The total gross sales you reported to the California Department of Tax and Fee Administration (CDTFA) does not match the gross sales on your federal income tax returns. If it does not, and there is a material difference, then you may receive a call from a tax auditor. If the difference is relatively small (immaterial), it may not be worth it to audit your business but the tax agency may contact you to ask for an explanation and supporting records.

Why is there a difference between your sales tax returns and your federal income tax returns? There could be a number of valid reasons, but the most common reasons are adjusting entries during the year-end closing of the books and timing differences between the filing basis between your sales tax returns and your income tax returns.

Although this is a simple task to review, it is often overlooked because the bookkeeper does not review the income taxes and the tax preparer does not review the sales tax returns. Gaps like these are often exploited by taxing agencies to identify businesses who may have underpaid their taxes.

If an auditor is already auditing your business, they will perform a thorough review of your records to ensure there are no other potential tax issues. So, even if there was a valid explanation for the difference between the gross sales, other tax issues could be be discovered during the audit. Clearly, it is best to avoid the scrutiny of an audit.

This will be a series of posts that discuss the most common reasons your business was selected for an audit. Sign up for my email list to be notified about new posts.

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