Common Audit Issues, Part 3
This is the final installment of our three-part series focusing on common audit issues for both individual and business entity taxpayers. This month, we highlight common issues that impact corporations.
Some of the most common tax audit issues currently affecting corporations are:
- Cost of Performance and Sourcing of Intangible Sales
- Sales Factor and Gross Receipts
- Abusive Tax Shelters
Cost of Performance and Sourcing of Intangible Sales
For tax years beginning before January 1, 2011, sales from intangible sales and services are assigned based on the cost of performance. The complex rules of identifying income-producing activities and documentation necessary to do a cost-of-performance analysis often result in incorrect assignment of sales from intangibles and services. For tax years beginning on or after January 1, 2011, taxpayers who elect a single sales factor for apportioning business income to California will use market rules for assigning sales from intangibles and services instead of cost of performance rules.
Sales Factor and Gross Receipts
We continue to see items in the sales factor denominator that do not meet the definition of "gross receipts" or that result in distortion.
Abusive Tax Shelters
We are seeing abusive tax shelters in a variety of situations to avoid state or federal tax. These types of transactions often involve the creation of entities or deductions without economic substance or a business purpose.
We continue to audit credits such as the Enterprise Zone and the Research and Development Credit to verify that taxpayers report the credit correctly.