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Managed Audit Program PUBLICATION 53 | JANUARY 2013 BOARD MEMBERS BETTY T. YEE First District San Francisco SEN. GEORGE RUNNER (Ret.) Second District Lancaster MICHELLE STEEL Third District Orange County JEROME E. HORTON Fourth District Los Angeles JOHN CHIANG State Controller CYNTHIA BRIDGES Executive Director PREFACE This publication provides general information regarding the Board of Equalization’s Managed Audit Program as well as specific instructions for managed audit procedures. The original Managed Audit Program expired on December 31, 2002. The program was reinstated effective January 1, 2004, as required by Revenue and Taxation Code sections 7076.1 through 7076.5. Note: This publication summarizes the law and applicable regulations in effect when the publication was written, as noted on the cover. However, changes in the law or in regulations may have occurred since that time. If there is a conflict between the text in this publication and the law, the decision will be based on the law and not on this publication. To contact your Board Member, see www.boe.ca.gov/members/board.htm. Fast, Easy, and Accurate . . . www.boe.ca.gov CONTENTS Chapter Page Introduction to the Managed Audit Program 1 Reviewing your sales 4 Reviewing your purchases 8 Finishing up the audit 12 Appealing the results of your audit 13 For more information 14 Managed Audit Program Participation Agreement (BOE-526) 17 INTRODUCTION This publication provides general information regarding the Board of Equalization’s (BOE) Managed Audit Program. The program allows certain businesses to conduct a type of self-audit with instructions and guidance from one of our auditors. If you qualify for a managed audit and we approve your participation, you will enter into a Managed Audit Program (MAP) Participation Agreement (see page 17) and conduct many of the audit tasks that would ordinarily be performed by our auditor. This publication provides general information on the program and specific instructions for audit procedures. Why should I do part of the audit work myself? If you complete a managed audit and owe additional tax, you will pay interest on that tax liability at only one-half the rate that would otherwise apply. This can result in significant savings to you. There are other benefits, too. In a conventional audit, our auditor typically reviews your records at your place of business, during working hours. In a managed audit, you can review your records whenever and wherever you like, as long as you finish your work within the time specified. You’ll also gain a more thorough understanding of how tax applies to your business transactions, what kind of records you should keep, and how to improve your business procedures that relate to sales and use tax. This will not only help you in your ongoing business operations but can help ensure that any future audits go smoothly. Your decision to participate in a managed audit does not affect your right to appeal the audit results. In addition, your participation is entirely voluntary. There are no adverse consequences for choosing to have us conduct your audit in the usual manner. What kind of work will I be doing? Under the direction of our auditor and using instructions provided in your MAP Participation Agreement and this publication, you will review your records to determine whether you have fully met your obligations under state, local, and district sales and use tax laws. You may be asked to review a representative sample of your sales and purchases or every transaction in the audit period. Typically, you will examine your sales records to see whether you: • Correctly calculated and reported the sales tax due on your transactions. • Have the required documentation to support any sales tax exemptions or exclusions you have claimed. You will typically review your purchase records to determine: • Whether you paid California sales or use tax on the purchase. • Whether you correctly calculated and reported the tax. As you conduct the reviews, you’ll fill out transaction worksheets with the information needed to determine whether you paid the correct amount of tax during the audit period (see samples on pages 7 and 11). Our auditor may also ask you to perform additional audit tasks, such as reviewing your sales tax returns. The auditor will review your work when you’re done and determine whether you owe more tax, whether you are owed a refund, or whether your sales and use tax returns were correct as filed. How will I know what to do? Our auditor will indicate in the MAP Participation Agreement which books, records, and equipment purchases you must consider in your review and provide you with detailed instructions. JANUARY 2013 | MANAGED AUDIT PROGRAM 1 How much of my time will it take? The amount of time needed to conduct the audit work will vary, depending on your business operations and records. Our auditor will give you an estimate of the time required, based on his or her experience. What happens when I’m done with my portion of the work? When you’ve reviewed all of your records and completed the necessary worksheets, our auditor will review and verify your work to determine whether you adequately followed instructions and addressed any problem areas. When satisfied that you have accurately completed your part of the work, the auditor will complete the audit and arrange a conference with you to explain the audit results. For more information regarding notification of audit results and subsequent steps in the process, please see publication 76, Audits (our auditor can provide a copy). Will the auditor review any of the transactions? Certain types of transactions are not appropriate for review in a managed audit, for example, those involving complex legal issues. If your records include such transactions, our auditor will notify you and let you know which books