Audit Manual

Chapter 5
Penalties
Sales and Use Tax Department
California State
Board of Equalization
This is an advisory publication providing direction to staff administering the Sales and Use Tax Law and Regulations.
Although this material is revised periodically, the most current material may be contained in other resources including
Operations Memoranda and Policy Memoranda.
Pcusc contuct un Ioud o]cc tIcc uc conccns cgudng un sccton o tIs uIcuton.
Audit MAnuAl
April 2000
PenAlties
tAble of Contents
PENALTIES 0500.00
INTRODUCTION 0501.00
Board Policy on Penalties ................................................................................... 0501.05
Responsibility of Field Auditors
For Penalty Recommendations ............................................................................ 0501.15
Types of Penalties Overview
Mandatory vs Discretionary Penalties .................................................................. 0501.22
Request for Relief of Mandatory Penalties ............................................................. 0501.25
Procedures for Relief of Penalty Reconsideration ................................................... 0501.27
Penalties For Negligence and Fraud ..................................................................... 0501.30
Local and Transactions Taxes .............................................................................. 0501.35
SALES TAX RETURNS 0502.00
Reporting Basis ................................................................................................ 0502.10
Due Dates of Returns ........................................................................................ 0502.15
Sales Tax Liability of Purchasers ......................................................................... 0502.20
Closeouts ........................................................................................................ 0502.30
Effect of Legal Holidays and Weekends On Due Dates ............................................ 0502.35
Statutory Date Falling on Saturday, Sunday or Holiday .......................................... 0502.36
Extensions for Filing Returns .............................................................................. 0502.40
FAILURE TO FILE A RETURN 0503.00
When Penalty Applies ........................................................................................ 0503.05
What Constitutes Filing a Return or Report ........................................................... 0503.15
Form BOE401E, Not a Return for All Purposes ................................................... 0503.20
Closeouts With Securities .................................................................................. 0503.30
Erroneous Refunds of security Deposits ............................................................... 0503.35
No Returns Filed For Period Preceding Closing Period ............................................. 0503.40
Taxpayers on a Monthly Basis ............................................................................. 0503.45
Availability of Security Between Business Taxes .................................................... 0503.50
More Than One Location .................................................................................... 0503.55
FAILURE TO PAY 0504.00
When Penalty Attaches ...................................................................................... 0504.05
Petitions for Redetermination ............................................................................. 0504.10
Payments or Petitions Mailed But Not Received ..................................................... 0504.15
Jeopardy Determinations ................................................................................... 0504.20
Prepayments.................................................................................................... 0504.25
Electronic Fund Transfer Related Penalties ............................................................ 0504.30
AMNESTY PENALTIES 0505.00
50 Percent Interest Penalty ................................................................................ 0505.05
Double Penalties ............................................................................................... 0505.10
NEGLIGENCE PENALTIES GENERAL 0506.00
Legal Basis ...................................................................................................... 0506.05
Dehnition ........................................................................................................ 0506.10
Negligence vs. Intentional Disregard ................................................................... 0506.15
Acts of an Agent, Employee or Partner ................................................................. 0506.20
Conditions Under Which Penalty Applies ............................................................... 0506.25
Penalties Applicable To Only Part of Audit Period ................................................... 0506.30
Penalty Comments on Audit Reports
or Field Billing Orders ........................................................................................ 0506.35
Classes of Negligence ........................................................................................ 0506.45
April 2000
Audit MAnuAl
October 2008
NEGLIGENCE IN KEEPING RECORDS 0507.00
General ........................................................................................................... 0507.05
Test For Negligence in Keeping Records ............................................................... 0507.10
Records Need Only Be Adequate For Tax Purposes ................................................ 0507.15
Records Need Only Be Adequate For Type of Business ............................................ 0507.20
Negligence of Other Taxpayers No Excuse ........................................................ 0507.25
Effect of Lack of Knowledge On Part of Taxpayer ................................................... 0507.30
Errors in Keeping Records .................................................................................. 0507.35
Errors Do Not Necessarily Constitute Negligence ................................................... 0507.40
Considerations in Classifying Errors ..................................................................... 0507.45
Destruction of Records ...................................................................................... 0507.50
NEGLIGENCE IN PREPARING RETURNS 0508.00
Dehciency Due To Misunderstanding .................................................................... 0508.05
Test For Negligence in Preparing Returns ............................................................. 0508.10
Mechanical Errors ............................................................................................. 0508.15
Errors in Application of Law ................................................................................ 0508.20
Duty To Make Inquiry ........................................................................................ 0508.25
Effect of Erroneous Information .......................................................................... 0508.30
Failure To Report Purchases Subject To Use Tax .................................................... 0508.35
More Than One Location .................................................................................... 0508.40
Other Types of negligence .................................................................................. 0508.45
Working Papers Are Destroyed ........................................................................... 0508.50
EVASION PENALTIES 0509.00
General ........................................................................................................... 0509.05
Dehnition of Evasion Penalties ............................................................................ 0509.10
Evasion vs. Negligence Penalties ......................................................................... 0509.15
Conditions Warranting an Evasion Penalty ............................................................ 0509.20
Evidence of Evasion .......................................................................................... 0509.25
Burden of Proof ................................................................................................ 0509.30
Evasion by Agent, Partner or Employee ............................................................... 0509.40
Amount To Which Penalty Applies ....................................................................... 0509.45
Knowingly Operating Without A Permit ................................................................ 0509.50
Misuse Of A Resale Certihcate ............................................................................ 0509.55
Out of State Registration of Vehicle, Vessel or Aircraft ........................................... 0509.60
Failure to Remit Tax .......................................................................................... 0509.65
Multiple Penalties.............................................................................................. 0509.68
Statute of Limitations for Evasion Penalties .......................................................... 0509.70
Approval of Evasion Penalties ............................................................................. 0509.75
MISCELLANEOUS 0510.00
Failure To Obtain Evidence that Operator
of Catering Truck Holds Valid Sellers Permit ......................................................... 0510.05
Failure of Retail Florist to Obtain Permit .............................................................. 0510.10
Penalties in Bankruptcy Cases ............................................................................ 0510.20
Receivers, Trustees and Debtors in Possession ...................................................... 0510.25
Negligence and Evasion Penalties Deceased Taxpayers ....................................... 0510.30
Negligence and Evasion Penalties Death of Partner ............................................ 0510.35
Assignment for the Beneht of Creditors ............................................................... 0510.40
PenAlties
PENALTIES 0500.00
INTRODUCTION 0501.00
BOARD POLICY ON PENALTIES 0501.05
It is the policy of the Board to encourage and assist all taxpayers in making an accurate and
timely self-declaration of their tax liability. When that is done, there should be no occasion for
imposiIion oI pcnaIIics Ior ncgIigcncc or Iraud. Thc Hoard rccognizcs Ihc many diILcuIIics IhaI
taxpayers may be confronted with in attempting to comply with all requirements of the law. While
unduly rigid or exacting requirements are not in the best interest of good tax administration, the
Board does not condone carelessness or deliberate disregard by taxpayers of their obligations to
kccp accuraIc rccords and prcparc propcr rcIurns. Whcn |usIiLcd by Ihc acIs or omissions oI
the taxpayer, penalties should be applied properly and impartially. Whenever there is any doubt
as to whether factual conditions warrant a penalty for negligence or fraud, that doubt should be
resolved in favor of the taxpayer.
RESPONSIBILITY OF FIELD AUDITORS
FOR PENALTY RECOMMENDATIONS 0501.15
Negligence and fraud penalties are generally imposed as part of the determinations based upon
fcld audii rcconncndaiions. Ficld audiiors and iIcir sucrvisors arc rcsonsillc for naling
rocr cnaliy rcconncndaiions lascd uon faciual fndings. TIis rcquircs good judgncni,
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
flc a rciurn. Howcvcr, a fraud cnaliy and a 10 crccni cnaliy for failurc io flc nay lc inoscd
to the same liability.
TYPES OF PENALTIES OVERVIEW
MANDATORY VS DISCRETIONARY PENALTIES 0501.22
Numerous sections of the Revenue and Taxation Code (RTC) impose penalties. Some penalties
are mandatory and are imposed automatically. Other penalties are discretionary and may be
asscsscd lascd on iIc audiior's judgncni and facis suoriing iIc sccifc cnaliy. (Scc AM
scciion 0203.21 for iyical cnaliy rcconncndaiions in salcs and usc ia audiis.
The tables that follow classify penalties as mandatory or discretionary.
May 2011
Audit MAnuAl
October 2008
(Cont.) 0501.22
Mandatory Penalties
Nature of Penalty Rate RTC Sections
Failurc io flc a rciurn 10% 6511; 6591
Failurc io ay iacs 10% 6565; 6591
Failurc io ay rcayncni anounis 6% 6476; 6477
Elccironic Fund Transfcr (EFT}

