Chapter 2: Preparation of Field Audits - Forms
TRUE OR FALSE
A waiver can at times expedite the audit process by allowing time to resolve audit issues “up front,” rather than during the appeals process.
TRUE
AM 0215.09
A taxpayer may benefit from signing a waiver as follows:
• The waiver avoids the CDTFA’s immediate issuance of a Notice of Determination in cases where the statute of limitation will expire.
• The waiver holds the period(s) in question open for filing a Claim for Refund or for offsetting any overpayment of tax against an existing tax liability.
• A waiver provides the taxpayer and the CDTFA with the ability to adapt to both foreseen and unforeseen time constraints. The waiver gives the taxpayer and the CDTFA the time necessary to thoroughly address difficult audit issues before those issues result in a billing.
• The waiver can at times expedite the audit process by allowing time to resolve audit issues “up front,” rather than during the appeals process.
• The waiver may eliminate needless “red tape” which may result from a billing issued with good intentions, but possibly incorrect, due to time constraints that did not allow the detailed review necessary to reach a fair and equitable conclusion.
Interest on overpayment is not allowed when:
A. Clerical or math errors made in filing returns resulting in overpayments
B. Over-reported purchases subject to use tax
C. Refunds of unapplied payments
D. Net credit returns
E. The taxpayer knowingly overpaid the tax liability
E. The taxpayer knowingly overpaid the tax liability
WHEN INTEREST ON OVERPAYMENTS IS NOT ALLOWED 0217.12
Interest on overpayments (credit interest) is not allowed when statutorily prohibited or in cases of intentional overpayment, fraud, negligence, or carelessness. The following examples illustrate situations in which credit interest would not normally be recommended:
• The taxpayer knowingly overpaid the tax liability.
• There are recurring overpayments caused by clerical or computational errors, such as inclusion of receipts for periods other than which the return is intended, omission of allowable deductions, use of incorrect tax rate, or errors of addition or subtraction committed on the face of the tax return or made on supporting schedules submitted with the tax return, and the taxpayer has been notified in writing of such errors.
• Audit situations where it is determined the taxpayer has overpaid the tax liability, but a negligence penalty would have been assessed had the audit resulted in a net deficiency.
• There are tax overpayments caused by repeated errors in similar transactions, when the taxpayer has been notified in writing, including comments in the audit working papers that such transactions are either non-taxable or are tax exempt.
TRUE OR FALSE
Quarterly Basis Returns are due on or after the last day of the month following the close of the quarter. Taxpayers who make prepayments must also file the prepayment returns in accordance with RTC section 6472.
FALSE
DUE DATES OF RETURNS 0502.15
Returns are due on or before the last day of the month following the close of the quarter. Taxpayers who make prepayments must also file the prepayment returns in accordance with RTC section 6472.
A _________ penalty and a _________ penalty can never apply concurrently. The two penalties are mutually exclusive.
A. Fraud, 10 percent penalty for failure to file
B. Negligence, fraud
C. Mandatory, 10 percent penalty for failure to file
D. Discretionary, negligence
B. Negligence, fraud
RESPONSIBILITY OF FIELD AUDITORS FOR PENALTY RECOMMENDATIONS 0501.15
Negligence and fraud penalties are generally imposed as part of the determinations based upon field audit recommendations. Field auditors and their supervisors are responsible for making proper penalty recommendations based upon factual findings. This requires good judgment, common sense and a thorough understanding of the penalty provisions of the law. A negligence penalty and a fraud penalty can never apply concurrently. The two penalties are mutually exclusive. The same is true of the penalty for negligence and the penalty for failure to file a return. However, a fraud penalty and a 10 percent penalty for failure to file may be imposed to the same liability.
When should be the Form CDTFA–1296, ACCOUNT UPDATE INFORMATION be completed?
A. During the initiative interview with taxpayer
B. After reviewing taxpayer’s records
C. After the exit conference
D. Before submitting the audit to auditor’s supervisor
B. After reviewing taxpayer’s records
CDTFA–1296, ACCOUNT UPDATE INFORMATION 0201.20
Auditors must complete Form CDTFA–1296, Account Update Information (Exhibit 18), for each audit report including on Forms CDTFA–414–C, the Report of Examination of Records and Form CDTFA–414–B, Field Billing Order, with the exception of audits of Fortune 500 businesses (www.fortune.com). Auditors must complete Form CDTFA-1296 after reviewing the taxpayer’s books and records. The form should be completed during the course of field work – before the exit conference with the taxpayer and/or representative. Form CDTFA-1296 should not be mailed or handed to the taxpayer for completion and information to complete the form should not be obtained from the CDTFA file or permit application. Detailed completion of Form CDTFA–1296 can assist in determining a responsible person liability when needed. As soon as Form CDTFA-1296 is completed, a copy of it, along with proof of tax reimbursement and any documents used to verify changes in corporate officer(s) or LLC member(s), should be routed to the District Principal Compliance Supervisor, via the auditor’s supervisor.
