Articles Posted in Sales Tax Audit

Mike Habib is an IRS licensed Enrolled Agent who focuses his tax practice on helping his clients resolve their tax controversy matters. His tax relief firm is rated “A” by the better business bureau, which is quite rare for this industry as many are rated “F” or already ceased business operations like American Tax Relief and Nationwide Tax Relief and possibly many more to come.

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BOE California State Board of Equalization

Sales tax audit, BOE tax audits, SBE tax audit
California Personal Income, Sales and Use Taxes: Tax Imposed on Support Service Providers

Legislation is enacted that imposes California sales tax on providers of support services and excludes from gross income, for purposes of personal income tax, any supplementary payment received by a provider of in-home supportive services, as provided.

Providers of Support Services

California sales tax is imposed on providers of support services at retail measured by the gross receipts from the sale of those services. The tax is operative provided specified federal approval requests for matching funds are granted. The tax is imposed at the rate of 7.25% (6.25% on and after July 1, 2011), according to the Bill Analysis. Sellers that are actively engaged in arranging for the retail sale of support services are required to register with the California State Board of Equalization (BOE), collect tax from the provider, and report and pay the tax to the BOE. Sales tax prepayments are inapplicable to sellers until no later than three months after the date that federal approval is obtained.

“Support services,” for purposes of the tax, are:

– domestic services and services related to domestic services;
– heavy cleaning;
– personal care services, as defined;
– accompaniment when needed during necessary travel to health-related appointments or to alternative resource sites;
– yard hazard abatement;
– protective supervision;
– teaching and demonstration directed at reducing the need for other supportive services; and
– paramedical services that make it possible for the recipient to establish and maintain an independent living arrangement, including necessary paramedical services ordered by a licensed health care professional, as provided.
“Provider” is defined as a natural person who is authorized by law to provide all such support services and who makes a retail sale. Moreover, the term includes nongovernmental persons that arrange for the retail sale of all support services.

“Seller” is defined to include:
– the California Department of Social Services in its capacity as the state agency that oversees the In-Home Supportive Services (IHSS) program;
– a county in which county staff serve as homemakers, as provided;
– a county that contracts with a nongovernmental contractor to arrange for the retail sale of support services; or
– any other nongovernmental person that arranges for the retail sale of support services.

In addition, the Director of the Department of Health Care Services is required to seek federal approval from the federal Centers for Medicare and Medicaid Services to implement these provisions and to notify the BOE within 10 days of receipt of that approval.
Supplementary Payment Excluded From Gross Income
Gross income, for California personal income tax purposes, does not include any supplementary payment received by a provider of in-home supportive services, as specified. That supplementary payment must be equal to a percentage of the gross receipts of the provider for the sale of the services, plus an amount that is equal to any additional payroll withholding required for federal income tax purposes and for purposes of taxation for the Social Security and Medicare programs, as provided, due to the supplementary payment.

California State Board of Equalization sales and use tax audits, sales and use tax settlements, sales and use tax installment agreements, Los Angeles BOE audit, Orange County BOE audit, San Bernardino BOE Audit, Riverside BOE Audit, Wholesale BOE sales tax audit problem.

The CA Sales & Use tax audit help line 1-877-788-2937

Southern California Tax Relief Services

IRS tax Relief, FTB tax Relief, BOE tax Relief, EDD tax relief

At Mike Habib, EA, a SoCal tax firm, we understand that being notified that your tax return is being challenged by the IRS or the FTB can be scary. When you are faced with an audit, or a collection action, by the IRS, or the FTB, you may not know where to turn or what to do. We have the skill set and representation expertise to deal with the IRS and the FTB on your behalf. We understand their rules and are experienced in negotiating the lowest possible tax debt settlement allowed by law.

Tax Relief Services offered:

If you’ve received a notice from the IRS, FTB, BOE or EDD, or if you have any unpaid taxes or unpaid back taxes contact our office immediately at 1-877-788-2937 so we can jump start your case as soon as possible. Ignoring tax problems won’t help, don’t compromise on your representation.

IRS Tax Help, IRS Tax Audit / Examination, Tax Problems & Tax Relief LOS ANGELES COUNTY:

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California tax collectors to visit small businesses

As per Los Angeles Times

The effort is part of a new program to catch scofflaws. Investigators will be checking for seller’s permits, business licenses and evidence that firms are collecting and paying enough sales and use tax

By Cyndia Zwahlen Special to The Times

September 8, 2008

The tax man cometh — right to your door, if you operate a business in a target ZIP Code.

Next week, the first of 8,000 small retailers and other businesses targeted can expect state workers to come calling as part of a new program by California tax collectors to catch scofflaws.

The investigators from the state Board of Equalization will be checking for seller’s permits, business licenses and evidence that the businesses are collecting and paying enough sales tax and the often-overlooked use tax.

The campaign is the start of a three-year program that state officials say will eventually reel in $223 million in previously uncollected taxes.

“There is a $2-billion difference between taxes owed and taxes paid,” said Randie Henry, deputy director for the agency’s sales and use tax department.

“This effort will help us to address that gap by making the landscape fair for those businesses that do comply with the law and are registered and appropriately pay their taxes,” she said.

Based on the results of a pilot program, Henry expects that 3% of the businesses inspected won’t have their required seller’s permits, which are supposed to be posted in a public spot, and won’t have paid required taxes.

The initial targeted ZIP Codes in Southern California are: Perris, 92570; Santa Ana, 92701; Torrance, 90505; and Van Nuys, 91406. Businesses farther north, in parts of Emeryville, Sacramento and San Jose also will receive the 20-minute visits.

The new program to boost compliance is getting off to a slower start than anticipated because of the state budget stalemate. Until money is released to fully fund the effort, the size of the program’s seven teams will be limited. Instead of 12 state workers each, eight of whom were to be in the field, there will be smaller teams with about three field workers each, said Erin Little, the department’s assistant chief of field services in Southern California.

Follow-up efforts also may take longer until the program is fully staffed, said Anita Gore, spokeswoman for the Sacramento-based board, which collects certain business taxes and fees, as well as property taxes. The board doesn’t handle individual or corporate income tax.

They’re ready at Second Time Around, a consignment shop that has operated in the Torrance 90505 ZIP Code for 32 years, said owner Susan Carmer. She was puzzled when she received the letter from the board but decided to check to make sure her seller’s permit was still in its glass case and that her business license was at hand.

She said she’d never considered that some retailers might not register or pay their share of sales tax.

Still, Carmer is concerned about any potential for disruption to her business that a visit from a state worker might cause.

“Sometimes you just can’t get away. You’ve got clothes coming in the back door and selling out the front,” Carmer said.

By today, an additional 8,500 storefront businesses probably will have received letters from the state agency notifying them of the next round of inspections due to start in three to four weeks.

Those missives went out Thursday to businesses with sales permits registered in four ZIP Codes: Lake Elsinore, 92530; San Jose, 95111; Santa Ana, 92705; and Torrance, 90504.

Retail businesses that aren’t registered with the state probably didn’t get the letter but may receive an in-person visit as workers, known as specialists, go door-to-door in the selected areas.

Henry emphasized that specialists were not auditors. If a company is suspected of owing taxes, it will be referred for a follow-up.

Seller’s permits are free. Businesses that need one, including retailers and service businesses that sell or lease taxable items, can find an application online at

Businesses that sell or lease items have to collect the 7.25% state sales tax, as well as any sales tax imposed by local cities or counties, and turn it over to the Board of Equalization. The board then pays the city’s and county’s shares to those local governments.

Most retailers follow the rules. Many service businesses that also sell items don’t know that they too are required to have a seller’s permit and to collect and pay sales taxes.

“All of us can understand the person who has a service business that has small incidentals they sell” not being aware of the need for a permit, Henry said. “But people actually selling tangible property, collecting taxes from their customers and not sending it in, those are the people we hope to fine,” she said.

In a typical visit, specialists will introduce themselves, check for required permits, such as a seller’s permit, business license and permit to sell cigarettes or tobacco, if applicable.

