ASTC | sales tax audit | tax experts

I'm From the Government and I'm Here to Help

The word “audit” is generally uttered in subdued, loathsome tones, accompanied by visible shudders. If you ask anyone who has been through tax audits by both the Internal Revenue Service and the California State Board of Equalization (Board), they will almost certainly tell you they would rather undergo ten more IRS audits than ever face the Board again.

When you question tax professionals why they constantly rate the Board as the most oppressive agency, you may wonder, “Isn’t the IRS a much larger, and therefore more complex and impersonal organization?”

The IRS is larger, but the Board can’t be beat for its complexity and impersonal treatment of taxpayers. The IRS operates under a series of rules and regulations established by the U.S. Congress which are generally consistent and a matter of public record. Any individual can, at any time, obtain a copy of an IRS regulation. (Using the freedom of information Act?) If that person doesn’t understand the regulation, he can ask an IRS representative, an accountant or a tax attorney, and any of these individuals will not only be qualified to provide clarification, they will generally be happy to assist. Not so with the Board.

The California Board also operates under a series of rules and regulations. However, the Board is not accountable to any legislative body. In this case, the rules are seldom reasonable, almost never consistent in interpretation, and, as a routine matter of practice, kept secret from the public as much as possible.

The following example is to illustrate what will happen to you when your business is subjected to a sales tax audit by the Board. After cooperating with the auditor who camped out in your office for two weeks, you will be assessed additional tax. In spite of your best efforts to collect the proper tax and to record and report your transactions accurately, the auditor says you have failed.

After being told by the Board that you are without further recourse, you approach the tax collector with a proposal to pay this amount off in monthly installments, in one year. After reviewing your books, you have determined that, if there are no setbacks, and if you are very careful, you can make the payment.

Chances are excellent your request will be swiftly denied. You may even be told there is no provision in the law for making installment payments and, if the liability cannot be paid immediately and in full, your bank accounts will be levied.

In a panic, you call the accountant who has served you well over the years. However, most of the time you will discover your advisor is not an expert in sales and use taxes. This is not his fault, but is partly due to the fact that the Board does not want him, or anyone else, to know the rules under which they are supposed to operate.

However, if you are one of the lucky business owners who can locate a sales and use tax expert, they will refer you to either Operations Memo 888 or, more likely, the Board’s own Compliance Policy and Procedures Manual, commencing with Section 757.0000. The finality penalty that is referred to in the following section is a ten-percent penalty that is levied when the tax is not timely paid pursuant to the Notice of Determination or Redetermination. Within these documents it states as follows:

“In March 1987, the Board adopted a policy to relieve finality penalties on determinations for taxpayers who request and satisfactorily complete installment proposals ... However, to be eligible for relief, the taxpayer must initiate the installment payment proposal and the proposal must be accepted within 45 days of the finality date of the Notice of Determination or Redetermination ... Upon completion of the prescribed payments, the District Administrator will notify the Petition Unit by memo that the finality penalty is to be adjusted out from the accounts receivable.”

After all these months of persistent scrutiny by the Board, your feel your luck has changing. Maybe you’re dealing with a compliance supervisor with a heart, who won’t try to deny you due process. In this case, he agrees to forward your request for installment payments. Don’t put on your party hat just yet.

The individual who will now review your file is actually toiling at an entry-level position. The reviewer generally has NO degree in business or accounting. In many cases, the examiner has nothing more than a high school diploma. Chances are excellent they will merely determine your monthly cash flow, and use your gross revenue to determine your monthly payment. They will not consider fixed monthly expenses such as rent, payroll, supplies or other taxes. This newly hired member of the Board staff does not care if you go out of business.

If you are one of the lucky persons to know a sales tax expert, you will be advised it is almost never too late to approach the Board, through one channel or another, to get another hearing or to make arrangements to pay your liability in a manner that will allow you to continue your daily business operations. But the Board itself will not tell you that.

The trick is not only in knowing what the rules and regulations are, but also in knowing how the Board interprets those rules and regulations, which can often be two very different matters. The sales and use tax law is so complex on its own that you need someone in your corner who has a long history of dealing with the Board of Equalization to wade through the quicksand for you. In most cases, a sales and use tax expert does not deal at all with income taxes, property taxes or any other type of transactions that businesses often are involved in. Simply stated, they are specialists. They not only know the rules and regulations for themselves, and can direct the Board’s attention to them when necessary, they also know what the Board means when it says something.

Just as you would choose to have your open heart surgery performed by an accomplished heart surgeon who has done many similar procedures over the years, rather than having the surgery done by a general practitioner, you choose a sales and use tax expert to serve as your representative before the California State Board of Equalization.

If you have any questions regarding this article, other sales and use tax issues, or want to know if you qualify for an exemption contact Joseph Micallef at (916) 369-1200 or visit us on the web at www.ASTC.com.