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Audit by Sampling

If FTB recently reviewed your or your client's business state tax return, it may have been done a little differently. We may have asked your consent for our use of a sampling method to verify an expense, credit, or other return position. Verifying return positions can be a lengthy, time-consuming process, and unnecessary in some situations. Sampling is one of many tools available for efficiently addressing an audit issue, while minimizing intrusion in a taxpayer's business.

We have recently adopted new sampling procedures, which include a sampling agreement, agreed to by the auditor and the taxpayer. The procedures are applied as appropriate to each audit situation, with the objective that FTB and the taxpayer will agree on how the sampling will be performed, and how the results will be used to determine any proposed adjustments.

Before we use sampling to audit an issue, we will present the taxpayer with a written sampling agreement. In addition to documenting the sampling process, the sampling agreement:

  • Describes what is being sampled, and the sample size.
  • Explains what constitutes an error, and how the error rate will be applied to determine the proposed adjustment.
  • Ensures that you or your client understand and agree with the methodology being used.
  • Gives you or your client the opportunity to provide input into the sampling process.

As necessary, other information can be substituted or added to the agreement based on the circumstances of the specific audit.

By signing the sampling agreement before any testing is performed, we reach agreement on the method before we expend any effort on the testing process. You or your business clients are able to evaluate the approach and provide feedback. The sampling agreement ensures we limit resources to the extent possible, both yours and ours, to resolve the audit issue most efficiently.

Signing the agreement reserves your right to disagree with specific disallowed items, while confirming your acceptance of the sampling methodology's stated terms.