They will check that their records match the business address, telephone, owner name and the like.

They will eyeball the physical operation to see whether it matches the picture given by the firm’s sales tax returns.

“One of the things about a visual visit is you can see, does what they are reporting make sense based on what we see happening in the store,” Gore said.

The specialists also will explain the relevant state business tax and fee requirements and hand out seller’s permit applications.

Follow-ups will be scheduled for businesses that aren’t in compliance.

Firms will not be fined for the lack of a seller’s permit unless they refuse to comply, Little said. The state can fine a business owner as much as $1,000 and impose a one-year jail term for noncompliance.

The inspectors also will be visiting sellers at fairs and swap meets, including the Pomona Swap Meet, to check for valid seller’s permits, while the owners of such ventures will be contacted so they can inform their vendors.

The average noncompliant business in the pilot program had been operating without paying taxes for almost two years, Henry said. The average overdue tax bill was $10,000.

The workers will also hand out a brochure that briefly explains the program as well as how to file a complaint if a business owner has concerns about the process or the state worker’s behavior.

The Board of Equalization held a meeting in Culver City last month and in Sacramento in July to notify business owners, trade groups and city officials.

The agency is sending letters to city officials and offering brochures and posters to business groups in an effort to get the word out.

Don’t be caught unaware.

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Final regs include new process for reporting employment tax adjustments and refund claims T.D. 9405, 06/30/2008, Reg. § 31.6011(a)-1, Reg. § 31.6011(a)-4, Reg. § 31.6011(a)-5, Reg. § 31.6205-1, Reg. § 31.6302-1, Reg. § 31.6402(a)-1, Reg. § 31.6413(a)-1, Reg. § 31.6403(a)-2

Mike Habib, EA

IRS has issued final regs on employment tax adjustments and refund claims, effective Jan. 1, 2009. The final regs modify the process for making interest-free adjustments for both underpayments and overpayments of Federal Insurance Contributions Act (FICA) and Railroad Retirement Tax Act (RRTA) taxes and Federal income tax withholding (ITW).

Background on interest-free adjustments and refunds. While generally interest must be paid to IRS on any tax underpayment and to a taxpayer on any tax overpayment, an exception applies to employment taxes. Where an incorrect amount of tax under Code Sec. 3101 (employee FICA tax), Code Sec. 3111 (employer FICA tax), Code Sec. 3201 (employee RRTA tax), Code Sec. 3221 (employer RRTA tax), or Code Sec. 3402 (ITW) is reported to IRS for any payment of wages or compensation, Code Sec. 6205(a) and Code Sec. 6413(a) allow employers to make interest-free adjustments for underpayments and overpayments, respectively.

Under the prior Code Sec. 6205(a) regs, if a return is filed and less than the correct amount of employee or employer portions of FICA or RRTA tax is reported and paid, the employer adjusts the underpayment (a) by reporting the additional amount due as an adjustment on a current return, or (b) by reporting such additional amount on a supplemental return. For overpayments of employment taxes, Code Sec. 6413(b) allows a refund claim to be filed when an interest-free adjustment cannot be made. Under the prior Code Sec. 6413 regs, IRS allows taxpayers to choose between filing a claim for refund and making an interest-free adjustment to correct an overpayment of employment taxes.

Late in 2007, IRS issued proposed regs on employment tax adjustments and refund claims (see Federal Taxes Weekly Alert 01/03/2008). The proposed regs have now been adopted with only minor changes.

Revised adjusted return process. The final regs are issued in connection with IRS’s development of new forms to report adjustments to employment taxes which will replace the existing process of reporting adjustments on regularly filed employment tax returns. The regs are part of IRS’s effort to reduce taxpayer burdens by allowing employers to make employment tax adjustments on a separately filed form as soon as an error is ascertained, rather than as a line adjustment on the regularly filed employment tax return. The new adjusted return will not affect the liability reported on the current return. Under the regs, the forms used to accept an assessment of employment taxes after an examination (Form 2504, Agreement and Collection of Additional Tax and Acceptance of Overassessment (Excise or Employment Tax), and Form 2504-WC, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment in Worker Classification Cases (Employment Tax)) constitute adjusted returns. (Reg. § 31.6205-1)

