Audit Preparedness for any Business
How to be ready for a Sales & Use Tax Audit
Being selected for a sales and use tax audit does not have to be a stressful and exasperating experience. Below, we’ll walk through what typically triggers issues during a California Department of Tax and Fee Administration (CDTFA) audit, how audits tend to unfold in practice, and how to protect yourself if an assessment is on the table.
Where CDTFA Audits Commonly Go Sideways
We understand. Audits rarely come at an opportune time and tax compliance may not always feel like the highest priority. However, knowing what to expect from an audit can help prevent small issues from becoming expensive problems.
Most audit assessments stem from inconsistencies. Reported sales that don’t line up with bank deposits. Sales tax returns that don’t reconcile cleanly with income tax filings. Purchases from out-of-state vendors, where sales tax wasn’t charged and use tax wasn’t reported. None of these automatically mean tax is owed, but if the differences are not clearly explained, they tend to raise red flags quickly.
Exemptions are another pressure point. Resale and exemption certificates are reviewed closely, and if documentation is not complete or defensible, exemptions can be denied retroactively. For example, if equipment purchases were claimed as partially exempt based on the partial manufacturing exemption, but were not capitalized properly, that generally will lead to the denial of exemptions.
How Audits Actually Unfold (and Why Silence Isn’t a Good Sign)
One surprise for many businesses is how broad an auditor’s document request list can be. It’s not uncommon to receive a long list that feels excessive for a sales and use tax audit. You are allowed to ask why certain items are being requested and how they relate to the audit. Clarifying this early can help keep the audit focused and manageable.
Another common misconception is that during an audit, no news is good news. In practice, many CDTFA auditors work quietly and avoid confrontation. They may continue building their analysis without much interaction, sometimes forming inaccurate assumptions that go unchallenged until a proposed assessment is issued at the end.
That’s why proactive communication matters. If you haven’t heard from the auditor, it’s often wise to check in, ask for an update, and offer to clarify anything under review. Letting the auditor know you want to be informed early about questionable areas can prevent misunderstandings from becoming entrenched positions.
With that being said, it is also important to be careful with how you answer questions. Auditors document conversations closely, and an imprecise or off-the-cuff response can be difficult to unwind later. When there’s uncertainty, pausing to get guidance is usually the safer move.
If an Assessment Happens, It’s Not Always the Final Number
If an audit results in an assessment, many businesses assume the numbers are fixed. In reality, auditors are mostly looking for how you underpaid tax, with little thought of how your company may have overpaid in other areas—but those overpayments often exist, especially for manufacturers and food processors. Identifying overpayments during an audit will offset the assessment and consequently also reduce the interest.
We once worked with a client who was already deep into a CDTFA audit and had received a proposed assessment of around $85,000. By the time we connected, the client’s team was exhausted and they were preparing to accept the assessment simply because they didn’t know what options were left or how to push back.
After reviewing the auditor’s workpapers, we found that several assumptions didn’t hold up once the underlying transactions were examined more closely. By reviewing the audit paperwork, we also identified credits that the auditor had not considered and used them to offset the tax owed. In the end, the assessment was reduced to roughly $10,000 of tax owed. The biggest relief for our client was not just the savings—it was realizing that someone was willing to step in and advocate for them when it mattered most.
If you’re facing an audit or want to be better prepared for the next one, a short conversation with ARC can go a long way.