Are both of the following statements True or False?
If the return is received after the determination is issued, any remittance made is considered a payment on account. No adjustment to the audit should be made.
If the return is received before the determination is issued, the electronic transcript of returns and the AWPs shall be updated to reflect the amounts the taxpayer has reported on the return
TRUE
DELINQUENT RETURNS FOR PERIODS INCLUDED IN AUDIT 0208.17
CDTFA’s general policy is to encourage taxpayers to voluntarily file any delinquent sales and use tax returns before an audit is completed. When the taxpayer files a delinquent return for reporting periods included in an audit, the following procedures apply:
• If the return is received after the determination is issued, any remittance made is considered a payment on account. No adjustment to the audit should be made.
• If the return is received before the determination is issued, the electronic transcript of returns and the AWPs shall be updated to reflect the amounts the taxpayer has reported on the return
TRUE OR FALSE
Records need only be adequate for sales and use tax purposes. The fact that the records may not be adequate for the purpose of preparing balance sheets or profit and loss statements, or for furnishing accurate cost data, information to stockholders, creditors, or others interested in the business does not necessarily constitute negligence for sales and use tax purposes.
TRUE
RECORDS NEED ONLY BE ADEQUATE FOR TAX PURPOSES 0507.15
Records need only be adequate for sales and use tax purposes. The fact that the records may not be adequate for the purpose of preparing balance sheets or profit and loss statements, or for furnishing accurate cost data, information to stockholders, creditors, or others interested in the business does not necessarily constitute negligence for sales and use tax purposes.
In what form(s) does the CDTFA recognizes a security deposit in connection with a petition for a jeopardy determination?
A. Cash deposits, including cashier check and money order (personal checks not acceptable)
B. Certificates of deposit issued by banks
C. Savings and loan certificates
D. All of the above
E. A & B
D. All of the above
JEOPARDY DETERMINATIONS 0504.20
Jeopardy determinations become final within 10 days after service of notice unless a petition for redetermination is filed within such period and security is deposited within such period in such amount as the CDTFA may deem necessary. The CDTFA will not recognize a petition in connection with a jeopardy determination unless such security is deposited with the CDTFA in one or more of the following forms:
1. Cash deposits, including cashier check and money order (personal checks not acceptable).
2. Certificates of deposit issued by banks
3. Savings and loan certificates
What documents can be used to verify changed in corporate officer(s) or LLC members?
A. Validated copies of Secretary of State (SOS) forms filed with the SOS.
B. A copy of the corporate minutes stating a change of officers.
C. A signed letter from the corporation or LLC, preferably on corporate or LLC letterhead, authorizing the corporation or LLC requester to make such changes and also documenting the officer or member change.
D. A copy of the bill of sale showing a transfer of the corporate stock to the new officer(s).
E. SOS Information obtained by an External Agency Tracking System request.
F. All of the above
F. All of the above
Updating Corporate Officer or LLC Member Information 0201.20
When completing Form CDTFA-1296, auditors must verify corporate officer (officer) or LLC members (member) in IRIS on TAR AI. If there is a change of officer or member, auditors must attach a copy of the documents used to verify the information before submitting Form CDTFA-1296 to compliance staff. Documents used to verify an officer or member change include, but are not limited to, the following:
• Validated copies of Secretary of State (SOS) forms filed with the SOS.
• A copy of the corporate minutes stating a change of officers.
• A signed letter from the corporation or LLC, preferably on corporate or LLC letterhead, authorizing the corporation or LLC requester to make such changes and also documenting the officer or member change.
• A copy of the bill of sale showing a transfer of the corporate stock to the new officer(s).
• SOS Information obtained by an External Agency Tracking System request.
What example(s) of instances will warrant a jeopardy determination?
A. Taxpayer is dissipating assets.
B. Evidence exists that the taxpayer is placing assets in the names of other persons for purposes of concealment.
C. Taxpayer’s assets are being attached by creditors, or are in imminent danger of attachment.
D. There is a pending sale of property that represents the last remaining asset and, without the funds from such sale, collection is doubtful.
E. There is evidence that the taxpayer intends to file a petition in bankruptcy or make an assignment for the benefit of creditors.
