How to Prepare for an Audit From the CDTFA

On: July 31, 2020

The California Department of Tax and Fee Administration (CDTFA) is like the IRS in its ability to audit your state taxes. The CDTFA typically conducts audits in three-year intervals. There are several reasons that the CDTFA may target you for an audit; these include suspicions about you avoiding sales or use taxes as well as tips from outside sources. CDTFA sales and use tax audits can be conducted on both individuals and businesses.

What Happens During a CDTFA Tax Audit?

During a CDTFA audit, an investigator is trying to determine answers to the following questions:

• Did you file and report all of your “gross” receipts? These include all receipts from the sale of personal property and taxable services.
• Did you properly pay any local taxes that apply to you and or your business?
• Did you accurately claim all of your deductions? Are all of the deductions you requested legitimate?
• If you own a business, did the business report all of the equipment it bought outside of the state? This is one significant way that CDTFA uncovers problems as some business owners make considerable equipment purchases in states that do not have a sales tax to save money.
• Did you properly apply tax to the use of the applicable personal property?
• When reporting sales in special tax districts, did you use all of the proper tax rates?

If you file a tax return, the statute of limitations for CDTFA sales tax audits is usually only three years, so if you are wondering how far back you need to keep records, that’s the answer.

How to Prepare for a CDTFA Audit?

The primary way you can prepare for a CDTFA audit is by gathering all the documentation and reviewing your recent tax filings. Also, if you are worried about what is going to happen during the tax audit, you can consider hiring either a CPA and or a tax attorney. A dedicated tax attorney can help you prepare your records and help represent you as you talk to the CDTFA.

The records you will need to provide during a CDTFA audit include:

• The total sales you have “on the books” versus the total sales you reported on your sales tax return. This record is especially crucial for cash-heavy businesses that are suspected of avoiding taxes because there is little to no history of their need.
• The CDTFA will also be interested in looking at the total amount of sales you made versus that which you reported on your income sales returns.
• They will also want to have any receipts having to do with claimed sales for resale and for any equipment you bought outside of the state of California.

Conclusion

The main thing to do when you audited by the CDTFA or the IRS is to stay calm, review your tax records, and start getting your records in order. That, plus always make sure to call Leading Tax Group and don’t attempt to do it yourself.