related penalties exclusive of prepayments 10%, 6479.3
Failurc io ay rcayncnis ly EFT 6% 6479.3
Amnesty interest penalty
50%
a
7074
Double amnesty penalty
b
7073
Failurc io ay rcayncni anounis ly sulicrs and wIolcsalcrs of fucl 10%
c
6480.4
a
TIis cnaliy alics only io criods cligillc for anncsiy and is lascd on iIc unaid ia as of MarcI
31, 2005 (scc AM scciions 0505.00 0505.10 for norc infornaiion}.
b
This penalty applies only to periods eligible for amnesty and is applicable to a Notice of Determination
issucd aficr Aril 1, 2005 (scc AM scciions 0505.00 0505.10 for norc infornaiion}.
c
TIc raic of cnaliy is incrcascd io 25 crccni if iIc sulicr or wIolcsalcr lnowingly or inicniionally
fails io nalc a iincly rcniiiancc of iIc rcayncni anounis.
Discretionary Penalties
Negligence or intentional disregard of the law or authorized rules and
regulations
10% 6478; 6484
Fraud or inicni io cvadc iIc law or auiIorizcd rulcs and rcgulaiions 25% 6485; 6514
Inrocr usc of a rcsalc ccriifcaic for crsonal gain io cvadc iIc ia
d
6072; 6094.5
Failurc io rcnii salcs ia rcinlurscncni or usc ia collccicd 40%
e
6597
Knowingly fails to obtain a valid permit for the purpose of evading the
payment of tax
50% 7155
Registration of a vehicle, vessel, or aircraft outside the State of
California for the purpose of evading the payment of tax
50%
6485.1;
6514.1
Failurc io oliain cvidcncc iIai iIc ocraior of caicring irucl Iolds a
valid sellers permit
$500 6074
Failurc of a rciail orisi io oliain a crnii lcforc cngaging in or
conducting business as a seller
$500
f
6077
d
10% of iIc ia duc or $500 wIicIcvcr is grcaicr.
e
FTC scciion 6597 ocraiivc January 1, 2007.
f
Plus any other applicable penalties.
PenAlties
October 2008
REQUEST FOR RELIEF OF MANDATORY PENALTIES 0501.25
The Board is empowered to relieve taxpayers of mandatory penalties when the Board determines
iIai iIc failurc io ay iacs or flc a rciurn iincly was duc io a rcasonallc causc and circunsianccs
beyond the persons control. Such failure must have occurred notwithstanding the exercise of
ordinary carc and iIc alscncc of willful ncglcci. Taaycrs wisIing io rcqucsi rclicf fron iIc
ayncni of cnaliics sIould do so aficr rcccii of a dcicrninaiion. A rcqucsi for rclicf nusi lc
rcscnicd in a wriiicn siaicncni, undcr cnaliy of crjury, sciiing foriI iIc facis uon wIicI iIc
rcqucsi is lascd. TIc usc of Forn DOE735, Request for Relief from Penalty (available at www.boe.
ca.gov}, is rcconncndcd lui noi rcquircd.
TIc following Hcadquaricrs scciions cvaluaic rcqucsis for rclicf of nandaiory cnaliics rclaicd io
iIcir rcscciivc arcas of rcsonsililiiy, and rcconncnd ciiIcr aroval or dcnial of iIc rcqucsi.
Fciurn Analysis Unii (MIC 35} Laic ayncni, laic fling of rciurns, EFT cnaliy, cic.
Pciiiions Scciion (MIC 38} Dcicrninaiions, audiis, cic.
Consuncr Usc Ta Scciion (MIC 37} VcIiclcs, vcsscls, aircrafi
Fcconncndaiion io arovc or dcny a rcqucsi for rclicf alovc $50,000 is forwardcd io iIc Dcuiy
Dirccior for furiIcr rcvicw and iIcn sulniiicd io iIc Doard Mcnlcrs for considcraiion.
PROCEDURES FOR RELIEF OF PENALTY RECONSIDERATION 0501.27
Taaycrs nay rcqucsi rcconsidcraiion of dcnicd rcqucsis for rclicf of nandaiory cnaliics.
Audiiors sIould lc awarc of iIcsc roccdurcs in ordcr io rcsond io iaaycrs' inquirics.
A. Penalties of $50,000 or Less
In the letter notifying the taxpayer of the Sales and Use Tax Departments (SUTD)
rcconncndaiion io dcny a rcqucsi for rclicf of cnaliy, iIc Hcadquaricrs' scciion scnding
the letter (e.g., Return Analysis Unit) will add a statement explaining that the decision to
recommend denying relief may be reconsidered if the taxpayer provides new information
wiiIin 15 days. TIc lciicr will also clain iIai if iIc iaaycr rovidcs addiiional infornaiion
and iIc rcqucsi for rclicf is siill rcconncndcd for dcnial ly iIc Hcadquaricrs' scciion, iIc
rcqucsi for rclicf will iIcn lc rcvicwcd ly iIc Dcuiy Dirccior. If iIc Dcuiy Dirccior agrccs
wiiI iIc rcconncndaiion io dcny iIc rcqucsi for rclicf of cnaliy, iIc Dcuiy Dirccior will
send a letter to the taxpayer indicating that he or she agrees with the recommendation.
Siaff sIould noi rcgard iIc 15day criod as alsoluic siaff nay siill considcr infornaiion
rcccivcd aficr 15 days. TIc 15day criod rovidcs a rcasonallc dcadlinc in wIicI iIc
taxpayer can respond.
B. Penalties in excess of $50,000
In iIc lciicr noiifying iIc iaaycr of iIc SUTD's rcconncndaiion io dcny iIc rcqucsi for
relief of penalty, the section sending the letter (e.g., Petitions Section) will add a statement
explaining that the decision to recommend denying relief may be reconsidered if the taxpayer
rovidcs ncw infornaiion wiiIin 15 days. TIc lciicr will also clain iIai if iIc iaaycr
rovidcs addiiional infornaiion and iIc rcqucsi for rclicf is siill rcconncndcd for dcnial ly
iIc Hcadquaricrs' scciion, iIc rcqucsi will iIcn lc rcvicwcd ly iIc Dcuiy Dirccior rior io
placement on the Board calendar. If the Deputy Director agrees with the recommendation
io dcny iIc rcqucsi for rclicf of cnaliy, iIc Dcuiy Dirccior will scnd a lciicr noiifying iIc
iaaycr iIai iIc rcconncndaiion io dcny iIc rcqucsi for rclicf will lc sulniiicd io iIc
Doard Mcnlcrs. TIc lciicr will also includc iIc aniiciaicd daic iIc Doard Mcnlcrs will
considcr iIc rcqucsi.
Again, iIc 15day criod is noi alsoluic siaff nay siill considcr infornaiion rcccivcd
aficr 15 days. TIc 15day criod rovidcs a rcasonallc dcadlinc so iIai cnaliy cascs
alovc $50,000 nay lc iincly laccd on iIc Doard calcndar.
Audit MAnuAl
October 2008
PENALTIES FOR NEGLIGENCE AND FRAUD 0501.30
These penalties are imposed when there is negligence or intentional disregard or fraud or
intent to evade the law or authorized rules and regulations, and may be asserted only as a
ari of dcicrninaiions nadc ly iIc Doard. SucI cnaliics nay lc roicsicd and arc suljcci io
cancellation if found to have been asserted in error.
When a fraud or intent to evade penalty has been imposed (i.e., billed on a Notice of Determination),
any change in such penalty shall be made only by the elected Board itself and not by Board staff.
LOCAL AND TRANSACTIONS TAXES 0501.35
TIc cnaliy rovisions of iIis cIaicr also aly io Uniforn Local Salcs and Usc Tacs and
Transactions (Sales) and Use Taxes. The penalties for negligence and evasion normally will apply
io siaic, local, and iransaciions iacs. Howcvcr, a rcconncndaiion for cnaliy nay lc alicd io
only one or two of the three taxes, as appropriate.
PenAlties
October 2008
SALES TAX RETURNS 0502.00
REPORTING BASIS 0502.10
Salcs ia rciurns arc duc on a calcndar quaricrly lasis unlcss iIc Doard rcquircs or allows iIc
iaaycr io flc rciurns on anoiIcr rcoriing lasis. A iaaycr cannoi rciroaciivcly lc laccd on
a rcoriing lasis sIoricr (c.g., ycarly io quaricrly} iIan iIc iaaycr's currcni rcoriing lasis
and lcconc suljcci io a cnaliy for laic ayncni lccausc iIc duc daic for aying ia undcr iIc
new reporting basis has already passed. Similarly, a taxpayer who has incurred a late payment
cnaliy cannoi avoid iIai cnaliy ly lcing rciroaciivcly laccd on a longcr (c.g., quaricrly io
yearly) reporting basis.
DUE DATES OF RETURNS 0502.15
Duc daics for rciurns flcd on iIc various rcoriing lascs arc as follows.
Quarterly Basis
Fciurns arc duc on or lcforc iIc lasi day of iIc noniI following iIc closc of iIc quaricr.
Taaycrs wIo nalc rcayncnis nusi also flc iIc rcayncni rciurns in accordancc
wiiI FTC scciion 6472.
Irregular Quarterly Basis
For salcs ia accounis iIai arc on a 13noniI ycar accouniing cyclc and arc rcoriing
quaricrly ovcr a criod of 13 noniIs, rciurns arc duc on or lcforc iIc lasi day of iIc noniI
following the close of the authorized reporting period.
Monthly Basis
Sales tax returns for each month are due on or before the last day of the following month.
Yearly Basis
Returns are due on or before the last day of the month following the close of the calendar
ycar rcoriing lasis or fscal ycar rcoriing lasis, ccci wIcn iIc iaaycr closcs oui
lcforc iIc cnd of iIc ycar. (Scc AM scciion 0502.30.}
WIcn cIanging an accouni fron a ycarly or fscal ycar lasis io anoiIcr lasis, and iIc
effective date is other than the beginning of the yearly reporting period, the district will
furnish the taxpayer with a return to report the expired portion of the year to and including
iIc lasi day of iIc quaricr wIicI rcccdcs iIc cffcciivc daic of iIc ncw lasis. TIc ia rciurn
for the expired portion of the year is due on or before the last day of the month following the
effective date of the new basis.
SALES TAX LIABILITY OF PURCHASERS 0502.20
A urcIascr, as rovidcd in FTC scciion 6421, wIo lcconcs liallc for ayncni of salcs ia as if
iIc urcIascr was a rciailcr naling a rciail salc Ias an olligaiion io flc rciurns and is suljcci io
iIc failurc io flc cnaliy rovisions of FTC scciion 6511 if a rciurn is noi iincly flcd.
CLOSEOUTS 0502.30
Ecci for iaaycrs on an annual rcoriing lasis, if a iaaycr sclls a lusincss or siocl of goods
or disconiinucs iIc lusincss, a fnal rciurn is noi duc uniil iIc duc daic of iIc rciurn for iIc
iaaycr's rcoriing criod during wIicI iIc closcoui occurrcd. For a iaaycr on an annual
reporting basis who discontinues a business, a closing return is due on or before the last day of
iIc noniI following iIc closc of iIc quaricrly criod in wIicI iIc lusincss was disconiinucd.
Audit MAnuAl
EFFECT OF LEGAL HOLIDAYS AND WEEKENDS ON DUE DATES 0502.35
WIcncvcr iIc duc daic falls on a Saiurday, Sunday, or lcgal Ioliday, iIc fling of rciurns and iIc
payment of taxes may be made on the following business day without penalty. The following is a
lisi of lcgal Iolidays as sci foriI in iIc Covcrnncni Codc.
New Years Day January 1
Mariin LuiIcr King, Jr. Day 3rd Monday in January
Presidents Day 3rd Monday in Fclruary
Cesar Chavez Day MarcI 31
Mcnorial Day Lasi Monday in May
Independence Day July 4
Lalor Day 1si Monday in Scicnlcr
Vcicrans Day Novcnlcr 11
TIanlsgiving Day 4th Thursday in November
Day aficr TIanlsgiving Friday aficr TIanlsgiving
Christmas Dcccnlcr 25
If onc of iIc forcgoing lcgal Iolidays falls on a Sunday, iIc following Monday is a lcgal Ioliday.
If Vcicrans Day falls on a Saiurday, iIc rcccding Friday is a lcgal Ioliday.
STATUTORY DATE FALLING ON SATURDAY, SUNDAY OR HOLIDAY 0502.36
Aciions oiIcr iIan fling and aying rciurns, wIicI nusi lc iincly, includc.
1. Waiving iIc siaiuic of liniiaiions (FTC scciion 6488}
2. Filing a ciiiion for rcdcicrninaiion (FTC scciions 6538 & 6561}
3. Filing a clain for rcfund (FTC scciion 6902}
4. Filing a suii for rcfund (FTC scciions 6933 & 6934}
5. Issuing a determination (RTC section 6487)
TIc frsi four of iIcsc acis arc crniiicd ly iaaycrs, and iIc lasi is a duiy inoscd on iIc
Doard. All of iIc acis arc rcquircd ly siaiuic io lc crforncd wiiIin a sccifcd criod of iinc.
When the due date of these acts falls on a Saturday, Sunday or holiday, it will nevertheless be
iincly if flcd on iIc nci lusincss day iIai is noi a lcgal Ioliday.
May 2010
PenAlties
EXTENSIONS FOR FILING RETURNS 0502.40
TIc various lusincss ia laws (c.g., FTC scciion 6459} rovidc in ari.
TIc loard for good causc nay cicnd, noi io ccccd onc noniI, iIc iinc for naling any
rciurn or aying any anouni rcquircd io lc aid undcr iIis ari. TIc cicnsion nay lc
granicd ai any iinc rovidcd a rcqucsi iIcrcfor is flcd wiiI iIc loard wiiIin or rior io iIc
period for which the extension may be granted.
Ccncrally, iIc iaaycr rcqucsis iIc cicnsion fron iIc disirici offcc and iIc disirici offcc will
sulnii a rcconncndaiion io iIc Fciurn Analysis Unii (MIC 35}. WIcn an cicnsion is granicd for
a sccifc criod, a dclinqucncy cnaliy will noi aly if iIc ia is aid on or lcforc iIc lasi day of
iIc criod for wIicI iIc cicnsion was granicd. Howcvcr, wIcn an cicnsion is granicd, inicrcsi
from the date on which tax would have been due must be paid. In cases in which an extension
of iinc Ias lccn granicd for naling a rcayncni, inicrcsi alics io iIc unaid anouni of iIc
rcquircd rcayncni.
Forn DOE468, Request for Extension of Time in which to File a Return, is available at the Boards
website located at www.boe.ca.gov.
April 2000
Audit MAnuAl
October 2008
PenAlties
October 2008
FAILURE TO FILE A RETURN 0503.00
WHEN PENALTY APPLIES 0503.05
Each taxpayer who has an active account under any of the revenue laws administered by the
Doard is rcquircd io flc rciurns ai rcgular inicrvals as rcscrilcd ly law and rcquircd ly iIc
Doard. FTC scciion 6591 inoscs a 10 crccni cnaliy for failurc io flc a rciurn on iIc anouni of
iacs duc, cclusivc of rcayncnis, wiiI rcscci io iIc criod for wIicI iIai rciurn was rcquircd.
For canlc, if iIc iaaycr is on a noniIly rcoriing lasis and failcd io flc a rciurn for only
one month during a period under audit, a penalty would apply only to tax due for that month.
Sinilarly, if a iaaycr on a noniIly lasis docs noi rcori salcs for May, lui insicad includcs
iIcsc salcs on Iis or Icr Junc rciurn, iIc failurc io flc cnaliy would aly io May cvcn iIougI
salcs wcrc sulscqucnily rcoricd in Junc.