and records to make available for review. If our auditor’s review indicates that you owe additional tax on these transactions, interest will apply at the reduced rate, provided you are still approved to participate in the Managed Audit Program. Why is my business eligible for the Managed Audit Program? Your business meets the criteria for our Managed Audit Program if the tax issues in your business are generally straightforward, your transactions are not subject to a number of sales tax exemptions, and you have the resources necessary to do the work. Is there anything that guarantees that I’ll get the reduced interest rate? Yes. If you choose to participate in a managed audit, you will enter into a MAP Participation Agreement with us (BOE-526—see sample on page 17). The agreement will: • Contain your name and account number. • Specify the period of time covered by the audit. • Specify a reasonable time period for you to complete your work (generally up to 90 days). • Specify the types of transactions and records to be reviewed. • Specify the review method and the periods for the records that will be reviewed. • Specify the circumstances under which we may void the agreement. • Specify the time period in which you must pay any tax and interest due. The agreement explains the terms and conditions of your managed audit. Please read it carefully before you sign and date it. The District Principal Auditor of the field office conducting your audit will also sign and date the form. You’ll receive a copy for your records. Can the Board terminate the MAP Participation Agreement? Under certain circumstances, we can terminate (void) a MAP Participation Agreement. The agreement form includes a list of the events that may cause us to take this action. Please note that these events are unlikely to occur in a managed audit where the taxpayer cooperates fully with the auditor. If we terminate the MAP Participation Agreement, you will not receive the benefit of the reduced interest rate. 2 MANAGED AUDIT PROGRAM | JANUARY 2013 How long do I have to decide whether a managed audit is right for me? Ask our auditor. The auditor must begin the audit as soon as possible and will need to make work plans based on your response. The auditor will usually give you a few days to consider how you would like to proceed. What if I change my mind after I’ve started? If after starting the work, you decide not to complete the managed audit, or you do not complete the work that you agreed to do, our auditor will finish the job. The full interest rate will apply to any tax liabilities that are disclosed by the audit. JANUARY 2013 | MANAGED AUDIT PROGRAM 3 REVIEWING YOUR SALES During an audit, the auditor customarily checks your sales records to be sure that you: • Computed the correct amount of tax. • Properly reported tax on your transactions. • Have documents in your records that support any untaxed sales. In a managed audit, you will be doing this verification yourself. To help you determine whether you have properly reported tax, our auditor will provide you with publications that describe the most common nontaxable sales and charges: sales for resale, sales delivered outside California, shipping and delivery charges, and sales to the U.S. government. The auditor will also give you information regarding cash discounts and nontaxable charges such as installation or repair labor. Assembling your records for review Our auditor will indicate in the MAP Participation Agreement which records you will review in the managed audit, as well as the test period and method you will use. Verifying information in your records You will need to carefully review your invoices, following procedures explained by our auditor and detailed in this section. If you added an amount for tax to the sale If your invoice shows that you added an amount for tax to the sale, you need to check the invoice to determine: • Whether you used the correct tax rate (for sales shipped into or out of special tax districts, see our auditor for help). All the rates in California are listed in our publication 71, California City and County Sales and Use Tax Rates, available on our website at www.boe.ca.gov/sutax/pam71.htm or from our Taxpayer Information Section (see page 14). • Whether you properly calculated the tax amount (check against your sales tax table or calculate the amount of tax due with a calculator). You should also check the invoice to make sure that you added an amount for tax to all taxable charges and did not add an amount for tax to nontaxable charges. The publications provided by your auditor should help you identify common nontaxable charges. If you’re not sure how tax should apply to a transaction, contact our auditor. If you find that your invoice lists either too much or not enough tax, you must enter information from the invoice on the blank worksheet provided by our auditor (see examples on pages 6 and 7). If you did not add an amount for tax to all or part of the sale If the invoice shows that you did not add an amount for tax to all or part of your charges, you must take these three steps: • Enter information for the transaction on the sales worksheet provided by your auditor (see pages 6 and 7). • Check your records to see if you have documents that support your decision not to add an amount for tax (see publications provided by our auditor). • Note the type of document in the comment column of the worksheet (for example: resale certificate). If you do not have a customer-provided document on file, note the reason tax does not apply (for example: repair labor). If you do not have documentation for a sale for resale, see page 5. 