Case Study
Proactive Audit Defense Reduces $1M Assessment by Over 50%
Company E
A multi-state distributor of electronic equipment and parts serving both wholesalers (construction contractors) and end users.
The Challenge
Company E was notified of a routine, multi-year audit by the California Department of Tax and Fee Administration (CDTFA). Confident in their internal processes, the company initially attempted to manage the audit themselves.
For nearly a year, they worked directly with a difficult auditor. Then the preliminary assessment arrived:
Over $1 million in proposed tax and interest.
Much of the liability stemmed from audit “sampling” methodology. A subset of transactions had been selected, several exemption certificates were deemed invalid or insufficient, and the resulting error rate was extrapolated across the entire population of sales.
The numbers were calculated.
But the interpretation was flawed.
Audit sampling is not just math — it is methodology, documentation, and defensible position-taking. And once extrapolated, small assumptions can become very large liabilities.
At that point, Company E’s CPA firm referred them to Miles Consulting Group.
The Solution
MCG stepped in not merely to review the numbers, but to evaluate the audit framework itself.
Our team—drawing on decades of experience working directly with state auditors—reassessed the sampling methodology and underlying assumptions. We:
- Analyzed the selected sample transactions in detail
- Identified instances where exemption and resale documentation had been improperly disallowed
- Challenged the extrapolation methodology
- Leveraged our working knowledge of CDTFA procedures to extend the assessment timeline
- Coordinated directly with the auditor to reopen discussions on previously disallowed items
In audits, the difference is rarely in the raw data. It lies in how that data is interpreted, supported, and defended.
Experienced judgment allowed us to “take another bite” at the sample population, materially reducing the disallowance rate that drove the projected assessment.
The Outcome
Through several months of coordinated effort among the auditor, the client, and the client’s customers:
The proposed liability was reduced by more than $500,000
Improperly disallowed exemptions were cleared
The extrapolated assessment was significantly lowered
The company avoided paying tax that was never truly owed
Beyond the immediate savings, MCG conducted training for Company E’s finance team, strengthening exemption documentation processes and preparing them for future audits with greater confidence.
Today, Company E operates with:
- Stronger internal controls
- Clear documentation standards
- A defensible audit posture
Because when an audit arrives, calculation alone isn’t enough.
What matters is who is prepared to stand behind the position.