Undcr FTC scciion 6487, iIc dcicrninaiion for failurc io flc a rciurn nusi lc nailcd wiiIin cigIi
ycars aficr iIc lasi day of iIc calcndar noniI following iIc quaricrly criod for wIicI iIc anouni
is rooscd io lc dcicrnincd. For cligillc anncsiy rcoriing criods, iIc dcicrninaiion nay lc
issucd wiiIin icn ycars fron iIc duc daic of iIc ia (FTC scciion 7073(d}}.
WHAT CONSTITUTES FILING A RETURN OR REPORT 0503.15
A rciurn is considcrcd flcd wIcn iIc iaaycr rovidcs in wriiing.
a. A rcqucsi iIai iIc corrcsondcncc lc acccicd as a rciurn or siaicncni, rcgardlcss of Iow
lricf, indicaiing iIai iIc iaaycr is aiicniing io flc a rciurn.
l. TIc rcoriing criod for wIicI iIc corrcsondcncc (rciurn} is flcd.
c. The amount of tax due or that no tax is due.
WIcn iIc iaaycr Ias sIown duc diligcncc in naling cvcry cffori io sulnii wIai iIc iaaycr
feels is a return, the correspondence submitted should be accepted as a return. Even if the
corrcsondcncc Ias no gross salcs or dcduciions and sIows only iIc nci ia fgurc, ii nay lc
accepted as a return if the information listed in a, b, and c above is provided. If a taxpayers
cIccl indicaics iIc rcoriing criod and iIc ncasurc of iIc ia lcing aid, ii nay lc roccsscd
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 taxpayers
intent.
FORM BOE401E, NOT A RETURN FOR ALL PURPOSES 0503.20
TIc fling of Forn DOE401E, Consumer Use Tax Return, cannoi lc rcgardcd as iIc fling of a
return with respect to sales tax liability as a seller, or use tax liability for sales made as a retailer,
lui only as iIc fling of a rciurn wiiI rcscci io usc ia lialiliiy as a urcIascr.
Audit MAnuAl
October 2008
CLOSEOUTS WITH SECURITIES 0503.30
Liquid sccuriiics (c.g., casI dcosii, ccriifcaic of dcosii, or an insurcd dcosii in a lanl or
savings and loan institution) are considered to be an advance payment of any tax due on or after
the date of closeout. Security will be applied in accordance with the guidelines discussed in the
Conliancc Policy and Proccdurcs Manual (CPPM} CIaicr 4, Security.
A ncgligcncc, fraud, or inicni io cvadc cnaliy docs noi aly io a dcfcicncy iIai is aid ly iIc
alicaiion of a liquid sccuriiy wIcrc iIc duc daic of iIc closcoui rciurn is on or aficr iIc closcoui
daic. TIis is lccausc iIcrc was no anouni rcquircd io lc aid io wIicI iIc cnaliy can lc addcd.
If iIc iaaycr is on a noniIly lasis, iIc quaricr or quaricrs in wIicI iIc closing noniI and iIc
preceding month occur should be segregated in the Sales Tax Calculation Summary in order to
sIow clcarly iIc alicaiion of any liquid sccuriiics and cnaliics.
Pcnaliy for failurc io flc will aly if a iaaycr sulniis a laic rciurn cvcn wIcn sccuriiy is
availallc. Pcnaliy for failurc io flc will also aly cvcn wIcn sccuriiy is availallc io clcar dclinqucni
reporting periods. A note is added on the billing to inform the taxpayer of the type of penalty being
applied.
WIcn iIc sccuriiy is noi suffcicni io ncci iIc lialiliiy for iIc closing criod, iIc roccdurc is as
follows.
a. WIcn a rciurn was flcd and an audii is in roccss
Forn DOE414A, Report of Field Audit, may include a penalty for negligence.
l. WIcn no rciurn was flcd and an audii is in roccss
Forn DOE414A will includc iIc cnaliy for failurc io flc for iIc anouni of iIc iacs,
cclusivc of rcayncnis, wiiI rcscci io iIc criod for wIicI a rciurn was rcquircd.
A noiaiion on Forn DOE414A undcr Sccial Insiruciions" sIould lc nadc wIcn a sccuriiy is
availallc. Scc AM scciion 0204.12.
When an audit is not to be made, attempts should be made to secure signed returns for periods
for wIicI no rciurns wcrc flcd. WIcn iIc dclinqucni rciurn or rciurns cannoi lc sccurcd, Forn
DOE414D, Field Billing Order, will be prepared to cover the estimated liability.
ERRONEOUS REFUNDS OF SECURITY DEPOSITS 0503.35
If a security deposit available on the closeout date is erroneously refunded instead of being applied
to a liability, no penalty or interest will be assessed where these charges would have accrued
solely because of the erroneous refund. Interest will start to accrue if such liability is unpaid
30 days aficr iIc nailing of a noiicc of dcicrninaiion for rcayncni of iIc crroncous rcfund. In
cases where there was no liability at the time the refund was made and a liability later developed,
applicable penalty and interest will be added.
NO RETURNS FILED FOR PERIOD PRECEDING CLOSING PERIOD 0503.40
TIcrc nay lc insianccs wIcrc no rciurn was flcd for iIc rcoriing criod inncdiaicly rcccding
the closing period, and where the due date for the preceding period is after the date of closeout
(c.g., iIc sccond quaricr 2007, wIcn closcoui daic was July 13, 2007}. If any ari of iIc sccuriiy
deposit is applied to tax due for such periods, a negligence penalty will not attach to the amount
of tax so paid. The security deposit is considered available on the date of closeout. Therefore, to
iIc cicni iIai ii is so alicd, iIcrc is no anouni rcquircd io lc aid io iIc siaic io wIicI cnaliy
can lc addcd. Howcvcr, if a iaaycr fails io flc a iincly rciurn for iIc rcccding criod, a failurc
io flc cnaliy will aly io iIc anouni of iacs, cclusivc of rcayncnis, for iIis criod iIai iIc
rciurn is rcquircd.
PenAlties
October 2008
TAXPAYERS ON A MONTHLY BASIS 0503.45
In iIc casc of iaaycrs rcoriing on a noniIly lasis, wIcrc no rciurn was flcd for iIc closing
noniI or iIc rcccding noniI, iIc quaricr or quaricrs in wIicI sucI noniIs occur sIould lc
lrolcn down in iIc Salcs Ta Calculaiion Sunnary, in ordcr io sIow clcarly iIc alicaiion of
security deposits and penalties.
AVAILABILITY OF SECURITY BETWEEN BUSINESS TAXES 0503.50
All or the remainder of the security of a taxpayers account may be transferred to another account
of iIc sanc iaaycr. Infornaiion rclaiivc io iIc iransfcr is coniaincd in iIc CPPM CIaicr 4,
Security.
MORE THAN ONE LOCATION 0503.55
Sellers engaged in business at more than one location must hold a permit for each location, or a
subpermit for each location under a consolidated account.
Howcvcr, iaaycrs wIo Iold scllcr's crniis for crnancni laccs of lusincss, and also conduci
ocraiions of a icnorary naiurc ai laccs sucI as fairs or carnivals, arc noi rcquircd io Iold
separate permits for the temporary operations. Such taxpayers should report their sales made at
iIc icnorary locaiion wiiI iIc rciurns flcd undcr iIcir rcgular crnii nunlcrs. For nuliilc
locaiion crniis, iIc icnorary locaiions sIould lc lisicd on Forn DOE530, Schedule C
Detailed Allocation by Suboutlet of Uniform Local Sales and Use Tax. For singlc locaiion crniis,
iIc icnorary locaiions sIould lc lisicd on Forn DOE530D, Local Tax Allocation for Temporary
Sales Locations and Certain Auctioneers. The three-year limitation period applies, and the penalty
for failurc io flc rciurns docs noi aly wiiI rcscci io any unrcoricd salcs ia lialiliiy incurrcd
ai iIc icnorary locaiion during any criod for wIicI a crson Ias flcd a rciurn for a crnancni
place of business.
TIc iIrcc-ycar liniiaiion criod alics, and iIc cnaliy for failurc io flc rciurns docs noi aly
with respect to any unreported sales or use tax liability incurred in any period for which a person
Ias flcd a rciurn for any locaiion. TIis is iruc cvcn iIougI iIc crson nay ocraic ai onc or norc
other locations for which neither a permit nor a subpermit has been issued.
Where a taxpayer operating under a consolidated permit fails to include sales in his or her return
relating to business at a particular location for which a subpermit is held, a penalty for failure to
flc a rciurn docs noi aly, lui iIc 10 crccni cnaliy for ncgligcncc or iIc 25 crccni cnaliy for
fraud may apply if circumstances warrant.
Audit MAnuAl
October 2008
PenAlties
October 2008
FAILURE TO PAY 0504.00
WHEN PENALTY ATTACHES 0504.05
FTC scciion 6591 inoscs a 10 crccni cnaliy for failurc io ay ia iincly if ia is noi aid, 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 Board, when not paid on or before the penalty date shown
on iIc Noiicc of Dcicrninaiion unlcss a iincly ciiiion Ias lccn flcd.
c. To redeterminations, when not paid on or before the penalty date shown on the Notice of
Redetermination.
PETITIONS FOR REDETERMINATION 0504.10
FTC scciion 6565 inoscs a 10 crccni cnaliy for failurc io ay iIc anouni of any dcicrninaiion
nadc ly iIc Doard wIicI is noi aid on or lcforc iIc daic iIc dcicrninaiion lcconcs fnal (30
days after service
1
of noiicc of dcicrninaiion}, unlcss a ciiiion for rcdcicrninaiion is flcd on or
lcforc iIai daic. TIc rulcs for dcicrnining wIcn a ciiiion was flcd arc iIc sanc as iIosc for
determining when a payment was made.
In preparing a reaudit, the auditor should determine if the petition was timely. The taxpayer
sIould lc noiifcd of any cnaliy io lc addcd ly Hcadquaricrs lccausc of a laic roicsi or laic
payment. Comments on the audit report should also indicate that a penalty will be added by
Hcadquaricrs.
PAYMENTS OR PETITIONS MAILED BUT NOT RECEIVED 0504.15
For uroscs of dcicrnining wIciIcr a laic ayncni or laic fling cnaliy is alicallc or a ciiiion
is flcd iincly, a ayncni or a ciiiion allcgcd io Iavc lccn laccd in iIc nail will gcncrally noi lc
ircaicd as rcccivcd or flcd iincly unlcss ii is aciually rcccivcd ly iIc Doard. Ecciions will lc
made in those instances where the taxpayer furnishes satisfactory proof that the original payment
or petition was mailed timely.
JEOPARDY DETERMINATIONS 0504.20
Jcoardy dcicrninaiions lcconc fnal wiiIin 10 days aficr scrvicc of noiicc unlcss a ciiiion for
rcdcicrninaiion is flcd wiiIin sucI criod and sccuriiy is dcosiicd wiiIin sucI criod in sucI
amount as the Board may deem necessary. The Board will not recognize a petition in connection
wiiI a jcoardy dcicrninaiion unlcss sucI sccuriiy is dcosiicd wiiI iIc Doard in onc or norc of
iIc following forns.
1. CasI dcosiis, including casIicr cIccl and noncy ordcr (crsonal cIccls noi accciallc}.
2. Ccriifcaics of dcosii issucd ly lanls.
3. Savings and loan ccriifcaics.
A docuncni iIai uroris io lc a ciiiion for rcdcicrninaiion flcd in conncciion wiiI a jcoardy
dcicrninaiion wIcrc sccuriiy is noi dcosiicd is noi a valid ciiiion. If iIc anouni sccifcd is noi
aid wiiIin 10 days aficr scrvicc of noiicc and wiiIoui a valid and iincly ciiiion, a 10 crccni
cnaliy for failurc io ay is inoscd ursuani io FTC scciion 6591. A crson againsi wIon a
jcoardy dcicrninaiion is nadc nay nonciIclcss aly for an adninisiraiivc Icaring as rovidcd
ly FTC scciion 6538.5.
1 Daic of nailing of iIc Noiicc of Dcicrninaiion or iIc daic iIc Noiicc of Dcicrninaiion was dclivcrcd
in person to the taxpayer.
Audit MAnuAl
October 2008
PREPAYMENTS 0504.25
RTC section 6476 imposes a 6 percent penalty on the amount of a prepayment that is paid late
lui wIicI is aid lcforc iIc lasi day of iIc noniIly criod following iIc quaricrly criod in wIicI
the prepayment was due.
FTC scciion 6477 inoscs a cnaliy wIcn a iaaycr fails io nalc a rcayncni lcforc iIc lasi
day of iIc noniIly criod following iIc quaricrly criod in wIicI iIc rcayncni lccanc duc,
lui flcs a iincly rciurn and ayncni for iIc quaricrly criod in wIicI iIc rcayncni lccanc
duc. TIc cnaliy is 6 crccni of iIc anouni cqual io 90 crccni of iIc ia lialiliiy for cacI of iIc
criods during iIai quaricrly criod for wIicI a rcquircd rcayncni was noi nadc.
TIc cnaliy inoscd undcr FTC scciion 6477 is incrcascd ly FTC scciion 6478 io 10 crccni if
iIc failurc io nalc iIc rcayncni was duc io ncgligcncc or inicniional disrcgard of iIc Salcs and
Usc Ta Law or auiIorizcd rulcs and rcgulaiions. FTC scciion 6478 also inoscs a 10 crccni
cnaliy on iIc anouni of any dcfcicncy in iIc rcquircd rcayncni if any ari of iIai dcfcicncy is
iIc rcsuli of ncgligcncc or inicniional disrcgard of iIc Salcs and Usc Ta Law or auiIorizcd rulcs
and rcgulaiions. TIc cnaliics discusscd in iIis aragraI arc noi alicallc io anounis suljcci
io a cnaliy undcr FTC scciions 6484, 6485, 6511, 6514, or 6591.
Prepayment penalties are not assessed in sales and use tax audits.
ELECTRONIC FUND TRANSFER RELATED PENALTIES 0504.30
TIc cnaliics inoscd in FTC scciions 6479.3 and 6591 aly io iaaycrs wIo arc rcquircd io
ay iacs ly ncans of Elccironic Fund Transfcr (EFT} and fail io do so. TIc cnaliics inoscd
undcr FTC scciions 6479.3 and 6591 arc liniicd io a nainun of 10 crccni of iIc anouni of
iacs, cclusivc of rcayncnis, for iIc rcoriing criod. Failurc io ay rcayncnis ly clccironic
funds iransfcr is suljcci io a cnaliy of 6 crccni of iIc rcayncni anouni incorrccily rcniiicd
(FTC scciion 6479.3 (c}(2}.
PenAlties
October 2008
AMNESTY PENALTIES 0505.00
Dcginning Aril, 1, 2005, anncsiy cnaliics nay lc alicd io ia lialiliiics for rcoriing criods
iIai lcgan rior io January 1, 2003. Scc AM scciion 0206.52 for audii conncnis rcgarding iIc
Amnesty Program.
50 PERCENT INTEREST PENALTY 0505.05
A. Application
TIc cnaliy is inoscd ursuani io FTC scciion 7074 and alics io iaaycrs wIo ncci
any of iIc following criicria.
Qualifcd for anncsiy lui did noi ariiciaic.
Participated in amnesty but underreported their tax liabilities.
Applied for amnesty but who did not enter into an Installment Payment Agreement (IPA)
