You received a CDTFA audit letter. Here is exactly what to do first

Do not send records yet

The letter asks for sales records, purchase invoices, bank statements and federal returns. Sending them piecemeal, or incomplete, is how audits go wrong: the auditor fills gaps with estimates, and estimates favor the state. Acknowledge the letter, request the audit plan, and take the time you are allowed.

Sign a power of attorney

CDTFA Form 392 lets your representative speak to the auditor for you. From that point calls and letters come to us. You never explain a discrepancy off the cuff.

Reconcile before the auditor does

The audit compares three things: sales reported on your returns, sales in your POS or books, and deposits in the bank. If they do not agree, you need to know why before the auditor does. Common, legitimate reasons: sales tax included in deposits, tips, delivery-platform fees netted before deposit, refunds, cash paid out for supplies, owner contributions.

Understand the sampling

When records are weak, auditors use mark-up tests or short test periods and extrapolate across the whole audit period. A single unrepresentative month can become three years of assessed tax. Challenge the method in writing when it is not representative, and offer a better one.

Know what is taxable

Restaurants: hot food, cold food consumed on premises, sodas. Not: most cold food to go. Retail: the district rate where the customer takes possession. Contractors: materials, with rules that differ for fixtures. Many assessments come from misapplied taxability, not hidden sales.

The exit

Most audits close with an assessment you can pay, dispute or appeal. A petition for redetermination is due within 30 days of the notice. If the numbers are right but the cash is not there, a payment plan is available. If the numbers are wrong, appeal — the appeals conference is where sampling errors get fixed.

This article is general information, not advice for your situation. Facts and thresholds change; confirm before acting.