What CDTFA's own numbers show
CDTFA files an annual audit and compliance report with the Legislature, and the fiscal year 2024-25 version tells a clear story. Audits identified $745.3 million in sales and use tax deficiencies, up about 19 percent from the prior year. Nineteen of the largest audits alone accounted for $189.8 million of that total. The agency's compliance programs as a whole generated over $1.0 billion in revenue, with a benefit-to-cost ratio the report puts at 7.5, meaning every dollar spent on enforcement returned roughly seven and a half dollars in collections.
The field side of that effort is the Statewide Compliance and Outreach Program, known internally as SCOP. In the same fiscal year, SCOP staff performed 61,923 in-person permit checks across the state, walking into businesses to confirm they hold a valid seller's permit. That work turned up 129 businesses operating without one, added 83 sub-locations to existing permits that hadn't been registered, and referred 435 cases to the audit division for a closer look. None of that requires a business to do anything wrong on purpose. It just means more eyes are checking more paperwork than in prior years.
What actually triggers an audit
CDTFA doesn't pick businesses at random. A handful of patterns show up again and again in the cases we see:
Cash-heavy industries
Restaurants, bars, convenience stores, gas stations, salons, and auto repair shops report a disproportionate share of the state's audit deficiencies, because cash transactions are harder to reconcile against a paper trail. Auditors know the typical markup ranges for these industries cold, and a reported margin that falls well outside the norm for the same type of business is a red flag on its own.
Resale certificates that don't add up
A business that buys inventory tax-free using a resale certificate but can't show the goods were actually resold, rather than used internally or given away, owes use tax on that purchase. CDTFA cross-references resale certificate activity against a buyer's own reported sales, and a mismatch is one of the more common audit starting points.
Mismatched third-party reporting
Payment processors issue 1099-K forms to the IRS and, increasingly, that data gets compared against what a business reported to CDTFA. A restaurant reporting less in taxable sales than its card processor shows in gross receipts, even accounting for tips and non-taxable items, invites questions.
An SCOP permit check that finds something off
As the numbers above show, a routine in-person permit verification can turn into an audit referral on its own, particularly if a location isn't registered or the business type doesn't match what's on file.
What happens once the audit starts
A CDTFA audit typically opens with a letter requesting records: sales journals, purchase invoices, bank statements, resale and exemption certificates, and often point-of-sale system exports covering a three-year period (four if the auditor suspects underreporting significant enough to extend the statute). The auditor reconciles reported sales against these records and, where the paper trail is incomplete, may build an estimate using a markup analysis, comparing your reported cost of goods sold against industry-typical margins to estimate what sales should have been.
If the audit produces a deficiency, CDTFA issues a Notice of Determination showing the additional tax owed, plus interest, and any penalty. That's the document that starts your clock for a response.
The 30-day clock, and why it matters
Generally, you have 30 days from the date on a Notice of Determination to file a petition for redetermination. Miss it, and the assessment becomes final, closing off the administrative appeal process entirely. A petition triggers an internal review by CDTFA's appeals function; if that doesn't resolve things in your favor, the next stop is the independent Office of Tax Appeals, a separate body created in 2017 specifically to hear disputes over CDTFA, FTB, and other state tax assessments. Confirm the deadline printed on your own notice before relying on the general 30-day rule, since a small number of programs and notice types run on a different schedule.
Negligence penalty vs. fraud penalty: the distinction is worth fighting for
Under Revenue and Taxation Code Section 6484, CDTFA can add a 10 percent penalty when part of a deficiency stems from negligence or intentional disregard of the rules. Under Section 6485, a 25 percent penalty applies when part of the deficiency is due to fraud or an intent to evade tax. Fraud requires the state to prove its case by clear and convincing evidence, a considerably higher bar than negligence, which is a routine finding in nearly every audit that produces any deficiency at all. An auditor's initial characterization of a discrepancy as "intentional" rather than "an accounting error" is exactly the kind of finding worth pushing back on before it becomes final, because the dollar difference between the two penalty tiers is often substantial on a large assessment.
What to do if you get the letter
Don't ignore it, and don't hand over records without understanding what the auditor is looking for first. Pull your own sales tax filings and bank statements before the auditor's first appointment so you know what your numbers actually show. If your business also has unresolved federal issues, payroll tax deposits, unfiled returns, or an existing IRS balance, it's worth addressing the state and federal sides together rather than in isolation, since a CDTFA deficiency can sometimes point to gaps in what was reported federally as well. Our audit defense page covers how we handle both IRS and CDTFA examinations, and if penalties end up on the assessment, penalty abatement may still apply once the underlying tax question is resolved.
We represent business owners across the Central Valley, including Bakersfield, on exactly this kind of state tax controversy. A free consultation with our tax debt resolution team can tell you within 15 minutes whether your situation calls for a formal petition, a negotiated settlement of the assessment, or simply better documentation before the auditor's next visit.