or ay iIcir ia lialiliiy ly May 31, 2005.
TIc cnaliy docs noi aly io.
Tax liabilities for eligible tax reporting periods that were included in an IPA in place on
January 31, 2005.
Ta lialiliiics includcd in an anncsiy IPA, cvcn if iIc iaaycr sulscqucnily dcfaulis
on its agreement.
Tax liabilities for reporting periods not eligible for amnesty, for example, reporting
periods for which a criminal court proceeding had been initiated against the taxpayer
prior to amnesty.
Eligible tax reporting periods where the tax portion of the liability was paid in full on or
rior io MarcI 31, 2005 (non-ariiciani} or May 31, 2005 (ariiciani}.
B. Computation
TIc cnaliy is cqual io 50 crccni of iIc inicrcsi on iIc unaid ia anouni rcnaining duc
as of MarcI 31, 2005 (non-ariicianis}, or May 31, 2005 (ariicianis wIo did noi fulfll
all rogran rcquircncnis}, conuicd fron iIc day following iIc original duc daic of iIc ia
iIrougI MarcI 31, 2005.
The penalty applies to both self-assessed and Board-assessed liabilities and is imposed beginning
Aril 1, 2005 (non-ariicianis} or Junc 1, 2005 (ariicianis wIo did noi fulfll all rogran
rcquircncnis}. WiiI rcgard io Doard-asscsscd lialiliiics, iIc cnaliy is inoscd ai iIc iinc iIc
lialiliiy lcconcs fnal. Payncni of iIc dcfcicncy rior io iIc fnaliiy daic docs noi rcvcni iIc
penalty from applying.
DOUBLE PENALTIES 0505.10
In addiiion io iIc 50 crccni inicrcsi cnaliy, undcrrcoricrs and nonrcoricrs arc suljcci io a
cnaliy iIai doullcs iIc raic of all cnaliics (ccci iIc 50 crccni inicrcsi cnaliy} alicallc io
a Noiicc of Dcicrninaiion issucd on or aficr Aril 1, 2005 (FTC scciion 7073}. Addiiionally, if iIc
fnaliiy cnaliy is inoscd, ii will lc alicd ai doullc iIc nornal raic.
Audit MAnuAl
October 2008
PenAlties
October 2008
NEGLIGENCE PENALTIES GENERAL 0506.00
LEGAL BASIS 0506.05
TIc FTC scciions rclaiing io iIc ncgligcncc cnaliy coniain iIc following languagc.
If any ari of iIc dcfcicncy for wIicI a dcfcicncy dcicrninaiion is nadc is duc io ncgligcncc
or inicniional disrcgard of iIis ari or auiIorizcd rulcs and rcgulaiions, a cnaliy of 10
percent of the amount of the determinations shall be added thereto.
DEFINITION 0506.10
Ncgligcncc nay lc dcfncd in gcncral as a failurc io ccrcisc duc carc. In nosi cascs, iIc law Ias
dcfncd iIc ccrcisc of duc carc as sucI carc iIai a rcasonallc and rudcni crson would ccrcisc
under similar circumstances. With respect to business tax matters, negligence may be further
dcfncd as a sulsianiial lrcacI ly iIc iaaycr of sonc duiy inoscd ly iIc law or auiIorizcd
rules and regulations.
NEGLIGENCE VS. INTENTIONAL DISREGARD 0506.15
There is a technical distinction between negligence and intentional disregard of the law or authorized
rules and regulations in that intentional disregard implies something more than negligence.
Howcvcr, inicniional disrcgard is lcss iIan fraud or inicni io cvadc iIc ia and is covcrcd ly iIc
negligence penalty. Accordingly, the term negligence penalty will be used to include the penalty
for ncgligcncc or for inicniional disrcgard. If, Iowcvcr, a siiuaiion is cncounicrcd wIcrc iIc fcld
auditor believes there is strong evidence of intentional disregard of the law or authorized rules
and regulations, the audit report should include appropriate comments regarding the evidence of
intentional disregard.
Fcd uudtos sIoud not ussunc tIut u ugc uudt dc]ccnc o oucuncnt s ndcutuc o
either negligence or intentional disregard. The auditor must use his or her highest skill and best
judgment to determine whether the amount of tax has been reported correctly. This same skill and
judgment should be used to determine whether a penalty should or should not be recommended.
Refer to AM section 0101.20, Tax Audit Policies. The auditor must support a negligence penalty
with appropriate comments (refer to AM section 0206.45).
ACTS OF AN AGENT, EMPLOYEE OR PARTNER 0506.20
In general, where an agent, employee, or partner of the taxpayer is guilty of negligence, with a
rcsuliing ia dcfcicncy, iIc 10 crccni cnaliy will aly. TIis is iruc cvcn iIougI iIc agcni,
cnloycc, or arincr acicd wiiIoui iIc iaaycr's lnowlcdgc or conscni, or acicd conirary io iIc
express instructions of the taxpayer. Situations may be encountered where the taxpayer has been
dcfraudcd ly an agcni, cnloycc, or arincr and as a rcsuli did noi lcncfi fron iIc undcrsiaicncni
of tax. Whether the negligence penalty is imposed will depend upon whether circumstances made
ii diffculi or inossillc for iIc iaaycr io dcicci sucI fraud. TIc alicaiion of a ncgligcncc
penalty in these instances should be decided on a case by case basis.
CONDITIONS UNDER WHICH PENALTY APPLIES 0506.25
TIc ncgligcncc cnaliy alics only io dcfcicncy dcicrninaiions and ii alics io iIc ioial anouni
of the tax liability. Generally, this means that, if the penalty applies, it will be for the entire
period of the audit regardless of class of transactions involved. Before the penalty is imposed, the
following condiiions nusi lc rcscni.
a. A ia dcfcicncy, and
l. Evidcncc iIai any ari of iIc ia dcfcicncy is iIc rcsuli of ncgligcncc or inicniional disrcgard
of the law or authorized rules and regulations.
Audit MAnuAl
PENALTIES APPLICABLE TO ONLY PART OF AUDIT PERIOD 0506.30
Situations may be encountered where the condition warranting the imposition of a negligence
penalty is not present during the entire period under audit and where the imposition of the penalty
io iIc cniirc anouni of iIc ia lialiliiy would lc incquiiallc. For canlc, a conlcic cIangc of
management occurred and conditions under one management were entirely different from those
undcr iIc oiIcr. In iIis iyc of siiuaiion iIc audiior will rcarc iwo scis of Forn DOE-414-A or
Forn DOE-414-D, onc includcs iIc 10 crccni cnaliy for iIc criod in wIicI ii is inoscd, and
the other without the penalty. Audit Determination and Refund Section will issue two Notices of
Determination accordingly. The audit report with the penalty must include a full statement of the
facts involved.
When considering the recommendation to impose a negligence penalty on a partial audit period,
audiiors sIould dcicrninc if iIc iaaycr nadc any cffori during a sulscqucni criod in iIc audii
to correct the situation which led to negligence. If such an effort has been made, a penalty may
not be appropriate.
PENALTY COMMENTS ON AUDIT REPORTS
OR FIELD BILLING ORDERS 0506.35
A comment should be made on any area which will be of value in connection with making a
determination or with making decisions regarding future audits (AM section 0206.03). Penalty
recommendations are frequently a source of disagreement between staff and taxpayers. To ensure
that both staff and taxpayers understand why a negligence penalty was or was not recommended,
a penalty comment using the following guidelines must be made in the General Audit Comments
section of Form BOE414A or Form BOE414B. The sole exception is when the tax liability is
lcss iIan $2,500 and no cnaliy is rcconncndcd.
TIc faciors wIicI consiiiuic ncgligcncc in lccing rccords (AM scciion 0507.00}, ncgligcncc
in rcaring rciurns (AM scciion 0508.00}, and cvasion cnaliics (AM scciion 0509.00}, nusi
be carefully considered before determining whether a negligence or evasion penalty should be
imposed. If a negligence penalty is being recommended, the auditor must provide in clear and
concise terms the rationale for imposing a penalty. An explanation of the evidence and facts
upon which the auditor relies to support the recommendation for imposition of a penalty must
be given. The explanation must enable supervisors, reviewers, the taxpayer and/or taxpayers
representative to determine whether the recommendation is consistent with the facts established
by the audit. The comments must be factual, not merely the auditors opinion, and must not be
stated in a manner derogatory to the taxpayer or the taxpayers employees. All penalty comments
nusi lc suffcicnily clcar io rovidc infornaiion iIai nay lc uscful in sulscqucni audiis of iIc
taxpayer.
If the auditor believes the imposition of a penalty is inappropriate, he or she must use the same
penalty comment guidelines as when recommending a negligence penalty. That is, the comments
nusi lc clcar and concisc io cnallc sucrvisors and oiIcr rcadcrs of iIc audii worling acrs
to determine whether the recommendation is consistent with the facts established in the audit,
and io rovidc infornaiion iIai nay lc uscful in a sulscqucni audii. Canncd conncnis" sucI
as Ncgligcncc noi noicd;" No negligence noted; or No penalty recommended, do not provide
enough information and are not acceptable.
If an evasion (fraud) penalty is being recommended, the comment on the audit report must include
Pcnaliy ursuani io FTC scciion 6485 is rcconncndcd". In addiiion, a ncnorandun is rcquircd
fron iIc Disirici Adninisiraior io iIc CIicf, Hcadquaricrs Ocraiions Division (scc AM scciion
0509.75 for conicnis of iIis ncno}.
May 2011
PenAlties
October 2008
(Cont.) 0506.35
Ficld audiiors arc frcqucnily faccd wiiI iIc dccision of wIciIcr io rcconncnd a cnaliy on iIc frsi
audii of a iaaycr. TIis dccision nusi lc lascd on an oljcciivc cvaluaiion of iIc audii fndings
and iIc iaaycr's laclground and ccricncc. Ccncrally, a cnaliy sIould noi lc rcconncndcd.
Howcvcr, iIcrc arc circunsianccs wIcrc a cnaliy would lc aroriaic. Criicria iIai sIould
be considered, among others, are the taxpayers prior business experience, the nature and state
of iIc rccords rovidcd, and wIciIcr iIc iaaycr uscd an ouisidc accouniani or loollcccr io
compile and maintain the records, and/or to prepare the sales and use tax returns. A penalty
nay lc aroriaic in any of iIc following circunsianccs. iIc iaaycr Ias no rccords of any
lind, iIc iaaycr Ias a Iisiory of rior crniis or lusincss ccricncc, analysis sIows iIai
urcIascs Iavc ccccdcd rcoricd salcs, or iIc iaaycr Ias iwo scis of lools. TIc conncni
Taaycr's frsi audii" sIould only lc uscd in conjunciion wiiI a dciailcd clanaiion for iIc
penalty recommendation.
To promote consistency in the application of penalties and the writing of penalty comments, all
comments must be reviewed by the auditors supervisor. In addition, special procedures will be
uscd for iIc following rcvicws.
AudIt tax decIency over S25,000 Fcvicwcd and arovcd ly iIc audiior's sucrvisor.
AudIt tax decIency over S50,000 Fcvicwcd and arovcd ly iIc Disirici Princial
Audiior sulscqucni io iIc rcvicw and aroval ly iIc audiior's sucrvisor.
This review and approval must be noted by the supervisor (and DPA if applicable) by commenting
and signing directly below the auditors penalty comment in the General Audit Comments section
of Forn DOE414A or Forn DOE414D. TIis nay lc a Iandwriiicn conncni or incororaicd
as the last line of the penalty comment (e.g., Reviewed and approved. ____________________,
Sucrvisor;____________________, DPA."} Scc AM scciion 0206.45.
CLASSES OF NEGLIGENCE 0506.45
A iaaycr nay lc ncgligcni in a nunlcr of ways, lui iIcrc arc only iwo linds of ncgligcncc wIicI
will rcsuli in a ia dcfcicncy and wIicI nay warrani iIc inosiiion of iIc ncgligcncc cnaliy.
TIcsc arc.
a. Ncgligcncc in lccing rccords (AM scciions 0507.00 0507.50, and
l. Ncgligcncc in rcaring rciurns (AM scciions 0508.00 0508.50}.
Audit MAnuAl
October 2008
PenAlties
October 2008
NEGLIGENCE IN KEEPING RECORDS 0507.00
GENERAL 0507.05
Guidelines for the maintenance of records are provided by Regulation 1698, Records. In general,
this regulation provides that a taxpayer shall maintain and make available for examination on
request by the Board or its authorized representative, all records necessary to determine the correct
tax liability under the Sales and Use Tax Law and records necessary for the proper completion of
the sales and use tax return. Such records include:
Nornal lools of accouni ordinarily nainiaincd ly iIc avcragc rudcni lusincss crson
cngagcd in iIc aciiviiy in qucsiion.
Bills, receipts, invoices, cash register tapes, or other documents of original entry supporting
iIc cnirics in iIc lools of accouni.
ScIcdulcs or worling acrs uscd in conncciion wiiI iIc rcaraiion of ia rciurns.
Conlcic alscncc of rccords will consiiiuic sirong cvidcncc of ncgligcncc. Howcvcr, audiiors
sIould dcicrninc if iIcrc arc niiigaiing circunsianccs for iIc lacl of rccords (scc AM scciion
0507.50}. WIcrc rccords arc nainiaincd and a ia dcfcicncy rcsulis, various faciors nusi lc
ialcn inio considcraiion in dcicrnining wIciIcr iIc ia dcfcicncy was duc io ncgligcncc in
lccing rccords. TIc icrn rccords" as uscd Icrcin includcs noi only iIosc sccifcally ncniioncd
in Fcgulaiion 1698, lui also sucI suoriing daia as rcsalc ccriifcaics, sIiing docuncnis in
support of interstate transactions, etc.
TEST FOR NEGLIGENCE IN KEEPING RECORDS 0507.10
TIc rinary icsi for ncgligcncc is wIciIcr a iaaycr lccs iIc iyc of rccords ordinarily nainiaincd
ly a rcasonallc and rudcni lusincsscrson wiiI a lusincss of sinilar lind and sizc. If iIc
cvidcncc indicaics iIai a iaaycr failcd io lcc sucI rccords and, as a rcsuli, failcd io conilc
tax returns with a reasonable degree of accuracy, and cannot substantiate the reported amounts
wIcn audiicd, ncgligcncc is indicaicd and iIc 10 crccni cnaliy nay lc aroriaic.
RECORDS NEED ONLY BE ADEQUATE FOR TAX PURPOSES 0507.15
Fccords nccd only lc adcquaic for salcs and usc ia uroscs. TIc faci iIai iIc rccords nay
noi lc adcquaic for iIc urosc of rcaring lalancc sIccis or rofi and loss siaicncnis, or for
furnisIing accuraic cosi daia, infornaiion io sioclIoldcrs, crcdiiors, or oiIcrs inicrcsicd in iIc
business does not necessarily constitute negligence for sales and use tax purposes.
RECORDS NEED ONLY BE ADEQUATE FOR TYPE OF BUSINESS 0507.20
Fccords nccd only lc adcquaic io ncci iIc ia rcquircncnis of iIc iyc of lusincss involvcd.
For canlc, a snall rcsiaurani nay rcquirc a vcry sinlc sci of rccords for salcs and usc ia
purposes, whereas, a large department store, oil company, automobile dealer, or contractor will
rcquirc a nucI norc conlc accouniing sysicn.
NEGLIGENCE OF OTHER TAXPAYERS NO EXCUSE 0507.25
A iaaycr sIould noi lc rclicvcd of cnaliy for ncgligcncc in lccing rccords ncrcly lccausc
iIcrc arc nany oiIcr iaaycrs cngagcd in iIc sanc lind of lusincss wIo also arc ncgligcni in
lccing rccords. EacI individual casc sIould lc dccidcd on iis own ncriis.
Audit MAnuAl
October 2008
EFFECT OF LACK OF KNOWLEDGE ON PART OF TAXPAYER 0507.30
A iaaycr sIould noi lc rclicvcd of a cnaliy for ncgligcncc in lccing rccords ncrcly lccausc
iIc iaaycr is unawarc of iIc rcquircncnis of iIc law. Howcvcr, wIilc lacl of lnowlcdgc is no
dcfcnsc io iIc ncgligcncc cnaliy, a iaaycr of liiilc cducaiion sIould noi lc cccicd io lcc
rccords in as good a forn as a iaaycr wIo Ias widc lnowlcdgc of corrcci accouniing rincilcs.
TIc iaaycr cannoi lc rcgardcd as ncgligcni ncrcly lccausc iIc rccords arc lci in a forcign
language.
ERRORS IN KEEPING RECORDS 0507.35
WIcrc rccords arc adcquaic for salcs and usc ia uroscs lui wiiI nuncrous crrors iIai rcsuli
in understatement of tax, the test for negligence is whether or not the taxpayer exercised due care
in lccing iIc rccords.
ERRORS DO NOT NECESSARILY CONSTITUTE NEGLIGENCE 0507.40
No naiicr Iow carcfully rccords arc rcarcd and cIcclcd, sonc crrors nay occur. Accordingly,
wIcrc crrors arc nadc in lccing rccords, iIc rclaiivc frcqucncy and inoriancc of sucI crrors
must be considered before a taxpayer is regarded as negligent. Due consideration should be given
io any ariicular accouniing diffculiics wIicI arc inIcrcni in iIc iaaycr's lusincss.
CONSIDERATIONS IN CLASSIFYING ERRORS 0507.45
To dcicrninc wIciIcr crrors consiiiuic ncgligcncc, iIc following sIould lc considcrcd.
a. TIc frcqucncy of iIc crrors rclaiivc io iIc volunc of iransaciions. The number of errors
found must be considered in relation to the total number and dollar amount of the same
type of transaction in the audit period.
b. The ratio of understatement to reported amounts. This percentage of error may be used
in a variciy of ways. For narl-u audiis, iIc nosi aroriaic cvaluaiion is iIc raiio
of understatement to reported taxable measure, particularly when reported taxable sales
Iavc lccn incacIcd. For audiis wIcrc iaallc ncasurc is lascd on a crccniagc of
total sales or claimed deductions, the most appropriate evaluation is the measure of
undcrsiaicncni io ioial rcoricd salcs or claincd dcduciions. For loiI nciIods, a largc
ratio of understatement may be indicative of negligence. If the audit measure is derived
from a statistical sample, comparison of the error percentage in the prior audit may be
appropriate if the same items are being sampled. A substantive increase or comparable
crror crccniagc nay lc indicaiivc of ncgligcncc. Howcvcr, ii nusi lc noicd iIai a raiio of
understatement is not, in and of itself, proof of negligence. A ratio should be considered in
conjunciion wiiI oiIcr faciors io dcicrninc wIciIcr ncgligcncc Ias occurrcd.
c. The cause of errors found by audit. The cause of errors may result from procedural or
ocraiional rollcns unrclaicd io ncgligcncc. For canlc, signifcani cIangcs in salcs
volunc fron a rior audii nay causc crrors iIai rcsuli fron siaffng rollcns raiIcr iIan
ncgligcncc. Sinilarly, a lusincss wiiI a largc volunc of snall dollar iransaciions nay fnd
it infeasible to hire the level of staff that would result in the total elimination of errors.
If iIc crrors arc ioo frcqucni in rclaiion io iIc volunc of iransaciions, or if iIc crrors rcsuli in a
higher ratio of understatement than would be expected of a reasonable and prudent businessperson
cngagcd in a lusincss of sinilar lind and sizc, or if iIcrc acars io Iavc lccn an alscncc of duc
carc, iIc 10 crccni cnaliy sIould aly.
PenAlties
October 2008
DESTRUCTION OF RECORDS 0507.50
All records pertaining to transactions involving sales or use tax liability must be preserved for a
period of not less than four years unless the Board authorizes in writing their destruction within
a lesser period.
Whether unauthorized destruction of records constitutes negligence depends on the circumstances
in each case.
Records Accidentally Destroyed
When the taxpayer has exercised due care in preserving the records, and the records were
accidentally destroyed in spite of such care, the taxpayer cannot be said to have been negligent in
failing io rciain rccords. In rcacIing sucI a conclusion, iIc audiior sIould lc saiisfcd iIai iIc
records were actually destroyed and that the destruction was accidental.
Records Intentionally Destroyed
WIcrc rccords Iavc lccn inicniionally dcsiroycd or dcsiroycd as a rcsuli of ncgligcncc or lacl of
duc carc on iIc ari of iIc iaaycr, any ia dcfcicncy iIai is csiallisIcd will lc rcsuncd io
Iavc lccn iIc rcsuli of iIc iaaycr's ncgligcncc in dcsiroying iIc rccords. TIc 10 crccni cnaliy
will aly unlcss iIcrc is cvidcncc iIai iIc dcfcicncy is noi iIc rcsuli of iIc dcsiruciion of iIc
records. Please note that intentional destruction of records may be an indication of fraud or intent
io cvadc iIc ayncni of ia (AM scciions 0509.00 0509.75}.
Audit MAnuAl
October 2008
PenAlties
October 2008
NEGLIGENCE IN PREPARING RETURNS 0508.00
DEFICIENCY DUE TO MISUNDERSTANDING 0508.05
WIcrc iIcrc is cvidcncc iIai iIc ia dcfcicncy rcsulicd fron a rcasonallc nisundcrsianding ly
iIc iaaycr conccrning iIc alicaiion of iIc ia, no cnaliy will aly. Howcvcr, wIcrc iIc
iaaycr Ias lccn adviscd, as a rcsuli of a rior audii or ly oiIcr ncans sucI as a sccifc lciicr,
docuncnicd iclcIonc call, or sccial indusiry noiicc, iIai iIc unrcoricd iicns wcrc suljcci io
iIc ia, ii is indicaiivc of inicniional disrcgard and a cnaliy nay aly. TIc 10 crccni cnaliy
should not apply when there are mitigating circumstances such as an attempt on the part of the
taxpayer to report the items, or changes in the taxpayers type of business or business operations
iIai affccicd rcoriing of iIc iransaciions in qucsiion.
TEST FOR NEGLIGENCE IN PREPARING RETURNS 0508.10
As in iIc casc of ncgligcncc in lccing rccords, iIc icsi for ncgligcncc in rcaring rciurns
is whether the taxpayer failed to exercise the degree of care exercised by an ordinary prudent
lusincsscrson wIo is cngagcd in a lusincss of a sinilar lind and sizc, and wIo in good faiiI Ias
attempted to prepare returns with a reasonable degree of accuracy.
MECHANICAL ERRORS 0508.15
MccIanical crrors in coniling rciurns do noi consiiiuic ncgligcncc unlcss sucI crrors arc
suffcicnily frcqucni or suffcicnily largc in anouni io ncci iIc icsi for ncgligcncc.
ERRORS IN APPLICATION OF LAW 0508.20
Erroncous alicaiion of iIc Salcs and Usc Ta Law wIcn conlciing rciurns docs noi consiiiuic
negligence unless there is evidence that the taxpayer failed to exercise due care in determining
wIciIcr iIc iransaciions in qucsiion arc suljcci io ia. TIc iaaycr nay lc rcgardcd as Iaving
exercised due care if the taxpayer has acted in good faith and has made a reasonably diligent effort
to determine how the tax applies to the taxpayers business. The average taxpayer can only be
expected to exercise the amount of diligence due from an ordinary prudent businessperson.
DUTY TO MAKE INQUIRY 0508.25
Where there is doubt concerning the correct application of the tax, the taxpayer has a duty to
nalc an inquiry. If iIc iaaycr fails io nalc an inquiry, iIc 10 crccni cnaliy nay aly. In
gcncral, if iIc iaaycr docs nalc an inquiry and fails io aci uon iIc rcsulis of iIc inquiry, iIc
10 crccni cnaliy sIould aly.
EFFECT OF ERRONEOUS INFORMATION 0508.30
A taxpayer who was misinformed about the proper application of tax may be relieved from the
ayncni of ia, inicrcsi and cnaliy if iIc iaaycr nccis iIc rcquircncnis for rclicf undcr FTC
scciion 6596 (AM scciions 0105.00 0105.10}. If iIc iaaycr docs noi qualify for FTC scciion
6596 rclicf, iIc ncgligcncc cnaliy sIould noi lc warranicd if iIc iaaycr rovidcs cvidcncc iIai
iIc iaaycr coniacicd iIc Doard io inquirc aloui iIc rocr alicaiion/rcoriing of ia and
was nisinforncd ly Doard siaff. Howcvcr, iIc iaaycr rcnains liallc for iIc alicallc ia and
interest.
TIc iaaycr is rcquircd io furnisI rcasonallc roof iIai iIc undcrrcoricd ia was iIc rcsuli
of erroneous information from the Board. In addition, the taxpayer should furnish a written
statement of his or her interpretation of the information provided by the Board staff.
Audit MAnuAl
October 2008
FAILURE TO REPORT PURCHASES SUBJECT TO USE TAX 0508.35
TIc sanc siandards wIicI dcicrninc iIc alicaiion of iIc ncgligcncc cnaliy io ia dcfcicncics
arising from an understatement of gross receipts or an overstatement of claimed deductions are
uscd io dcicrninc iIc alicaiion of iIc ncgligcncc cnaliy io a ia dcfcicncy arising fron failurc
io rcori urcIascs suljcci io usc ia.
MORE THAN ONE LOCATION 0508.40
A taxpayer operating under a consolidated permit who fails to include on returns sales relating to
a location for which a subpermit is held may be presumed to be negligent for all tax due for that
sullocaiion unlcss sucI onissions arc infrcqucni and do noi consiiiuic a sulsianiial ari of iIc
ioial dcfcicncy.
OTHER TYPES OF NEGLIGENCE 0508.45
WIilc iIc siiuaiions dcscrilcd in AM scciions 0508.35 and 0508.40 arc raiIcr olvious cascs of
negligence in preparing returns, it is not intended that the imposition of the penalty for this reason
be so limited, since many other types of situations will be encountered where items have been
omitted from returns for no apparent reason except that taxpayer was negligent.
WORKING PAPERS ARE DESTROYED 0508.50
WIcn iIc audiior fnds iIai worling acrs uscd ly iIc iaaycr in rcaraiion of iIc ia rciurns
Iavc lccn dcsiroycd and iIc iaaycr is unallc io clain sulsianiial dcfcicncics in rcoriing,
iaaycr sIould lc givcn a rcasonallc ooriuniiy io rcarc ncw worling acrs or io clain
Iow anounis rcoricd on rciurns wcrc conuicd. Failurc or inaliliiy on iIc ari of iIc iaaycr
io do so will ordinarily consiiiuic cvidcncc of ncgligcncc and warrani iIc inosiiion of iIc 10
percent penalty.
PenAlties
October 2008
EVASION PENALTIES 0509.00
GENERAL 0509.05
In OcncraI, pcnaIIics Ior Iraud or inIcnI Io cvadc arc imposcd onIy in connccIion wiIh dcLcicncy
determinations made by the Board. It is important to remember that the Board has the burden of
supporting the imposition of an evasion penalty.
TIc FTC scciions iIai inosc cvasion cnaliics arc as follows.
a. RTC sections 6072 and 6094.5 nisusc of rcsalc ccriifcaic io cvadc ia, 10 crccni or
$500 wIicIcvcr is grcaicr.
b. RTC section 6485 fraud or inicni io cvadc ia, 25 crccni of dcicrninaiion.
c. RTC sections 6485.1 and 6514.1 rcgisiraiion of a vcIiclc, vcsscl, or aircrafi ouisidc of
iIis siaic for iIc urosc of cvading ia, 50 crccni of ia duc.
d. RTC section 6514 fraud or inicni io cvadc ia ly failurc io flc rciurn, 25 crccni of ia,
in addiiion io iIc nandaiory FTC scciion 6511 failurc io flc cnaliy of 10 crccni.
e. RTC section 6597 failurc io rcnii salcs ia rcinlurscncni or usc ia collccicd, 40
percent of amounts representing sales tax reimbursement or use tax collected and not
timely remitted to the Board.
f. RTC section 7155 failurc io oliain valid crnii ly duc daic of frsi rciurn for iIc
urosc of cvading ia, 50 crccni of ia duc lcforc crnii oliaincd.
DEFINITION OF EVASION PENALTIES 0509.10
Fraud nay lc dcfncd as conduci inicndcd io dcrivc iIc siaic of ia lcgally duc. Inicni io cvadc
nay lc dcfncd as inicni io cscac iIc ayncni of ia iIrougI dccciion or nisrcrcscniaiion.
Although there may be a legal distinction between fraud and intent to evade, the terms will be
considered synonymous in this manual, and penalties imposed as a result of such act will be
referred to as evasion penalties.
EVASION VS. NEGLIGENCE PENALTIES 0509.15
Evasion is a step beyond negligence. When negligence penalties are recommended, the facts
sIould indicaic iIai iIc iaaycr failcd io ccrcisc duc carc in lccing rccords or rcaring
rciurns or inicniionally ignorcd ccriain duiics or rcquircncnis. TIc cvasion cnaliics arc io lc
alicd if ii can lc sIown iIai iIc iaaycr noi only failcd io fulfll ccriain duiics, lui sucI failurc
