California Sales Tax Audit Readiness Checklist
California sales tax audits are examinations conducted by the California Department of Tax and
Fee Administration to verify that businesses are collecting, reporting, and paying sales tax correctly. If your business collects sales tax and sells taxable products or services, the state may select your account for audit review.
Sales tax audits focus on whether sales tax was properly collected from customers and accurately reported on your sales and use tax returns. This is different from income tax audits because it examines transaction-level compliance rather than profit or loss.
Understanding what a California sales tax audit involves, what records you need, and how to respond helps reduce stress and prevent penalties. Ignoring an audit notice or failing to provide requested documentation can result in assessments, penalties, and legal collection action.
What This Issue Means
A California sales tax audit is a formal request from the California Department of Tax and Fee
Administration to examine your business records. Verification of collected sales tax on taxable sales and accurate reporting on your returns is what the state seeks to confirm.
Audits can be conducted in person at your location, through correspondence by mail, or through a combination of both methods. Official California State Board of Equalization guidance establishes the standard audit period as three years, and a sales tax audit does not automatically mean you did something wrong because it is a routine administrative process the state uses to ensure sales and use tax compliance across all businesses.
Why the State Issued This or Requires This
The Board of Equalization selects businesses for audit using several methods. High-volume sellers, businesses with significant changes in reported sales tax, and accounts flagged for specific compliance issues are common audit targets, while random audits monitor overall use tax and sales tax compliance across industries.
Some audits are triggered by customer complaints, sales and use tax reporting inconsistencies, or industry-wide compliance reviews. Once selected, the state issues a formal Audit
Engagement Letter that explains the audit process timeline, the time period under review, and
specifies what records and documentation you must provide, though the specific reasons why your account was selected are not always detailed in the audit notice itself.
What Happens If This Is Ignored
Failing to respond to a California sales tax audit notice has serious consequences. The CDTFA can proceed with the audit process using only the information available to them, which results in estimates of use tax and sales tax owed based on available data rather than your actual records.
When the state cannot verify your reported sales tax, they may assess additional tax liability, penalties, and interest based on their calculations. Ignored audit notices may escalate to collection action, including liens on business assets, wage garnishment, or legal proceedings, and the longer an audit remains unaddressed, the larger potential liability can become because interest and penalties continue to accumulate.
What This Does NOT Mean
Receiving a sales tax audit notice does not mean criminal charges are being filed against you.
Sales tax audits are civil administrative processes governed by the Sales and Use Tax Law, not criminal investigations, and an audit does not automatically result in additional taxes owed because the state is examining records to determine what is actually due.
You have not been accused of fraud or intentional wrongdoing simply because you were selected for audit. Most audits are routine compliance reviews conducted under the audit process, and an audit notice is not a final bill but rather a request for information and records so the state can complete its examination.
Checklist: What to Do After Receiving an Audit Notice
Step 1: Read the entire audit notice carefully
Locate the audit notice number, the time period being examined, the contact person’s name and phone number, and the deadline for responding. Note whether the audit is correspondence-based or will include an in-person examination, then understand exactly what records and documentation the state has requested.
Step 2: Organize and locate all requested records
Gather sales invoices, purchase orders, point-of-sale records, cash register tapes, accounting journals, ledgers, and sales and use tax returns for the period under review. Organize records chronologically if possible, and if original records are not available, collect copies, bank statements, or other supporting documentation that shows sales activity during the audit period.
Step 3: Identify any records that are missing or unavailable
Make a list of records that the state requested that you cannot locate. Determine whether records were destroyed, lost, or never created, then document how long you typically retain records and why specific documents may be unavailable.
Step 4: Calculate and verify your reported sales figures
Review the sales and use tax returns you filed for the audit period. Verify that the sales tax amounts reported match your accounting records, identify any discrepancies between your records and what you reported to the state, then calculate the sales tax you collected and compare it to what you reported and paid.
Step 5: Document your sales tax collection and payment procedures
Write down or gather evidence of how you collected sales tax from customers. Explain your point-of-sale system, invoicing process, and how you tracked taxable versus exempt sales, then gather documentation showing how you calculated tax rates and which products or services you treated as taxable.
Step 6: Identify sales that may have been non-taxable
Review your sales during the audit period to identify transactions that should not have been taxed. Examples include exempt sales for resale, sales to government agencies, or sales of items that qualify as exempt sales under California law, so gather supporting documentation such as resale certificates or exemption certificates you obtained from customers.
Step 7: Review your use tax obligations if applicable
Determine whether you purchased items for use in your business without paying sales tax. If you bought equipment, supplies, or inventory without paying sales tax from out-of-state sellers, the state may examine whether you reported and paid use tax on those purchases.
Step 8: Contact the auditor if you need clarification
Call or email the auditor listed on the audit notice if you do not understand what records are being requested or if you need more time to gather documentation. Respond to the state before the deadline rather than waiting until the last moment.
Step 9: Prepare a written response to the audit notice
Write a letter that addresses each item requested in the audit notice. Explain what records you are providing, what records are unavailable and why, and any issues that affect your ability to respond fully, keeping your response factual and straightforward.
Step 10: Submit your response within the deadline
Send your records and written response to the auditor using the method specified in the audit notice. Make copies of everything you submit for your own records, and if mailing, send by certified mail with return receipt requested so you have proof of delivery.
- State enforcement actions and notices
- Payroll tax debt review and resolution
- Penalty and interest reduction options
- Payment plans and compliance solutions
- Representation before state tax agencies
Step 11: Cooperate with any in-person examination if scheduled
Allow the auditor access to your records and business location as requested if the audit includes an in-person visit. Be prepared to answer questions about your sales, accounting procedures, and tax collection methods.
What Happens After This Is Completed
After you submit your response and documentation, the auditor reviews the materials to complete the examination. This process varies depending on the complexity of your business and the completeness of the records you provided.
The state will issue a formal audit result: a Notice of Determination if additional tax is owed, a
Notice of Refund if you are entitled to a refund, or a letter stating that your returns have been accepted as filed if no change results from the audit. When additional tax liability is determined, the notice will include the amount owed, any penalties assessed, and the deadline for payment or appeal rights.
Common Mistakes to Avoid
Missing the CDTFA audit statute of limitations deadline results in the state proceeding without your records or issuing an assessment based on incomplete information. Submitting incomplete or disorganized records creates confusion, so label records clearly and provide a detailed inventory of what you are submitting, then address each request in the audit notice or explain why you cannot locate a document.
Facing State Enforcement or Payroll Tax Issues?
If you’ve received a state tax notice and aren’t sure how to respond, we can help you review your options and next steps.
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