Q. I have been notified by the EDD that they would like to audit my employment records. What happens in an EDD audit?

A. An Employment Development Department auditor will generally look to see if you have been reporting all wages that have been paid, and that payments for wages have been classified as such. A common occurrence with many businesses is that they make payments to individuals without designating what the payments were for. For example, were payments made to these individuals for products or services. If no contrary documentation can be found, the EDD will probably be inclined to classify all payments as wages (and so payroll taxes will be due on those wages along with applicable penalties and interest). When payments to an individual are re-classified as wages, the EDD's tax assessment for income taxes can be reduced by showing the EDD that the employee paid income tax on the payments made to him or her. Lastly, the IRS will then follow on with corresponding reclassifications of these worker payments. We have former tax auditors (formerly IRS and EDD) on staff to assist our clients in most audit engagements.

Q. I have been notified by the IRS that I have been selected for audit. Why was I selected?

A. The IRS has a number of things that drive audit selection. The IRS has historically used a scoring system to evaluate an individual tax return's "audit worthiness." However, the IRS has also instituted programs where particular types of returns are selected for audit. Two of those programs are the Industry Specialization Program and the Market Segment Specialization Program. Under these programs, auditors are trained in specific industry methods and practices. Because of the auditor's increased familiarity with the market or industry, audits are more likely to generate additional tax revenue because of the auditor's increased efficiency and proficiency.

Q. I have been notified by the California Board of Equalization that they would like to perform an audit of my sales transactions for the past three years. Why was I selected and what should I expect?

A. The California Board of Equalization audit selection process is subjective for smaller taxpayers (under $200,000 in sales tax reported in a year) and mandatory for those that exceed that benchmark. If you are a smaller taxpayer, you were probably randomly selected.

The auditor is in search of both unreported taxable sales and purchases made without California sales tax that are subject to California use tax. Every question the auditor asks will somehow relate to uncovering something that may lead to an audit "pick up"...assessment. If you do not have excellent controls and documentation, you should engage the services of a Sales/Use Tax audit professional BEFORE scheduling the audit appointment. That person can help you avoid countless headaches, time spent, and ultimately additional tax, interest, and penalties.

Getting Organized We have found scanning technology to be getting stronger. One consumer level product we have tried is NeatReceipts. The scanner and its software take your scanned receipts and categorize them automatically. Pretty impressive. The new faster NeatReceipts scanner came out recently. Check out their new scanner below: