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California Department of Tax and Fee Administration Proposes to Delete the Three-Error Rule from Audit Manual

The California Department of Tax and Fee Administration (“CDTFA”) has been busy with regulatory projects this new year.  On January 11, 2023, the CDTFA issued a notice that the second interested parties meeting for its proposed changes to Audit Manual Chapter 13, Statistical Sampling and Chapter 4, General Audit Procedures will be held on February 1, 2023, at 11:00 A.M. Pacific Time.

The first interested parties meeting on this subject was held on January 7, 2022.  Numerous interested parties provided feedback arguing against CDTFA’s numerous changes, including CDTFA’s proposal to do away with the three-error rule.  The current version of the Audit Manual, Chapter 13, states, “When a sample produces only one or two errors, the auditor must evaluate whether these errors were representative, or whether it is possible that they indicate problems in certain areas that could be examined separately. Such a low error occurrence rate could then leave doubt as to whether the sample is representative and should be projected.”  As stated in stakeholders’ written comments, the three-error rule acknowledges that a low error occurrence rate highlights taxpayers’ substantial compliance with California law and decreases the compliance burden for taxpayers and the agency.

The newly proposed revisions to Audit Manual Chapter 13 and Chapter 4 retain many of the amendments from the agency’s first interested parties meeting.  Those interested in the CDTFA’s changes to the Audit Manual can review the Second Discussion Paper at the link below:

If you have questions about CDTFA’s proposed changes to the Audit Manual or need assistance with any other tax matter, please get in touch today with our dedicated team of attorneys at Bewley, Lassleben & Miller, LLP.

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