For most businesses, the idea of any kind of audit – especially a tax audit – is a tremendous burden. It can be a costly resource burden to prepare for an audit, and any problems uncovered by the audit can result in serious, potentially expensive, repercussions.
It is critical for your business to be prepared for a tax audit. And part of that preparation involves simple actions you can take long before the California State Board of Equalization (SBE) informs you of an upcoming audit.
How to get your business prepared
To prepare for a sales tax audit:
- Keep good records: Some of the most important preparation for a sales tax audit happens long before an audit is pending. Establish a good record keeping system, preferably something automated at the point of sale, that will keep track of all your transactions and the sales tax implications. It goes without saying that you should make sure whatever system you use complies with California sales tax laws so that you will have nothing to hide. Manage the storage of this information carefully, saving data at least three of four years.
- Gather data: If you have followed the first step meticulously, this step should be relatively simple. You need to gather all the sales data from the year being audited. Make sure you don’t miss anything. Also, it is a good idea to have all the data labeled and well organized to streamline the process and eliminate potential confusion for the auditor.
- Keep up to date on changing tax laws: The California legislature and the administrative bodies in charge of tax laws are always changing and updated the legal landscape. For example, in February this year, the National Law Review online reported that the California Department of Tax and Fee Administration (CDTFA) is considering several amendments to the Sales Tax Audit Manual. If these amendments go through, they will certainly impact the preparation for audits. And that is only one example.
Of all the things your business can do to protect its financial interests regarding its tax responsibilities, the most important of these is working with an experienced attorney who focuses on tax law. An attorney can help you keep good records and gather them for an audit, which can help your business avoid fines, penalties and other problems arising from sales tax law violations.