F. All of the above
G. A & B
F. All of the above
JEOPARDY DETERMINATIONS 0204.15
The purpose of a jeopardy determination is to provide a means of protecting the State’s interest when there is substantial evidence that any further delay in collection activity would seriously impair or jeopardize the CDTFA’s ability to obtain taxes due. Jeopardy determinations are a notice to the taxpayer that tax is immediately due. (RTC section 6536.) Taxpayers must post a security deposit with the CDTFA in order to file a petition for redetermination on jeopardy determinations. (RTC section 6538) Use the following examples as a guide for instances when a jeopardy determination is warranted:
1. Taxpayer is dissipating assets.
2. Evidence exists that the taxpayer is placing assets in the names of other persons for purposes of concealment.
3. Taxpayer’s assets are being attached by creditors, or are in imminent danger of attachment.
4. There is a pending sale of property that represents the last remaining asset and, without the funds from such sale, collection is doubtful.
5. There is evidence that the taxpayer intends to file a petition in bankruptcy or make an assignment for the benefit of creditors.
6. There is evidence that creditors intend to file an involuntary petition in bankruptcy against the taxpayer.
Which of the following circumstances in which a negligence penalty may be appropriate in a first-time audit?
A. The business has no records of any kind or extremely poor records.
B. The business is controlled by a CPA or former CPA who has prior experience advising businesses of the same type on compliance with the Sales and Use Tax Laws.
C. The business is controlled by a person or persons that control (or controlled) a similar business which received written advice from the CDTFA regarding a record keeping or reporting issue.
D. All of the above
E. A&C
D. All of the above
NEGLIGENCE PENALTIES IN A TAXPAYER’S FIRST AUDIT 0506.40
· The business is controlled by a person or persons that control (or controlled) a substantially similar business that was previously subject to audit.
· The business received written advice from the CDTFA regarding a record keeping or reporting issue.
· The business is controlled by a person or persons that control (or controlled) a similar business which received written advice from the CDTFA regarding a record keeping or reporting issue.
· The owner of the business has a history of opening and closing businesses.
· The business has no records of any kind or extremely poor records, which resulted in substantial underreporting.
· The business is controlled by a CPA or former CPA who has prior experience advising businesses the same type on compliance with the Sales and Use Tax Laws.
When is a 10 percent penalty for failure to pay tax timely if tax is not paid imposed?
A. To self‑declared tax, when not paid on or before the due date of the return or before the expiration of any extension that has been granted.
B. To determinations made by the CDTFA, when not paid on or before the penalty date shown on the Notice of Determination unless a timely petition has been filed.
C. To redeterminations, when not paid on or before the penalty date shown on the Notice of Redetermination.
D. All of the above
E. A & B
D. All of the above
WHEN PENALTY ATTACHES 0504.05
RTC section 6591 imposes a 10 percent penalty for failure to pay tax timely if tax is not paid, as follows:
a. To self‑declared tax, when not paid on or before the due date of the return or before the expiration of any extension that has been granted.
b. To determinations made by the CDTFA, when not paid on or before the penalty date shown on the Notice of Determination unless a timely petition has been filed.
c. To redeterminations, when not paid on or before the penalty date shown on the Notice of Redetermination.
TRUE OR FALSE
During the discussion, the auditor must provide to the taxpayer or the taxpayer’s representative a copy of all AWP. Taxpayers should be provided a paper copy of the final AWP unless the taxpayer specifically requests a digital copy.
FALSE
FURNISHING COPIES OF AUDIT WORKING PAPERS (AWP) 0207.0
During the discussion, the auditor must provide to the taxpayer or the taxpayer’s representative a copy of all AWP. Taxpayers should be provided a digital copy of the final AWP unless the taxpayer specifically requests a paper copy. When providing a copy of the digital AWP, the auditor must redact or remove files containing confidential information such as Federal Tax Information or CDTFA-1164s.
TRUE OR FALSE
Interest (credit interest) on overpayment is not allowed when there are excess or duplicate prepayments involving a claim for refund.
FALSE
AM 0217.13
The following situations illustrate when credit interest on overpayments is allowed:
• Clerical or math errors made in filing returns resulting in overpayments
• Inclusion of prior period receipts in current period
• Omission of allowable deductions
• Over-reported purchases subject to use tax
• Refunds of unapplied payments
• Overpayments of tax resulting from excess tax reimbursement
• Refunds as a result of Appeals process
• Refunds of erroneous billings
• Misinterpretation of the law resulting in overpayment
• Net credit returns
• Timing differences
• Excess or duplicate prepayments involving a claim for refund
The return is considered filed when the taxpayer provides a written copy of the following:
A. A request that the correspondence be accepted as a return or statement, regardless of how brief, indicating that the taxpayer is attempting to file a return.
B. The reporting period for which the correspondence (return) is filed.
C. The amount of tax due or that no tax is due.
D. All of the above
E. A & C
D. All of the above
WHAT CONSTITUTES FILING A RETURN OR REPORT 0503.15
A return is considered filed when the taxpayer provides in writing:
a. A request that the correspondence be accepted as a return or statement, regardless of how brief, indicating that the taxpayer is attempting to file a return.
b. The reporting period for which the correspondence (return) is filed.
c. The amount of tax due or that no tax is due.
