Got a CDTFA Audit Letter? 7 Steps for California Restaurant Owners
What to do first when the CDTFA tells your restaurant it has been selected for a sales tax audit.
By Victoria Nguyen, EA, Enrolled Agent · October 27, 2026
Few letters make a restaurant owner’s stomach drop like a notice from the California Department of Tax and Fee Administration (CDTFA). Restaurants are among the businesses the CDTFA audits most often, because cash sales, tips, and to-go orders make sales tax easy to get wrong. The good news: how you handle the first few weeks has a big effect on how the audit ends.
1. Don’t ignore it, and don’t panic
An audit letter is not a bill. It means the CDTFA wants to review your records for a set period. Write down every date in the letter, including the audit period and any deadline to respond or schedule a meeting.
2. Talk to a representative before you call the auditor
What you say early on can shape the whole audit. A representative can contact the auditor for you once you sign a CDTFA power of attorney. That keeps conversations focused and lets you keep running your restaurant.
3. Know what period is being reviewed
Sales tax audits generally look back three years. If returns were not filed, the CDTFA can look back further. Knowing the exact period tells you which records you need.
4. Gather the records auditors ask for
- Sales and use tax returns for the audit period
- Point-of-sale (POS) reports, including daily and monthly sales summaries
- Bank statements and merchant (credit card) processor statements
- Purchase invoices from food and beverage suppliers
- Records of tips, service charges, and alcohol sales
- Federal and California income tax returns
5. Understand the tests the auditor may use
When records are incomplete, auditors often estimate sales. Two common methods are a markup test, which compares your purchases to what you should have sold, and a credit card ratio test, which uses your card sales to estimate cash sales. These estimates can be challenged when they don’t reflect how your restaurant actually operates, such as heavy waste, staff meals, or a high share of card payments.
6. Check how your menu items are taxed
Many errors come from treating food the wrong way. Hot prepared food, cold food to go, food eaten on site, and service charges can all be taxed differently. A review of your POS settings often explains differences between your reports and your returns.
7. Know your options if you disagree
If the audit ends with findings you believe are wrong, you can dispute them. Deadlines are short: a petition for redetermination generally must be filed within 30 days of the Notice of Determination. If a balance is owed, payment plans and penalty relief may be available.
How we help
We represent restaurant owners in CDTFA sales tax audits and EDD payroll audits from the first letter to the final determination. We organize your records before the auditor arrives, work with the auditor directly, and challenge estimates that don’t fit your business.
Common questions
How far back can a CDTFA sales tax audit go?
Generally three years from the filing of the return. If returns were not filed, the CDTFA can go back further.
Do I have to meet the auditor myself?
No. With a signed power of attorney, a representative can communicate and meet with the auditor on your behalf.
What if my records are incomplete?
We work with what is available, such as bank statements, POS data, and supplier invoices, to support your numbers.
Need help with this?
Book a consultation and we will review your situation and explain your options in plain language.
This article is general information, not tax or legal advice for your specific situation. Tax rules change, so please contact us before acting on it.