Why Your Business Might Be Targeted for a Sales Tax Audit
Most business owners are caught off guard when they receive a letter from the California Department of Tax and Fee Administration (CDTFA) notifying them of a sales tax audit. The first question is always the same: Why me?
The reality is that there are clear patterns in how businesses are selected for review.
Reason #1: Reported Revenue Looks Inconsistent
One of the most common triggers is when your reported gross revenue and taxable revenue don’t align with industry norms.
Example: Restaurants
If your restaurant reports $1 million in gross sales but only $300,000 in taxable sales, that gap raises questions. Based on industry statistics, that ratio looks unusually low. Situations like this can make your business stand out to the CDTFA.
Reason #2: Business Sales and Transfers
Another common trigger happens when you sell your business. Even if you’ve been paying sales tax, the government often audits at the time of sale.
Why Sales Trigger Audits
Once the transfer is complete, it becomes harder for the government to pursue the prior owner for unpaid taxes. To avoid missing potential liabilities, the CDTFA may decide to audit before the sale closes.
In California, buyers also request a tax clearance certificate from the CDTFA to confirm there are no open balances or audits. That request itself can trigger a review.
What This Means for Business Owners
If your reported revenue looks out of line with industry standards, or if you’re preparing to sell your business, you are at higher risk of being audited.
How to Prepare
- Compare your reported taxable revenue to industry benchmarks
- Keep accurate, organized sales tax records
- Anticipate clearance certificate requests during a business sale
- Address potential reporting gaps before an auditor does
Why Experience Matters
Facing a sales tax audit is stressful, but preparation makes a difference. An experienced tax attorney knows the CDTFA’s red flags and how to navigate clearance certificate requests. By resolving issues before they escalate, you reduce the risk of added liability, penalties, or delays in a sale.
Bottom Line
Sales tax audits don’t happen at random. The CDTFA looks for patterns, inconsistencies, and opportunities to collect revenue. If your business is showing unusual numbers or if you’re selling your company, you may be targeted.
At Milikowsky Tax Law, we help businesses understand their risk factors, prepare for audits, and protect themselves from unexpected liabilities.