Interest-free adjustments. The final Code Sec. 6205 regs set out the procedures for making interest-free adjustments for underpayments of employment taxes. If a return is filed and less than the correct amount of employee or employer FICA or RRTA tax is reported, and the employer discovers the error after filing the return, the employer adjusts the resulting underpayment of tax by reporting the additional amount due on an adjusted return for the return period in which the wages or compensation was paid. The adjustment must be made by the due date of the return for the return period in which the error is ascertained, and the amount of the underpayment must be paid by the time the adjustment is made, or interest will begin to accrue from that date. An underpayment adjustment can only be made within the period of limitations for assessment. For underpayments of ITW where the incorrect amount was withheld, subject to limited exceptions, an adjustment can only be made for errors ascertained during the calendar year in which the wages were paid. (Reg. § 31.6205-1(b)(2))

The final regs also provide for interest-free adjustments of underpayments of FICA tax, RRTA tax, and ITW under certain circumstances where the underpayment arises because the employer failed to file an original return or failed to report and pay the correct type of tax. (Reg. § 31.6205-1(b)(3), Reg. § 31.6205-1(c)(3))

The final Code Sec. 6413(a) regs set out the procedures for making interest-free adjustments for overpayments of employment taxes. If an employer ascertains an overpayment error within the applicable period of limitations on credit or refund, it’s required to repay or reimburse its employees the amount of overcollected employee FICA or RRTA tax before the expiration of that period. However, the requirement to repay or reimburse doesn’t apply to the extent that taxes weren’t withheld from the employee or if, after reasonable efforts, the employer cannot locate the employee. In such a case, the employer can make an adjustment for only the employer share of FICA or RRTA tax. An interest-free adjustment for an overpayment cannot be made once a claim for refund has been filed. (Reg. § 31.6413(a)-1)

Once an employer repays or reimburses an employee to the extent required, the employer may report both the employee and employer portions of FICA or RRTA tax as an overpayment on an adjusted return. The employer must certify on the adjusted return that it has repaid or reimbursed its employees to the extent required.

Under the final regs, the reporting of the overpayment constitutes an interest-free adjustment if the overpayment is reported on an adjusted return filed before the 90th day prior to expiration of the period of limitations on credit or refund. Similar rules apply for making interest-free adjustments for ITW overpayments, except that an interest-free adjustment can only be made if the employer ascertains the error and repays or reimburses its employees within the same calendar year that the wages were paid and reports the adjustment on an adjusted return. (Reg. § 31.6413(a)-2)

No repayment or reimbursement for interest-free adjustments of overpayments. Unlike in the proposed reg, in the final regs the employer isn’t required to repay or reimburse the employee or to adjust the overpayment by the due date of the return for the return period following the return period in which the error is ascertained. (Reg. § 31.6402-2(a)(1)) After reconsideration, IRS determined there was insufficient reason to impose a timing restriction other than the period of limitations on credit or refund of taxes. (T.D. 9405, 06/30/2008)

Deposits, payments, and credits. An employer making an interest-free adjustment must pay the amount of the adjustment by the time it files an adjusted return. The timely payment satisfies the employer’s deposit obligations for the adjustment. (Reg. § 31.6302-1(c)(7)) In determining the amount of accumulated taxes in an agricultural employer’s lookback period (which determines the employer’s deposit schedule), adjustments to tax liability made under the filing of adjusted returns or refund claims aren’t taken into account; new agricultural employers are treated as having employment tax liabilities of zero for any lookback period before the date the employer started or acquired its business. (Reg. § 31.6302-1(g)(4))

If the underpayment amount isn’t paid when the adjusted return is filed, interest begins to accrue as of the date the adjusted return is filed. (Reg. § 31.6205-1(b)(2))

The adjusted overpayment amount will be applied as a credit toward payment of the employer’s liability for the calendar quarter (or calendar year for annual returns being adjusted) in which the adjusted return is filed, unless IRS notifies the employer that the credit will be applied to a different return period or that the employer isn’t entitled to the adjustment under applicable laws or procedures. (Reg. § 31.6413(a)-2(b)(2))

