California Department of Tax and Fee Administration Publishes Amendments Deleting the Three-Error Rule from Audit Manual
The California Department of Tax and Fee Administration (“CDTFA”) has formally published new amendments to its Audit Manual, and taxpayers with ongoing audits should especially take note. As you may recall, in February of this year, the CDTFA held a second interested parties meeting (“IPM”) for its proposed changes to Audit Manual Chapter 13, Statistical Sampling and Chapter 4, General Audit Procedures.
The most contentious change was CDTFA’s elimination of the three-error rule. Despite the controversy and arguments raised by interested parties during both IPMs, CDTFA pressed forward with the publication of the final version of the amendments to Audit Manual Chapter 13, Statistical Sampling, and Chapter 4, General Audit Procedures, which deletes the three-error rule. The elimination of the three-error rule will allow CDTFA auditors to project based on a single item, which may lead to increased disputes, and longer, costlier audits.
For taxpayers with ongoing audits, the new changes to the Audit Manual have an effective date of April 1, 2023. Language in the revised Audit Manual and CDTFA guidance provides that if an opening audit conference has been held, audits in progress should follow the previous version of Chapter 13. However, even if the opening conference has been held, taxpayers may elect to apply the new Audit Manual provisions if sample items have not yet been pulled.
Those interested in the new text of the Audit Manual Chapter 13 and Chapter 4 can review the chapters at the links below:
If you have questions about CDTFA’s changes to the Audit Manual chapters or need assistance with any other tax matter, please get in touch today with our dedicated team of attorneys at Bewley, Lassleben & Miller, LLP.