California Department of Tax and Fee Administration Withdraws Amendments Deleting the Three-Error Rule from Audit Manual

Taxpayers can rejoice that they may continue to use the three-error rule for California sales and use tax audits for now.  On July 7, 2023, the Office of Administrative Law published an update in its California Regulatory Notice Register that the California Department of Tax and Fee Administration (“CDTFA”) has formally certified that it will not issue, use, enforce, or attempt to enforce the amendments to its Audit Manual Chapter 13 and Chapter 4, that were alleged to be underground regulations.  As you may recall, the CDTFA formally published the new amendments to Audit Manual Chapter 13, Statistical Sampling and Chapter 4, General Audit Procedures, earlier this year and declared that the new changes would be effective April 1, 2023.

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 deleted the three-error rule.  The elimination of the three-error rule would have allowed CDTFA auditors to project based on a single item, which may lead to increased disputes, and longer, costlier audits.

However, thanks to retired State Board of Equalization Member Dean Andal’s citizen-filed petition challenging the CDTFA’s authority to move forward with those amendments, CDTFA has decided to rescind those amendments to the Audit Manual.  Thus, Taxpayers with ongoing or upcoming audits can rest assured that they will be able to utilize the three-error rule.

Enclosed is the portion of the California Regulatory Notice Register 2023, Volume 27-Z, which includes the CDTFA’s memorandum certifying that it will not use, enforce, or attempt to enforce its previously published amendments to the Audit Manual.

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

Suspension of Action Regarding Underground Regulation – CDTFA Audit Manual