What Triggers a CDTFA Sales Tax Audit in California?
Sales tax audits from the California Department of Tax and Fee Administration (CDTFA) can feel like they come out of nowhere — but in reality, they’re often based on predictable red flags. If you’re a California business owner, especially in a high-risk industry, it’s important to understand what draws the CDTFA’s attention and how to protect yourself before the audit notice arrives.
In this article, we break down the most common audit triggers — and what to do if your business is at risk.
1. Late or Inconsistent Sales Tax Filings
One of the biggest red flags is irregular filing behavior:
- Missing monthly or quarterly returns
- Filing late repeatedly
- Showing wildly fluctuating sales tax due amounts
Even if the problem was caused by a bookkeeping delay or turnover, the CDTFA may interpret it as a sign of underreporting — and open an audit to investigate further.
2. Sales Underreported vs. Other Records
If your reported taxable sales don’t align with:
- 1099-K merchant processor reports
- Bank deposits
- Franchise Tax Board (FTB) gross receipts
…the CDTFA may assume you’re understating revenue. In some cases, this mismatch can even lead to California FTB bank levy enforcement if tax debts remain unresolved.
3. You’re in a “High-Risk” Industry
The CDTFA targets certain industries more than others because they:
- Involve a lot of cash transactions
- Are prone to recordkeeping errors
- Have a history of noncompliance
Commonly audited business types include:
- Restaurants and food trucks
- Auto repair and tire shops
- Retail stores and smoke shops
- Hair salons and nail studios
- Construction contractors
- Wholesalers and resellers
If you’re in one of these sectors, your audit risk is much higher — even if you’ve never had problems before.
4. Prior Noncompliance or Audit History
If you’ve had past issues with:
- Missed filings
- Prior audits
- Sales tax debt
…you’re far more likely to be audited again. Agencies often revisit businesses within 3–5 years to confirm “compliance continuity.” In some cases, this can tie into IRS-related issues, like needing guidance on responding to an IRS audit assessment or even challenging IRS penalties.
5. Tips, Complaints, or Referrals
Sometimes CDTFA audits are triggered by:
- Employee whistleblowers
- Competitor complaints
- Random selection based on zip code sampling
You can’t always prevent this. But if your business records are inconsistent, or if you operate primarily in cash, even a small tip could lead to an audit or collection activity such as an EDD payroll tax levy in California.
What to Do If You’re at Risk
If any of the above triggers apply to your business:
- Get a sales tax compliance review done proactively (before the CDTFA does it for you)
- Organize your past 3–5 years of:
- Sales records
- POS reports
- Bank statements
- Filed returns (sales tax + income tax)
- Don’t go it alone. CDTFA audits are aggressive, assumption-based, and can result in huge assessments — even for innocent errors.
Businesses in Southern California often ask about Orange County IRS tax relief options as well, since state and federal tax issues frequently overlap.
Speak with a California Sales Tax Audit Defense Expert
At Boulanger CPA and Consulting PC, we defend California businesses against CDTFA audits — from first notice through appeal.
If you want to prepare and protect your business, learn more in Defend What’s Yours — our resource for taxpayers facing aggressive enforcement.
📍 Based in Orange County — Serving All of California
Call:
657-218-5700
Email:
marc@boulangercpa.com
Schedule a Confidential Audit Review
Need help now? Visit our California Sales Tax Audit Defense page to learn how we can protect you before the CDTFA takes control.
Frequently Asked Questions
What are the most common triggers for a CDTFA sales tax audit?
Frequent triggers include underreporting sales, inconsistent tax filings, large cash transactions, or discrepancies between sales tax returns and income tax returns.
Does receiving a notice always mean I did something wrong?
No. Audits are often triggered automatically by industry averages, random selection, or data mismatches—not just suspected wrongdoing.
Are certain industries more likely to face CDTFA audits?
Yes. Cash-intensive industries like restaurants, convenience stores, liquor stores, and vape shops are frequent audit targets because of higher noncompliance risk.
How far back can a CDTFA audit go?
Typically, CDTFA audits cover three years, but they can go back longer if fraud or significant underreporting is suspected.
What records should I keep to avoid audit problems?
Maintain accurate sales journals, point-of-sale reports, bank statements, and purchase invoices. Organized records reduce risk of unfavorable adjustments.
Can a CDTFA audit trigger an IRS or FTB audit?
Yes. Audit findings are often shared with other tax agencies. If significant underreporting is found, it may lead to additional audits or assessments.
What happens if CDTFA finds I underpaid sales tax?
You may owe back taxes, penalties, and interest. In some cases, payment plans or penalty relief may be available.
Should I hire a professional before responding to an audit notice?
Yes. Professional representation helps protect your rights, ensures accurate records are presented, and minimizes costly errors in the audit process.
📣 About the Author
Marc Boulanger, CPA is the founder of Boulanger CPA and Consulting PC, a boutique tax resolution firm based in Orange County, California and trusted by high-income individuals and business owners across Southern California.
He is the author of Defend What’s Yours: A California Taxpayer’s Guide to Beating the IRS and FTB at Their Own Game, available now on Amazon. The book offers a step-by-step plan for resolving IRS and FTB tax debt without losing your business, your home, or your peace of mind.
With over a decade of experience resolving high-stakes IRS and State tax matters, Marc brings strategic insight to complex cases involving wage garnishments, bank levies, unfiled returns, and six-figure tax debts. He is known for helping clients reduce or eliminate tax liabilities through expertly negotiated settlements and compliance plans.
Marc is a Certified Public Accountant licensed in California and Oklahoma and holds the designation of Certified Tax Representation Consultant. He is a member of the American Society of Tax Problem Solvers (ASTPS) — the national organization founded by the educators and practitioners who have trained thousands of CPAs, EAs, and tax attorneys in IRS representation strategy.
Every case is handled with discretion, proven methodology, and direct CPA-led representation — not call center scripts.
📍 Learn more at www.orangecounty.cpa or call (657) 218-5700.
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