4 MANAGED AUDIT PROGRAM | JANUARY 2013 PURCHASE ORDERS You should have a timely and valid resale certificate on file for customers who make resale purchases using purchase orders. In general, each purchase order should indicate whether the customer’s purchase was for resale or whether it was taxable. If the purchase order includes items to be resold and items to be used, it must specify which items are being purchased for resale (in those words) and which are being purchased for use. You must list on your transaction worksheet any transactions involving a purchase order if you did not add a tax amount to all or part of the sale. Be sure to set aside your support documents for our auditor to review. Alternative method—verifying sales for resale As you know, accepting a valid resale certificate in good faith from your customer at the time of a sale relieves you of responsibility for the tax that would otherwise be due. You must retain resale certificates as part of your records. If in verifying a transaction you find that you do not have a valid resale certificate on file or that you do not have other adequate support documents in your records, you may use an alternative verification procedure. In this procedure, you will send a letter to your customer along with a BOE-504-C, Statement Concerning Property Purchased Without Payment of California Sales Tax. Ask our auditor for written and oral instructions, a sample letter (called an “XYZ” letter), and copies of the form. Return of the completed form by your customer may relieve you of liability for tax on the transaction, provided your customer properly purchased the item for resale or paid the applicable tax. Completing your sales verification worksheet Our auditor will provide you with paper or electronic transactions worksheets on which you’ll enter information for the sales identified earlier in this section. The next two pages show sample invoices and a sample sales worksheet completed with information from the invoices. As you complete your sales worksheet with information from your actual invoices, you may find that you have questions that are not addressed in this publication or that you’re not sure exactly what information to include. Contact our auditor if you need more help. Be sure to keep all listed invoices and related records available for our auditor’s review. JANUARY 2013 | MANAGED AUDIT PROGRAM 5 SAMPLE INVOICE REVIEW Note: Tax rates in this publication may not be current. Be sure to use the correct rates in your audit. Taxable sale As you review this invoice, you check to see whether you properly calculated the tax amount. You find that your clerk used the wrong tax rate (the rate for your San Diego location is 8.00 percent, not 7.50 percent). The correct tax amount, according to your tax rate table, is $20.00. You must list this invoice on your worksheet (see line 3 on worksheet, next page). Coast Widgets San Diego, CA 24207 Date: January 2, 2008 P.O. # n/a Sold to: Cristina Customer 1121 Any Street San Diego, CA 92123 Ship to: counter sale Item 1 widget Cost 250.00 subtotal Extension 250.00 250.00 sales tax @ 7.25% 18.13 shipping n/a total $ 268.13 Nontaxable sale You must enter information for nontaxable sales on your sales worksheet (see worksheet line 2, next page). As you review this invoice for a nontaxable sale for resale, you check to make sure you have a timely and valid resale certificate or other documentation on file. Since you find a resale certificate in your records, you note that on the worksheet in column N, “Comment.” Coast Widgets San Diego, CA Date: January 2, 2008 P.O. # 1503 Sold to: Roger Retailer 1112 Hill Street San Diego, CA 92123 Ship to: customer’s address CV Express Item 10 widget subtotal sales tax @ 7.25% shipping total 6 24203 MANAGED AUDIT PROGRAM | JANUARY 2013 Cost 250.00 Extension 2500.00 2500.00 resale cert. on file 12.50 $ 2512.50 TIPS FOR COMPLETING YOUR SALES WORKSHEET Note: Lines 2 and 3 below are completed with information from the sample invoices on the previous page. D E DATE SALES INVOICE NUMBER CUSTOMER NAME STREET CITY, STATE, ZIP 2 1/2/08 24203 Roger Retailer 1112 Hill Street San Diego, CA 92123 3 1/2/08 24207 Cristina Customer 1121 Any Street San Diego, CA 92123 REF F 1 G SHIP TO PO NUMBER  L M  same 1503 will call n/a I J K ITEM AMOUNT QUESTIONED AMOUNT TAXABLE    10 widgets 2500.00 resale certificate 1 widget 250.00 wrong rate—7.25% DISTRICT MEASURE DISTRICT CODE H R N COMMENT O P 1164 SENT C XYZ SENT B PO STATUS A  Please note: Your auditor will complete columns K, L, M, and P, shown above in gray. Please leave these columns blank on your worksheet.  Enter “will call” for over-the-counter sale, “same” if item delivered to customer’s address, name of city if item delivered to another destination (include state if not California).  For sales by purchase order only: enter “R” if customer indicated purchase was for resale; “T” if taxable. If part of sale was not taxable or if customer indicated “not taxable” on purchase order, make note in the “Comment” column.   Enter quantity and description of merchandise sold.  If you did not add tax to all or part of the sale, enter the type of support documentation you have in your records (see page 4). If you do not have a customer-provided document, enter the reason tax did not apply. If you should have added a tax amount, see next paragraph. Enter amount of sale listed on the invoice, not including tax amount or any nontaxable shipping charges (see publication 100, Shipping and Delivery Charges). If you’re not sure what amount to enter, ask your auditor. If you added tax incorrectly (see page 4), you will need to do one of the following: • If you used the wrong tax rate, enter “wrong rate” and the rate used. • If you reported the wrong tax amount because of a math error or misreading of a tax table, enter “tax miscalculated.” • If you added tax to a nontaxable charge, enter “overpaid tax.” • If you did not add a tax amount to a taxable charge, enter “underpaid tax.”  If you have sent an “XYZ” letter to the customer to verify a sale for resale, make an X in this column (see page 5). JANUARY 2013 | MANAGED AUDIT PROGRAM 7