was intentional and for the purpose of evading part or all of the true tax liability.
CONDITIONS WARRANTING AN EVASION PENALTY 0509.20
Before an evasion penalty can be imposed, there must be clear and convincing evidence that an
cisiing ia dcfcicncy is iIc rcsuli of a dclilcraic inicni io cvadc iIc ayncni of ia. WIcrc iIcrc
is a sulsianiial dcfcicncy wIicI cannoi lc claincd saiisfaciorily as lcing duc io an Ioncsi
nisialc or io ncgligcncc and wIcrc iIc only rcasonallc clanaiion is a willful aiicni io cvadc
iIc ayncni of ia, iIc 25 crccni cvasion cnaliy sIould aly. TIc sizc of iIc dcfcicncy in
rclaiion io iIc ia rcoricd sIould lc ialcn inio accouni. TIc indicaiion iIai a dcfcicncy is duc
to intent to evade increases in direct proportion to the ratio of understatement when it cannot
otherwise be satisfactorily explained.
Audit MAnuAl
October 2008
EVIDENCE OF EVASION 0509.25
Ii is vcry diffculi io sccurc dircci cvidcncc iIai a iaaycr inicndcd io cvadc a ia lialiliiy. In
most cases, it is necessary to rely on circumstantial evidence. Certain facts or actions are by
nature evidence of a deliberate attempt to evade the payment of tax, and that an evasion penalty
is warranicd. SucI facis or aciions includc, lui noi liniicd io.
a. Falsifcd rccords, csccially wIcn norc iIan onc sci of rccords is nainiaincd.
b. Substantial discrepancies between recorded amounts and reported amounts which cannot
be explained.
c. Willful disrcgard of sccifc advicc as io alicaliliiy of ia io ccriain iransaciions.
d. Failurc io follow iIc rcquircncnis of iIc law, lnowlcdgc of wIicI rcquircncnis is cvidcnccd
by permits or licenses held by taxpayer in prior periods.
c. Ta or ia rcinlurscncni rocrly cIargcd, cvidcncing lnowlcdgc of iIc rcquircncnis of
the law, but not reported.
f. Transferring accumulated unreported tax from a tax accrual account to another income
account.
Under the clear and convincing standard, any assertion of intent to evade the tax must be
supported by as many of the above indicators as possible. These indicators of evasion must be
documented. In addiIion Io Ihc Lndings oI subsIanIiaI discrcpancics and propcr charging oI Iax or
tax reimbursement, other evidence of evasion must be included in the audit working papers. Such
cvidcncc can incIudc copics oI IaIsiLcd rccords, Hoard IcIIcrs providing spcciLc advicc, copics
of previous permits and applications, and evidence of improper transfers of unreported tax. A
summary of the evidence must be provided in the audit working papers. The summary must
reference the schedules providing the evidence of evasion and must provide an explanation of how
the evidence supports the recommendation for an evasion penalty.
BURDEN OF PROOF 0509.30
As a matter of law, fraud is never presumed but must be proven and the burden of proof is on
the Board. However, the standard of proof is not beyond a reasonable doubt as in a criminal
prosecution. (See Helvering v. Mitchell (1938) 303 U.S. 391). Instead, the standard of proof in civil
tax fraud cases is clear and convincing evidence (In re Renovizors Inc. v. BOE (9iI Cir. 2002} 282
F.3d 1233}. Clcar and convincing cvidcncc" rcquircs cvidcncc so clcar as io lcavc no sulsianiial
doubt as to the truth of an assertion of fraud. That is, there is a high probability that the assertion
of fraud is true.
A iaaycr's inicni io cvadc iIc ia is iIc lcy clcncni io roving fraud. TIc ncrc faci iIai a
taxpayer has a substantial tax liability does not in and of itself prove intent. Rather the evidence
nusi suori inicni. For canlc, a consisicni aiicrn of undcrrcoriing nay indicaic cvasion,
ariicularly if iIcrc is no oiIcr clanaiion for iIc undcrsiaicncni. Howcvcr, addiiional cvidcncc
(c.g., falsifcd rccords} nusi lc rovidcd io suori fraud wIcn iIc undcrrcoriing is randon. In
all cases where a fraud penalty is recommended, the district administrator must submit evidence
of a sulsianiial naiurc iIai iIc iaaycr lnowingly conniiicd sccifc acis wiiI iIc inicniion of
dcfrauding iIc Siaic of ia, wIicI was lcgally duc. (Scc AM scciion 0509.75.}
PenAlties
October 2008
EVASION BY AGENT, PARTNER OR EMPLOYEE 0509.40
Audiiors sIould rcconncnd iIc 25 crccni cnaliy wIcn a iaaycr's agcni, arincr, or cnloycc
has acted with intent to evade tax payment, even though the attempted evasion occurred without
iIc iaaycr's lnowlcdgc or conscni. TIis is lccausc iIc fraud of iIc agcni is inuicd io iIc
rincial ccci wIcn iIc rincial iaaycr is dcfraudcd ly iIc agcni or cnloycc. For canlc,
when tax has been understated to cover up money or property stolen from the taxpayer, such
an evasion will not be imputed to the taxpayer and the penalty should not apply. Generally, if a
iaaycr Ias noi lcncficd fron iIc inicni io cvadc, iIc cvasion cnaliy sIould noi aly.
AMOUNT TO WHICH PENALTY APPLIES 0509.45
Thc cvasion pcnaIIics undcr RTC sccIions 6485 and 6514 arc imposcd iI any parI oI Ihc dcLcicncy
is due to fraud or intent to evade. Therefore the penalty will apply to the entire amount of the
dcLcicncy. In unusuaI cascs iI may bc incquiIabIc Io appIy Ihc pcnaIIy Io Ihc cnIirc dcLcicncy. For
example, a change in management during an audit period may have resulted in the discontinuance
of fraudulent practices, or the reverse. In such cases, two sets of Form BOE414A or Form
BOE414B should be submitted, one includes the penalty and the other without the penalty,
accompanied by a full statement of the circumstances involved. Hcadquaricrs will nalc iwo
determinations accordingly.
Ecci for iIc cnaliics inoscd undcr FTC scciions 6485 and 6514, cvasion cnaliics sIould lc
alicd only io iIc oriion of iIc dcfcicncy wIicI was iIc rcsuli of iIc aci or acis iIai consiiiuicd
evasion.
KNOWINGLY OPERATING WITHOUT A PERMIT 0509.50
Sellers engaged in business at more than one location must hold a permit for each location, or a
subpermit for each location under a consolidated account.
RTC section 7155 imposes a 50 percent penalty of the tax due when a person, for the purpose
of evading the payment of tax, knowingly fails to obtain a sellers permit. This penalty may be
assessed when all of the following factors are present:
1. TIc iaaycr did noi oliain a crnii rior io iIc daic iIc frsi ia rciurn was duc.
2. TIc iaaycr, wIilc ocraiing wiiIoui a crnii, lncw a crnii was rcquircd.
3. TIc avcragc measure of tax liability during the period in which the taxpayer operated
wiiIoui a crnii was norc iIan $1,000 cr noniI.
In addiiion, iIc Scciion 7155 cnaliy nay aly wIcn a crson is cngagcd in lusincss ai norc
iIan onc locaiion lui lnowingly fails io oliain a crnii or sulcrnii for cacI locaiion.
Audit MAnuAl
October 2008
MISUSE OF A RESALE CERTIFICATE 0509.55
FTC scciion 6072 inoscs a cnaliy of 10 crccni or $500, wIicIcvcr is grcaicr, for cacI iransaciion
wIcn a urcIascr, for crsonal gain or io cvadc iIc ayncni of ia, lnowingly issucs a rcsalc
ccriifcaic wIilc iIc crson is noi aciivcly cngagcd in lusincss as a scllcr. FTC scciion 6094.5
inoscs iIc sanc cnaliy wIcn iIc urcIascr lnowingly issucs a rcsalc ccriifcaic for crsonal
gain or io cvadc iIc ayncni of ia, for iIc rocriy wIicI iIc urcIascr lnows ai iIc iinc of iIc
purchase will not be resold in the regular course of business. The normal statute periods apply
io FTC scciion 6094.5 cnaliy iIrcc ycars for iaaycrs wIo Iavc crniis and flc rciurns; cigIi
ycars for iaaycrs wIo do noi flc rciurns; icn ycars for cligillc anncsiy rcoriing criods (FTC
scciion 7073 (d}}.
TIc nisusc of a rcsalc ccriifcaic cnaliy gcncrally alics in iIc following siiuaiions.
TIc urcIascr, wIo docs noi Iold a scllcr's crnii, issucs a rcsalc ccriifcaic wiiI an
erroneous sellers permit number or gives the valid number of a permit held by another
person, or
TIc urcIascr's crnii was closcd oui rior io iIc daic of urcIasc, or
TIc urcIasc, rcgardlcss of anouni, is onc of a scrics of urcIascs wIicI wcrc noi inicndcd
to be resold by the taxpayer in the regular course of business, or
TIc urcIascr lnowingly issucd a rcsalc ccriifcaic for crsonal gain or io cvadc iIc ayncni
of the tax. In these cases, the penalty should normally be applied regardless of the amount
of the purchase and whether or not the purchase is one of a series of intentional misuses
of the purchasers sellers permit privileges, or
TIc urcIascr Ias lccn adviscd ciiIcr iIrougI rior audii(s} or oiIcr coniaci wiiI Doard
siaff on iIc rocr usc of rcsalc ccriifcaics and/or iIc alicaiion of ia io urcIascs
made for their own use.
TIc cnaliy gcncrally docs noi aly in iIc following siiuaiions.
TIc dollar anouni of iIc urcIasc is vcry snall, iIc urcIasc docs noi acar io lc onc of
a series of intentional misuses of the sellers permit privileges by the purchaser, and there
is no indicaiion iIai iIc urcIascr Ias lnowingly issucd a rcsalc ccriifcaic for crsonal
gain or to evade the payment of the tax, or
TIc urcIascr Ias urcIascd lusincss sulics or sinilar iicns and ii acars io lc duc
to a misunderstanding of the law rather than an intentional misuse, or
TIc iicn urcIascd Ias lccn rcoricd on iIc urcIascr's salcs and usc ia rciurn(s}.
Ii is iIc aci of nisusing a rcsalc ccriifcaic, wiiIoui rcgard io iIc anouni, wIicI warranis iIc
inosiiion of iIc nisusc of a rcsalc ccriifcaic cnaliy. TIcrcforc, iIc cnaliy alics in iIosc
instances where there is a pattern of intentional misuse by the purchaser, even though the
anounis involvcd nay lc snall. Howcvcr, if iIc facis in qucsiion do noi clcarly suori a fnding
iIai a rcsalc ccriifcaic Ias lccn nisuscd, iIcn iIc cnaliy for nisusc of a rcsalc ccriifcaic docs
not apply.
In those instances where a number of small purchases from the same vendor are noted, a single,
raiIcr iIan nuliilc, cnaliy of $500 or 10 crccni (wIicIcvcr is grcaicr} gcncrally alics unlcss
iIc urcIascr Ias lccn rcviously adviscd of iIc conscqucnccs of nisusing a rcsalc ccriifcaic.
If iIc nisusc involvcs largc anounis wiiI iIc inicni of cvading iIc ia, iIc 25 crccni fraud
penalty under RTC section 6485 for intent to evade the tax should be considered if the evidence
exists to support the imposition of the penalty.
PenAlties
October 2008
(Cont.) 0509.55
Muliilc $500 cnaliics nay lc warranicd in cascs wIcrc iIcrc is an csiallisIcd aiicrn of nisusc
of rcsalc ccriifcaics for naicrial anounis wiiI nuliilc vcndors.
EIilii 1 is a sanlc lciicr io lc issucd io a urcIascr wIo is urcIasing iangillc crsonal
property that is unusual for the type of business the purchaser is engaged in. If we are not
rcqucsiing iIai iIc urcIascr rovidc suori for a sccifc iransaciion, wc sIould nalc our
intent clear. As this letter is addressed to purchasers whom we suspect may be misusing a resale
ccriifcaic, iIc ionc nusi lc clanaiory.
EIilii 2 is a sanlc lciicr iIai nay lc scni io urcIascrs wIcn wc Iavc cnougI infornaiion io
inosc iIc nisusc of a rcsalc ccriifcaic cnaliy.
Investigations and Audits
Lcads rcgarding susccicd nisuscs of rcsalc ccriifcaics arc io lc ircaicd as rioriiy assignncnis.
An audiior sIould invcsiigaic iIc urcIascr io dcicrninc wIciIcr a nisusc of a rcsalc ccriifcaic
has occurred. In those instances where the purchaser states that the merchandise was resold,
the auditor must verify this statement by tracing the sale(s) to the taxpayers sales invoice(s), sales
journals, gcncral lcdgcrs, salcs ia rciurns and/or oiIcr rclaicd lools and rccords.
If the taxpayer states or the auditors examination discloses that the merchandise was not resold,
the auditor must expand the examination of the purchasers records to determine whether other
nisuscs Iavc occurrcd. If nisusc of a rcsalc ccriifcaic is confrncd and iIc crson is cngagcd
in business, consideration should also be given to performing an audit of sales activity to ensure
that all sales have been properly reported and exemptions properly claimed. Staff should close out
accounis wIcn iIc urcIascr is noi rcquircd io Iold a crnii.
The District Administrator will be responsible for approving recommendations to impose the
nisusc of a rcsalc ccriifcaic cnaliy and wIciIcr or noi rosccuiion sIould lc sougIi. In cvcry
insiancc wIcrc iIc FTC scciion 6072 or 6094.5 cnaliy is rcconncndcd, Forn DOE414A or
Forn DOE414D nusi lc acconanicd ly a ncnorandun signcd ly iIc Disirici Adninisiraior,
addrcsscd io iIc CIicf, Hcadquaricrs Ocraiions Division (scc AM scciion 0509.75}. In addiiion
to penalty comments, comments on whether prosecutions are recommended should be made on
Forn DOE414A or Forn DOE414D.
OUT OF STATE REGISTRATION OF VEHICLE, VESSEL OR AIRCRAFT 0509.60
FTC scciions 6485.1 and 6514.1 rovidc a 50 crccni cnaliy on a urcIascr wIo rcgisicrs a
vehicle, vessel, or aircraft outside of California (i.e., in another state or foreign country) for the
purpose of evading the tax. The standards of proof for this penalty are similar to those for fraud
in general.
TIc cnaliy undcr FTC scciions 6485.1 and 6514.1 nay noi lc asscricd in conjunciion wiiI a
cnaliy undcr FTC scciion 7155 (failurc io oliain a crnii} or scciion 6485 or 6514 (fraud or
