as well.
For example, if your gross receipts were found to be underreported, the BOE can then report this fact to the California Franchise Tax Board (FTB). The FTB will then want to adjust your tax returns, which may result in a state income tax audit.
Furthermore, the FTB can report their findings to the IRS. which can trigger a federal income tax audit.
Because of the potential problems of dealing with multiple tax audits and paying over more taxes to the BOE, FTB, and IRS, you want to make sure that your sales tax audit is handled properly.
After your audit, the tax auditor will hold an exit conference, where your tax attorney can attempt to negotiate a lower sales tax bill. If that conference does not result in a determination that all parties agree upon, you file a petition to have your case heard by the 5 member elected Board of Equalization. Along the way there are additional possibilities for review and settlement.
The outcome of your California sales tax audit can lead to serious repercussions that damage your business, so prepare yourself thoroughly and seek advice from an experienced tax professional.