HOW IS A TAXPAYER CHOSEN FOR A CALIFORNIA SALES AND USE TAX AUDIT? (as it appeared in the Spring 2006 edition of The Successful California Accountant)
This is a question that we often receive from taxpayers and representatives both. There are many reasons why a particular taxpayer is chosen to undergo a sales and use tax audit and the following list identifies a few of these reasons:
- The Board of Equalization performs a significant number of routine audits that are selected from the total population of holders of California Sellers Permits. This selection process may consider, among many factors, things such as:
- Type of business.
- Size of business.
- Location of business.
- Types of exempt sales claimed on the sales and use tax returns.
- History of prior audits.
- History of problems noted in audits of similar types of businesses.
- The Board of Equalization may receive information from an outside source, such as a disgruntled employee or competitor, requiring an audit investigation to ascertain the validity of the informant’s claim.
- Information obtained during an audit of a customer or supplier of a taxpayer may provide evidence of a potential underpayment of tax by the taxpayer, requiring an audit to verify whether an underpayment exists.
- The Board of Equalization may obtain information from other government sources, such as the Federal Aviations Administration or California Department of Motor Vehicles, indicating that a potential underpayment of tax exists, requiring an audit to verify whether an underpayment exists.
- The Board of Equalization may begin actively investigating businesses in a specific industry based on known issues in that industry.
Although the above list identifies the most common causes for a taxpayer being chosen for a California sales and use tax audit, the list is not all inclusive. Because there is no way to know for certain whether a particular taxpayer will be audited, the best course of action is to dedicate the necessary resources to insure complete compliance in the area of sales and use tax.
CAN A RETAILER REPORT THEIR SALES TAX LIABILITY ON A CASH BASIS? (as it appeared in the Spring 2006 edition of The Successful California Accountant)
The simple answer is, No. Although a retailer may be entitled to report on a cash basis for other purposes, California Sales and Use Tax Regulation 1642(c) states in part “All retailers must report sales tax liability on an accrual basis.” This requirement would hold true even when the retailer’s records are compiled on a cash basis. As a practical matter, if a retailer is found to be reporting on a cash basis during an audit, the audit will generally include an assessment of sales tax on those taxable sales that have been completed and included in the retailer’s accounts receivable but which were not included on the retailer’s sales and use tax returns for the period in which the sale was completed. For more information on this matter and the associated allowable bad debts refer to Sales and Use Tax Regulation 1642 and the related law sections.