inicni io cvadc}. Howcvcr, iIis cnaliy nay lc asscricd in conjunciion wiiI cnaliics undcr FTC
scciion 6511 (failurc io flc} or FTC scciion 6072 or 6094.5 (nisusc of rcsalc ccriifcaic}.
The penalty will generally be applicable when the purchaser is a California resident who purchased
a vehicle, vessel, or aircraft for use in California and is unable to provide convincing evidence for
registration out of state.
Audit MAnuAl
October 2008
FAILURE TO REMIT TAX 0509.65
For rcoriing criods lcginning January 1, 2007, FTC scciion 6597 inoscs a 40 crccni cnaliy
on any crson wIo lnowingly collccis salcs ia rcinlurscncni (Fcgulaiion 1700, Reimbursement
for Sales Tax
2
} or lnowingly collccis usc ia, and fails io iincly rcnii iIai salcs ia rcinlurscncni
or use tax (tax) to the Board. The penalty is discretionary and may only be applied when all the
condiiions lisicd lclow arc nci.
1. TIc unrcniiicd ia avcragcs ovcr $1000 cr noniI for iIc rcoriing criod.
2. TIc ioial unrcniiicd ia ccccds fvc crccni of iIc ioial ia rcoricd in iIc sanc quaricrly
reporting period in which the tax was due.
3. TIc iaaycr docs noi rovidc a crcdillc clanaiion sIowing iIc failurc io rcnii iIc ia
was due to reasonable cause or circumstances beyond the taxpayers control (see Regulation
1703(c}(3}(D}} and occurrcd noiwiiIsianding iIc ccrcisc of ordinary carc and iIc alscncc
of willful neglect.
Scc EIilii 3 for canlcs iIai illusiraic wIciIcr iIc 40 crccni cnaliy alics.
TIc 40 crccni cnaliy alics only io iIc unrcniiicd ia csiallisIcd on an aciual lasis for iIc
rcoriing criods wIcrc iIc iaaycr lnowingly collccicd and failcd io rcnii iIc ia. As wiiI
oiIcr cvasion cnaliics, iIc alicaiion of iIc 40 crccni cnaliy can cicnd iIc iinc for wIicI
dcicrninaiions can lc nadc lcyond iIc oiIcrwisc alicallc siaiuic of liniiaiions (AM scciion
0509.70}.
When a taxpayer provides an explanation for failure to remit the tax, it will be the District
Adninisiraior's rcsonsililiiy io dcicrninc wIciIcr iIcrc arc suffcicnily conclling rcasons io
jusiify iIc iaaycr's failurc io rcnii iIc ia. Unlcss iIcrc is clcar and convincing cvidcncc iIai
refutes the taxpayers explanation for failing to remit the tax, staff should accept the explanation
as meeting the taxpayers burden of proof that their failure to timely remit the tax was due to
reasonable cause and or circumstances beyond their control. If the penalty is not applied, the
audiior nusi docuncni iIc iaaycr's clanaiion on Forn DOE414A, Fcori of Ficld Audii or
Forn DOE414D, Ficld Dilling Ordcr.
If iIc cnaliy is alicd, iIc facc of iIc audii rcori nusi includc iIc noiaiion Pcnaliy of 40% Ias
been added for unremitted tax collected and the General Audit Comments section must include
a conncni iIai iIc 40 crccni cnaliy is rcconncndcd. Audii conirol siaff will cnicr Linc Iicn
Nunlcr 23 on iIc Nonconliancc scrccn and iIc codc UTC" (Unrcniiicd Ta Collccicd} on iIc
Principal and Interest screen.
WIcn an audii rcconncnds iIc 40 crccni cnaliy, a ncnorandun is rcquircd fron iIc Disirici
Adninisiraior io iIc CIicf, Hcadquaricrs Ocraiions Division. Scc AM scciion 0509.75 for norc
information on this memo.
2 Pursuani io FTC scciion 6597, salcs ia rcinlurscncni also includcs any salcs ia iIai is advcriiscd,
held out, or stated to the public or to any customer, directly or indirectly, that the tax or any part
thereof will be assumed or absorbed by the retailer.
PenAlties
October 2008
MULTIPLE PENALTIES 0509.68
Two or norc fraud or cvasion cnaliics nay noi lc addcd io iIc sanc dcfcicncy dcicrninaiion
when the penalties apply to the same series of acts or course of action in the same reporting
periods.
If a crson wiiI inicni io cvadc ia fails io oliain a crnii and fails io flc a rciurn, ciiIcr
FTC scciion 7155 cnaliy (50 crccni for failurc io oliain a crnii} or FTC scciion 6514
cnaliy (25 crccni for fraud or inicni io cvadc ia ly failurc io flc rciurn} nay lc inoscd,
but not both.
FTC scciion 7155 cnaliy sIould noi lc alicd in conjunciion wiiI a scciion 6485 cnaliy
(25 crccni for inicni io cvadc}.
FTC scciion 6597 cnaliy (40 crccni for lnowingly collcciing and failing io iincly rcnii
tax) should not be applied to liabilities for which a fraud or evasion penalty, or a negligence
penalty has already been assessed in the same period.
Howcvcr, undcr ccriain circunsianccs, norc iIan onc cnaliy nay aly io iIc sanc dcicrninaiion.
FTC scciion 6511 cnaliy (10 crccni for failurc io flc rciurn} sIould lc alicd along wiiI
FTC scciion 6514 cnaliy (25 crccni for fraud or inicni io cvadc ia}. FTC scciion 6511
cnaliy nay lc alicd wiiI FTC scciion 7155 cnaliy (50 crccni for failurc io oliain a
permit) when appropriate.
FTC scciion 6511 cnaliy nay lc alicd in conjunciion wiiI FTC scciion 6597 cnaliy (40
crccni for lnowingly collcciing and failing io iincly rcnii ia}.
Thc scrics oI acIs or coursc oI acIion invoIvcd in Ihc misusc oI a rcsaIc ccrIiLcaIc Ior Ihc purposc
of evading payment of tax on gurcbases are different from those involved in failing to obtain a
permit for the purpose of evading the tax on sales. Therefore the following penalties may apply
to the same determination:
FTC scciion 6511 cnaliy (10 crccni for failurc io flc a rciurn} nay lc alicd wiiI FTC
scciion 6072 or 6094.5 cnaliy (inrocr usc of rcsalc ccriifcaic} sincc FTC scciion 6511
cnaliy is noi for fraud or inicni io cvadc iIc ia. Sinilarly, FTC scciion 7155 cnaliy (50
percent for failure to obtain a permit) may be added to the same determination if appropriate.
STATUTE OF LIMITATIONS FOR EVASION PENALTIES 0509.70
The application of evasion penalties can extend determinations beyond the three or eight-year
statute of limitations set forth in RTC section 6487 or ten-year statute of limitations set forth in
RTC section 7073 (d) . Therefore, tax can be assessed and penalties imposed for prior periods in
which the taxpayer intentionally understated the tax liability. However, proof that the taxpayer
intentionally understated the tax liability wItbIn the otherwise applicable statute of limitations
(Ihrcc, cighI or Icn ycars) is noI by iIscII suILcicnI Io supporI an cvasion pcnaIIy Ior pcriods
outside the statutory period. Ideally, evasion should not be asserted for periods outside the
applicable statutory period (three, eight or ten years), unless records for the expired periods are
available, and such records establish an actual tax liability and support the assertion of fraud.
WIcrc cvasion was noi discloscd in iIc audiis of rior criods lui discovcrcd in a sulscqucni
audii, iIc rior criods will lc includcd in iIc sulscqucni audii if iIc following condiiions arc
nci.
1. Evasion was rcscni during iIc criods rcviously audiicd, and
2. SucI cvasion was noi discovcrcd during iIc rior audiis lccausc infornaiion ncccssary io
its detection was concealed from the auditors who made the previous audit(s) or because of
some other act(s) or fraud by the taxpayer.
Audit MAnuAl
October 2008
APPROVAL OF EVASION PENALTIES 0509.75
WIcn an audii rcconncnds iIc cvasion cnaliy, a ncnorandun is rcquircd fron iIc Disirici
Adninisiraior io iIc CIicf, Hcadquaricrs Ocraiions Division. Uon iIc aroval of iIc Disirici
Administrator or someone acting on his or her behalf, and after the completion of district audit
rcvicw, iIc ncnorandun along wiiI iIc audii rcori and worling acrs will lc forwardcd io iIc
CIicf, Hcadquaricrs Ocraiions Division for aroval, wiiI a coy of iIc ncnorandun io iIc CIicf,
Ficld Ocraiions Division, Equalizaiion Disiricis 1 & 2 and Oui-of-Siaic Disirici, or iIc CIicf,
Ficld Ocraiions Division, Equalizaiion Disiricis 3 & 4 and Ccniralizcd Collcciion Scciion. The
taxpayer may not be furnished a copy of the memorandum until the Chief, Headquarters Operations
Division has approved the evasion penalty.
The memorandum must clearly state the evidence which supports the taxpayers intent to evade
iIc ayncni of ia and nusi idcniify iIc clcncnis or indicaiors of fraud alicallc io iIc sccifc
casc. Any confdcniial cvidcncc iIai is noi includcd in iIc audii worling acrs nusi lc aiiacIcd
to the memorandum. The memorandum must explain why the evasion penalty is appropriate
vcrsus iIc ncgligcncc cnaliy, and Iow iIc iaaycr lcncficd fron iIc cvasion. Ii nusi noi
includc lcngiIy conncnis or conncnis iIai arc alrcady ari of iIc audii vcrifcaiion conncnis.
If iIc quaricrly rcconciliaiion of iIc audiicd and rcoricd anounis suoris iIc rcconncndaiion
of iIc cvasion cnaliy, sucI infornaiion sIould lc sunnarizcd and noi lc sIown on a quaricrly
basis. If an audit includes related taxpayers, a separate memorandum must be prepared for each
taxpayer for whom the auditor recommends an evasion penalty.
In those cases where criminal tax evasion is suspected and potential prosecution is contemplated,
iIc casc sIould lc rcfcrrcd io iIc Invcsiigaiions Division iIrougI iIc CIicf, Ficld Ocraiions
Division, Equalizaiion Disiricis 1 & 2 and Oui-of-Siaic Disirici, or CIicf, Ficld Ocraiions Division,
Equalizaiion Disiricis 3 & 4 and Ccniralizcd Collcciion Scciion. Crininal rosccuiion conncnis
sIould lc nadc only on iIc coy io iIc aroriaic CIicf, Ficld Ocraiions Division.
PenAlties
October 2008
MISCELLANEOUS 0510.00
FAILURE TO OBTAIN EVIDENCE THAT OPERATOR
OF CATERING TRUCK HOLDS VALID SELLERS PERMIT 0510.05
Any crson naling salcs io an ocraior of a caicring irucl wIo Ias lccn rcquircd ly iIc Doard
ursuani io FTC scciion 6074 io oliain cvidcncc iIai iIc ocraior is iIc Ioldcr of a valid scllcr's
crnii issucd ursuani io FTC scciion 6067 and wIo fails io conly wiiI iIai rcquircncni sIall
lc liallc for a cnaliy noi io ccccd fvc Iundrcd dollars ($500} for cacI sucI failurc io conly.
FAILURE OF RETAIL FLORIST TO OBTAIN PERMIT 0510.10
Any rciail orisi (including a nolilc rciail orisi} wIo fails io oliain a scllcr's crnii lcforc
engaging in or conducting business as a seller shall, in addition to any other applicable penalty,
ay a cnaliy of fvc Iundrcd dollars ($500}. For uroscs of iIis rcgulaiion, nolilc rciail orisi"
ncans any rciail orisi wIo docs noi scll fron a siruciurc or rciail sIo, including, lui noi liniicd
io, a orisi wIo sclls fron a vcIiclc, usIcari, wagon, or oiIcr oriallc nciIod, or wIo sclls ai a
swa ncci, ca narlci, or sinilar iransicni locaiion. TIc icrn rciail orisi" docs noi includc any
owcr or ornancnial lani growcr wIo sclls Iis or Icr own roducis.
PENALTIES IN BANKRUPTCY CASES 0510.20
In lanlruicy cascs, ia cnaliics for rc-lanlruicy criods sIould lc dcicrnincd in iIc sanc
nanncr as for crsons noi in lanlruicy. Pcnaliics arc noi cniiilcd io iIc sanc rioriiy ircaincni
as rc-lanlruicy iacs and accrucd inicrcsi. Howcvcr, cnaliics naylc cniiilcd io a disiriluiion
undcr a lcsscr rioriiy. TIc Sccial Proccdurcs Scciion will nalc an cvaluaiion wIciIcr io includc
cnaliics in a roof of clain io lc flcd in a lanlruicy casc. WIcn a ia cnaliy is noi discIargcd
in a lanlruicy casc, iIc cnaliics associaicd wiiI iIc ia lialiliiy arc lilcwisc noi discIargcd
and any penalty should be included in the determination so it can be collected from the tax debtor.
TIc daic iIc lanlruicy ciiiion is flcd nusi lc noicd in iIc audii. Prc-ciiiion and osi ciiiion
cnaliics sIould lc scaraicly idcniifcd.
RECEIVERS, TRUSTEES AND DEBTORS IN POSSESSION 0510.25
Trusiccs of lanlruicy csiaics and dcliors-in-osscssion nay ocraic iIc lusincss of a dclior.
Accordingly, cnaliics wIicI aiiacI ly rcason of iIc dclinqucncy or nalfcasancc of a irusicc, or
debtor-in-possession while operating a business will be billed to the trustee, debtor-in-possession,
and lanlruicy csiaic.
NEGLIGENCE AND EVASION PENALTIES DECEASED TAXPAYERS 0510.30
Negligence and evasion penalties will not be included in determinations made after the death
of an individual taxpayer. It is obvious that the malfeasant in such cases would not suffer the
penalty, and the effect would be to reduce the assets for distribution to the estate of the deceased.
Howcvcr, sucI cnaliics arc alicallc io iIc ncgligcncc of iIc adninisiraior(s} or cccuior(s} of
the decedents estate, or their intent to evade the payment of tax.
NEGLIGENCE AND EVASION PENALTIES DEATH OF PARTNER 0510.35
If a arincrsIi is rocrly suljcci io a ncgligcncc or cvasion cnaliy, iIai cnaliy will siill lc
imposed even if the partnership is thereafter dissolved due to death of one of the partners.
ASSIGNMENT FOR THE BENEFIT OF CREDITORS 0510.40
Any crson wIo nalcs an assignncni for iIc lcncfi of crcdiiors and wIo owcs an anouni wIicI
lccanc dclinqucni ciiIcr lcforc or aficr iIc assignncni was nadc is cIargcd wiiI cnaliy and
interest, when applicable, the same as other taxpayers.
Audit MAnuAl
October 2008
Sample Warning Letter - Misuse of a Resale Certihcate ........................................Exhibit 1
Sample Letter Imposing Penalty for Misuse of a Resale Certihcate ..........................Exhibit 2
Examples Application of 40 Percent Penalty .....................................................Exhibit 3
tAble of exihibits
PenAlties
October 2008
SampIe Warning Letter - Misuse of a ResaIe Certicate Exhibit 1
STATE OF CALIFORNIA
STATE BOARD OF EQUALIZATION