Refunds for overpayments. As in the prior regs, instead of making an interest-free adjustment for an overpayment, employers can file a claim for refund for the amount of the overpayment. Furthermore, if an employer can’t make an interest-free adjustment for an overpayment because the period of limitations for claiming a credit or refund for the overpayment will expire within 90 days or because IRS has otherwise notified the employer that it’s not entitled to the adjustment, the employer can recover the overpayment only by filing a claim for refund. (Reg. § 31.6413(a)-2(d))

An employer can file a claim for refund of an overpayment of FICA or RRTA tax, but must certify that it has repaid or reimbursed the employee’s share of FICA or RRTA tax to the employee or has secured the employee’s written consent to allowance of the refund or credit. However, the employer isn’t required to repay or reimburse the employee or obtain the written consent of the employee to the extent that the overpayment doesn’t include taxes withheld from the employee or, after reasonable efforts, the employer cannot locate the employee or the employee, once contacted, will not provide the requested consent. (Reg. § 31.6402(a)-2(a)) The final regs under Code Sec. 6414 set out similar procedures for filing a claim for refund of overpaid ITW, except that an employer can’t file a claim for refund of an overpayment of ITW for an amount the employer deducted or withheld from an employee. (Reg. § 31.6414-1(a))

IRS intends to issue guidance to provide examples of how the final regs apply in different factual scenarios. (T.D. 9405, 06/30/2008)

State Sales Tax & Use Tax Audits and Examination – why you need a tax professional on your side

Mike Habib, EA

Among the most frightening words a business owner can hear are the words: sales tax audit. There are many reasons why this is a phrase that should be feared, not the least of which is that the negative outcome of a sales tax audit may cost you your business, your accounts receivable, your current business & personal assets, and can leave you starting over with nothing. There are options available to you though, keep reading to learn how you can survive this trying time.

Begin with the best possible defense – an exemplary system of record keeping when it comes to sales tax paid, received, and possible exemptions. Document everything and review your documents with an internal sales tax audit yearly. This gives you a great opportunity to catch mistakes that may have been made and correct them before an actual audit takes place. You will also want to review your documentation immediately prior to your audit.

When faced with a sales tax audit, or a use tax audit, you need to go to the tax resolution experts. Chances are that you either have a bookkeeper on staff or you use an outside bookkeeping firm in order to file sales and tax state reports. You may consider the valuable services of our firm for assistance with the your sales tax audit as well as dealing with the potential outcome and any consequences that may apply.

Many businesses find that the sting of owed sales tax is not nearly as lethal as the time and attention that must be dedicated to the process of a sales tax audit. This takes hours of work finding the documentation, defending the receipts for tax-exempt items, and time is money in the business world. Unfortunately, this is a necessary evil. The penalty for not complying with the taxing authorities in this matter are simply too devastating to consider.

When experiencing a sales tax audit you need to provide the auditor with a nice quiet place in which to work, all the documentation he or she needs and/or requests, and a basic overview of how your business operates. Be prepared to provide follow up documentation if necessary and to defend certain transactions along the way. The purpose of the sales tax audit in all honesty is to generate more money for the state so cooperate but don’t roll over.

Our firm is well-qualified and can assist you from the very beginning of your sales tax audit by speaking the language of your sales tax auditor. Many auditors are much more approachable when dealing with a licensed tax representative rather than dealing with individual taxpayers and business owners. Let our firm work for you and the tax savings are likely to pay for the service and so much more.

Having a tax expert on your team such as Mike Habib, EA often helps when enduring a sales tax audit. He knows the tax code and will be able to identify potential pitfalls prior to the audit in addition to being able to help you defend certain transactions that may fall within gray areas of the tax code or negotiate with your auditor if necessary. The most important thing you can do to prepare for a sales tax audit however is to avoid panic and let the tax experts do their job while you try going about your own as seamlessly as possible while waiting on the verdict.

For sales tax and use tax audit representation CLICK HERE.