What Type of Penalties Can I Face in a California Sales Tax Audit?

If you're under audit by the California Department of Tax and Fee Administration (CDTFA), the financial exposure can go far beyond just the back taxes you may owe. The CDTFA aggressively applies penalties and interest, which can inflate your total liability by tens of thousands of dollars.

This blog explains the most common CDTFA penalties, how they’re triggered, how much they cost, and what you can do to reduce or remove them with strategic CPA representation.

CDTFA PENALTY OVERVIEW

During a sales tax audit, the CDTFA will assess:

1. Unpaid or underpaid sales tax
   
   
2. Interest on the unpaid amount
   
   
3. Civil penalties
   
   
4. In some cases, criminal charges
   
   

Penalties alone can exceed 25%–50% of the tax due, and they are often applied even if you made an honest mistake.

MOST COMMON CDTFA PENALTIES

1. NEGLIGENCE PENALTY (10%)

• Applied if CDTFA believes your failure to report tax was due to negligence or careless recordkeeping
  
  
• Often assessed in addition to other penalties
  
  

2. LATE PAYMENT PENALTY (10%)

• Applied when sales tax is paid after the due date, even by one day
  
  
• Can be combined with interest
  
  

3. LATE FILING PENALTY (5%–25%)

• Applied for failing to file your return on time
  
  
• Increases by 5% per month, up to 25% maximum
  
  

4. FRAUD PENALTY (25%–40%)

• Applied if CDTFA believes you intentionally underreported sales
  
  
• Requires proof of intent or pattern of concealment
  
  
• Extremely difficult to challenge without professional help
  
  

5. FAILURE TO OBTAIN A PERMIT (50%)

• If you operated without a seller’s permit, CDTFA can assess a 50% penalty on the tax owed
  
  

6. COLLECTION COST RECOVERY FEE

• Applied when your case is referred to CDTFA collections
  
  
• Often a flat fee added to the balance
  
  

7. RETURNED PAYMENT PENALTY ($25 OR 10%)

• If your payment bounces, you can be hit with a flat penalty or a percentage-based fee
  
  

8. SUCCESSOR LIABILITY PENALTY

• If you bought a business with unresolved CDTFA debt, you may become liable — with penalties added
  
  

9. RECORDKEEPING PENALTY

• Applied when your books are missing, incomplete, or misleading
  
  
• CDTFA may estimate your tax due based on industry standards
  
  

10. UNREPORTED USE TAX PENALTY

Many businesses are shocked to find penalties for failing to report use tax on out-of-state purchases

HOW PENALTIES ADD UP

Here’s a real-world example:

Yes — but you must request penalty abatement using one of the CDTFA’s approved reasons:

• Reasonable cause
  
  
• Good faith misunderstanding
  
  
• First-time error
  
  
• Reliance on CDTFA guidance or a tax professional
  
  

At Boulanger CPA, we write customized Penalty Abatement Requests that show:

• You acted in good faith
  
  
• You relied on professional advice
  
  
• You have corrected the issue
  
  
• The penalty is excessive or inequitable
  
  

Many penalties can be removed or reduced if challenged properly and early.

HOW WE DEFEND BUSINESSES IN CDTFA AUDITS

As a local Orange County CPA firm, we help California businesses:

• Respond to audit notices
  
  
• Challenge audit findings
  
  
• Dispute improper penalties
  
  
• Negotiate reduced balances
  
  
• Avoid enforcement actions (levies, liens, permit suspension)
  
  

Don't try to argue with the CDTFA on your own. We handle the pressure and build your defense.

RELATED POSTS

• How to Get Audit Penalties Abated with the CDTFA
  
  
• What Happens When You Fail a Sales Tax Audit (CDTFA)
  
  
• CDTFA Sales Tax Audit Process: Step-by-Step
  
  
• The CDTFA Audit Manual: What California Auditors Use Against You