www.boe.ca.gov
Date

ABC Company
One Main Street
Sacramento, CA 95814

In Reply Refer To:
Account number

Dear Mr. Jones:


The Board of Equalization has reviewed the records of one of your vendors and found resale certificates
were issued by your company for items that do not appear to be of a type normally resold by your
business. While the resale certificate may have been properly issued, in some cases businesses are not
aware of the proper use of resale certificates.

The purpose of this letter is to remind you that resale certificates may only be issued for merchandise you
intend to resell. Your sellers permit does not allow you to purchase property without tax for personal or
business use. In fact, a purchaser who knowingly issues a resale certificate for the purpose of evading
payment of the sales and use tax may be subject to one or more of the following penalties:

A penalty of $500 or 10% of the amount of tax due, whichever is
greater, for each misuse of a resale certificate.
A 25% penalty for intent to evade the tax.
Revocation of the sellers permit.

At this time, we are not asking for any further information or action on any specific transactions.

If you have any further questions or concerns, please do not hesitate to contact us at the above address or
call our Information Center at (800) 400-7115. You may also visit our website at www.boe.ca.gov.


Sincerely,





BETTY T. YEE
First District, San Francisco

BILL LEONARD
Second District, Ontario/Sacramento

MICHELLE STEEL
Third District, Rolling Hills Estates

JUDY CHU, Ph.D.
Fourth District, Los Angeles

JOHN CHIANG
State Controller


RAMON J. HIRSIG
Executive Director
Audit MAnuAl
October 2008
SampIe Letter Imposing PenaIty for Misuse of a ResaIe Certicate Exhibit 2


TATE OF CALIFORNIA S
S


TATE BOARD OF EQUALIZATION


www.boe.ca.gov


ABC Company
One Main Street

Date
Sacramento, CA 95814
In Reply Refer To:
Account Number
Based on the information you provided, it has been determined that a
he penalty
and Taxatio

state for a
in the 10 days of the date of this letter if you do not agree with the imposition of any
amount of tax, please return the bottom portion of the form
ber or address shown
incerel ,

Enclosure: BOE-1, Audit Payment Information
First Distr
Second District, O
Third District, Rollin
JU
Fourth District, le


RAMON J. HIRSIG
Executive Director

BETTY T. YEE
ict, San Francisc

o
BILL LEONARD
ntario/Sacrament

o
MICHELLE STEEL
g Hills Estate

s
DY CHU, Ph.D.
s Los Ange

JOHN CHIANG
State Controller

Dear Mr. Jones:

We have reviewed your response to our letter and the statement concerning Property Purchased Without
Payment of California Sales Tax.
$500 penalty for Misuse of a Resale Certificate is applicable. This penalty is in addition to the tax and
interest on the same transaction.

T for Misuse of a Resale Certificate is authorized pursuant to section 6094.5 of the Revenue
n Code which states as follows:
Any person, including any officer or employee of a corporation, who gives a resale
certificate for property, which he or she knows at the time of purchase is not to be
resold by him or her or the corporation in the regular course of business, is liable to
the state for the amount of tax that would be due if he or she had not given such
resale certificate. In addition to the tax, the person shall be liable to the
penalty of 10% of the tax or five hundred dollars ($500), whichever is greater, for
each purchase made for personal gain or to evade the payment of taxes.

Please respond with
portion of this decision. I will consider any additional information that you provide before preparing my
recommendation.

While there is no interest imposed upon penalties and interest, interest does continue to accrue on the
amount of unpaid tax. For your convenience, I have enclosed Form BOE-1, Audit Payment Information.
If you wish to make a payment toward any
with your payment and include the phrase Misuse of Resale Certificate Billing with your remittance so
that we may properly credit your account.

If you have any further questions, please feel free to contact me at the telephone num
above.



S y
PenAlties
October 2008
ExampIes - AppIication of 40 Percent PenaIty Exhibit 3
The following examples illustrate whether the penalty is applicable.
Example 1
During a quaricrly rcoriing criod, a iaaycr's ioial ia collccicd is $10,000, as dcicrnincd
ly an audii invcsiigaiion. TIc iaaycr rcniis $7,500 of iIc ia collccicd. TIc ioial unrcniiicd
ia is $2,500. TIc avcragc noniIly unrcniiicd ia is $833 ($2,500 3 noniIs}, wIicI docs noi
ccccd $1,000 cr noniI. Sincc iIc avcragc noniIly unrcniiicd ia is lcss iIan $1,000 cr
noniI, iIc 40 crccni cnaliy inoscd ursuani io scciion 6597 docs noi aly.
Example 2
During a quaricrly rcoriing criod, a iaaycr's ioial ia collccicd is $500,000, as dcicrnincd ly
an audii invcsiigaiion. TIc iaaycr rcniis $480,000 of iIc ia collccicd. TIc ioial unrcniiicd ia
is $20,000. TIc avcragc noniIly unrcniiicd ia is $6,666 ($20,000 3 noniIs}, wIicI ccccds
$1,000 cr noniI. Howcvcr, fvc crccni of iIc ioial anouni of ia collccicd in iIc sanc quaricr
in wIicI iIc ia was duc is $25,000 ($500,000 .05}, wIicI is norc iIan iIc ioial unrcniiicd
ia of $20,000. Sincc iIc unrcniiicd ia anouni ($20,000} docs noi ccccd 5 crccni ($25,000}
of ioial ia rcoricd in iIc sanc quaricr in wIicI iIc ia was duc, iIc 40 crccni cnaliy docs
not apply.
Example 3
During a quaricrly rcoriing criod, a iaaycr collccicd $22,000 in ia lui rcniiicd only $10,000,
as dcicrnincd ly an audii invcsiigaiion. TIc ioial unrcniiicd ia is $12,000. TIc avcragc noniIly
unrcniiicd ia is $4,000 ($12,000 3 noniIs}, wIicI ccccds $1,000 cr noniI, and fvc crccni
of iIc ioial ia collccicd in iIc sanc quaricr in wIicI iIc ia was duc is $1,100 ($22,000 .05}.
Sincc iIc avcragc noniIly unrcniiicd ia ($4,000} ccccds loiI iIc $1,000 cr noniI and iIc
fvc crccni of iIc ioial ia collccicd in iIc sanc quaricr in wIicI iIc ia was duc ($1,100}, iIc 40
crccni cnaliy nay lc alicd io iIc $12,000 lialiliiy, unlcss iIc failurc io rcnii iIc ia wIcn
due was due to reasonable cause or circumstances beyond the persons control, (i.e., the Board
lacls clcar and convincing cvidcncc iIai iIc crson's oiIcrwisc rcasonallc clanaiion for failing
to remit the tax is false).