When the taxpayer has shown due diligence in making every effort to submit what the taxpayer feels is a return, the correspondence submitted should be accepted as a return. Even if the correspondence has no gross sales or deductions and shows only the net tax figure, it may be accepted as a return if the information listed in a, b, and c above is provided. If a taxpayer’s check indicates the reporting period and the measure of the tax being paid, it may be processed as a return. As a general rule, if tax due can be calculated from the information provided, the correspondence should be processed as a return. It is important to always consider the taxpayer’s intent.
TRUE OR FALSE
RTC section 6511 penalty (10 percent for failure to file return) may be applied in conjunction with RTC section 7155 penalty (50 percent for failure to obtain a permit) when appropriate.
TRUE
MULTIPLE PENALTIES 0509.68
However, under certain circumstances, more than one penalty may apply to the same determination:
• RTC section 6511 penalty (10 percent for failure to file return) should be applied along with RTC section 6514 penalty (25 percent for fraud or intent to evade tax). RTC section 6511 penalty may be applied with RTC section 7155 penalty (50 percent for failure to obtain a permit) when appropriate.
• RTC section 6511 penalty may be applied in conjunction with RTC section 6597 penalty (40 percent for knowingly collecting and failing to timely remit tax).
TRUE OR FALSE
A signed waiver allows any credits in the period indicated on the waiver to be offset against any tax liability and the taxpayer does not need to file a timely claim for refund.
FALSE
SIGNIFICANCE OF THE WAIVER OF LIMITATION 0215.03
Form CDTFA-122, Waiver of Limitation (waiver), is a legal agreement that a taxpayer may voluntarily enter into with the CDTFA. A waiver that is signed by the taxpayer prior to the statute expiration date, extends the three-year statute of limitations (or eight years in cases where no return was filed), for the period indicated on Form CDTFA–122. The waiver requests the signature of a CDTFA employee but the employee signature is not required for the waiver to be considered valid. A waiver duly signed by only the taxpayer is still a valid waiver. If the taxpayer signs a waiver prior to the statute expiration date, such waiver allows the CDTFA to examine the taxpayer’s records, and possibly assess additional tax, for the periods which otherwise would expire under the statute of limitations. In addition, a signed waiver allows any credits in the period indicated on the waiver to be offset against any tax liability and it extends the period within which a taxpayer may file a timely Claim for Refund.
In regard to sampling for refund claims, __________ and __________ techniques may be used by taxpayers to determine the amount of overpayment of tax liability using criteria similar to the techniques used by auditors.
In regard to sampling for refund claims, Sampling and Projection techniques may be used by taxpayers to determine the amount of overpayment of tax liability using criteria similar to the techniques used by auditors.
SAMPLING FOR REFUND CLAIMS 0216.21
Sampling and projection techniques may be used by taxpayers to determine the amount of overpayment of tax liability using criteria similar to the techniques used by auditors (see AM sections 0405.20 and 1302.05). If sampling and projection techniques are not appropriate for some or all of the transactions, the amount of the refund will be determined on an actual basis.
There are two kinds of negligence which will result in a tax deficiency and which may warrant the imposition of the negligence penalty. These are Negligence in _______________, and Negligence in _______________.
Negligence in keeping records
Negligence in preparing returns
CLASSES OF NEGLIGENCE 0506.45
A taxpayer may be negligent in a number of ways, but there are only two kinds of negligence which will result in a tax deficiency and which may warrant the imposition of the negligence penalty. These are: a. Negligence in keeping records (AM sections 0507.00 — 0507.50, and b. Negligence in preparing returns (AM sections 0508.00 — 0508.50).
(RTC) section 6597 penalty (40 percent for tax reimbursement collected and not timely remitted) may only be applied under which conditions?
i. The liability for the unremitted sales tax reimbursement or use tax averages over $1000 per quarter for the reporting period.
ii. The total unremitted tax exceeds 5% of the total amount of tax liability for which tax reimbursement was collected in the same quarterly reporting period in which the tax was due.
iii. The liability for the unremitted sales tax reimbursement or use tax averages over $1000 per month for the reporting period
iv. The total unremitted tax exceeds 10% of the total amount of tax liability for which tax reimbursement was collected in the same quarterly reporting period in which the tax was due.
A. i. and ii.
B. iii. and iv.
C. ii. and iii.
D. i. and iv.
C. ii. and iii.
FAILURE TO REMIT SALES TAX REIMBURSEMENT OR USE TAX 0509.65
The penalty may only be applied when both of the thresholds listed below are met:
1. The liability for the unremitted sales tax reimbursement or use tax averages over $1000 per month for the reporting period, and
2. The total unremitted tax exceeds five percent of the total amount of tax liability for which tax reimbursement was collected in the same quarterly reporting period in which the tax was due.