California residency audits are Franchise Tax Board (FTB) examinations aimed at determining whether you owe California state income tax as a resident or nonresident. These audits can affect anyone, from high-net-worth individuals and business owners to former Californians who have moved to other states nationwide. Federal taxes apply to the worldwide income of U.S. citizens and residents, regardless of where they live. Similarly, California taxes its residents on their worldwide income. However, nonresidents are only taxed on income sourced from California. This makes your residency status a high-stakes issue. In a residency audit, the FTB scrutinizes where you live, work, and maintain ties to decide if you were a full-year California resident, a part-year resident, or a nonresident for a given tax year. The outcome determines whether California can tax all of your income or just a portion.
The IRS is concerned with federal residency primarily for international taxpayers (e.g., foreign nationals), whereas California focuses on whether you improperly avoided state tax by claiming to live elsewhere. It’s entirely possible to be fully compliant with the IRS but still face an aggressive FTB residency audit. In fact, information from your federal tax return or an IRS audit can trigger a California state tax audit – the IRS and California state tax authorities routinely share data, and a tip from the IRS or another third party can prompt the FTB to investigate your residency. Even if the IRS finds no issues, California can independently pursue taxes if it believes you were a California resident who didn’t pay your share.
Who is at risk? California’s high income tax rates (up to 13.3%) mean the state has a strong incentive to identify residents who might claim to live elsewhere to escape taxes. Whether you lived in California state for decades or only periodically, if there’s money on the line, the FTB may come calling. High-income earners who relocate, entrepreneurs with multi-state businesses, and even retirees who spend part of the year in California are prime targets. The FTB is known for being extremely vigilant and aggressive in coming after out-of-state people, who it claims are still California residents. All taxpayers – including former Californians now in tax-friendly states – should be aware that moving out doesn’t guarantee escaping California tax. A residency audit is the state’s way of saying, “prove you really left.” Given the complex rules and potential tax bill, understanding these high-risk tax audits is essential for protecting your wealth.
Domicile vs. Residency: California’s Rules for Full-Year and Part-Year Residents
At the heart of any residency audit are two key concepts: domicile and residency. California law makes a clear distinction between the two. Domicile is your one true, fixed, permanent home – the place you intend to return to whenever you’re away. You can only have one domicile at a time. In contrast, residency for tax purposes hinges on where you are living currently and whether your presence here is more than “temporary or transitory.” It is possible (and common in California) to be domiciled in one state but still be deemed a resident of California for tax purposes, or vice versa.
California’s residency tests revolve around the idea of intent and connections. The law defines a California resident as anyone in California other than for a temporary or transitory purpose, or any California domiciliary who is outside California state for a temporary or transitory purpose. In plain terms, if you move to California without the intent of only being here temporarily (i.e., you’re making it your principal place of living), you become a resident. Likewise, if you are domiciled in California and leave the state temporarily (planning to return), you remain a resident in the eyes of the FTB. Only a permanent or indefinite move out of state breaks residency status. Part-year residents are those who changed their residency during the year. They are treated as California residents for part of the year and nonresidents for the rest. Part-year status means you only pay California tax on all income while a resident, plus any California-source income earned while a nonresident. However, determining the exact date your residency ends is often contentious.
FTB auditors apply a “closest connections” test: where is your spouse, minor children, primary home, driver’s license, voter registration, business interests, doctors, country club, and even your pets? One strong California tie can outweigh three weaker out-of-state ties. Keep a California house, claim a homeowner’s exemption, or swipe your credit card here weekly, and the FTB will build timelines showing you never truly left. Half-measures like moving on paper while your life still revolves around California states crumble fast under high-risk residency audits.
Proper planning and precise documentation of the change in domicile can prevent the nightmare of residency audits. The goal is to have one clear tax home at a time. If you are changing residency, it’s often wise to do it before major income events and to document the date of your move thoroughly, e.g., by keeping plane tickets, moving truck receipts, new lease or home purchase documents, job offer letter in new state, etc. These will be vital in a residency audit to establish the timeline.
Burden of Proof, Audit Pitfalls, and Potential Criminal Tax Fraud Exposure
One of the most important things to understand about California residency audits is that the burden of proof is on the taxpayer. The FTB’s determination of your residency comes with a presumption of correctness, and you must prove them wrong. This is a steep burden. Taxpayers often find it challenging to produce the extensive documentation the FTB demands. Audit requests can span years’ worth of credit card statements, travel records, emails, home utility bills, and even social media to glean where you were and what you were doing. It’s critical to go into an audit with a well-organized defense file: calendars of your time in/out of California, receipts, logs – anything that backs up your claim of nonresidency or part-year residency. Without solid proof, the state will win by default.
One of the most common mistakes in residency audits is failing to sever ties with California entirely. Simply obtaining a mailing address or opening a bank account in another state is not enough if you continue to maintain significant connections to California. Key pitfalls include keeping your California home (especially without renting it out to an unrelated party at market rates), leaving a spouse or minor children in California, continuing to claim a homeowner’s exemption on a California property, or maintaining active business interests within the state. Even social and professional ties, like membership in local clubs or regularly attending California board meetings, can weaken your case.
Another critical error is providing incomplete or misleading information to the FTB. Any attempt to backdate documents, use a friend’s out-of-state address while secretly remaining in California, or otherwise conceal your true residency can quickly escalate a civil audit into an exponentially worse criminal tax investigation. The FTB imposes severe penalties for fraud, including a 75% civil tax fraud penalty on underpaid taxes, monthly late filing penalties up to 25%, and steep interest charges. Worse, truly egregious cases may lead to criminal tax charges. Willful tax evasion is a felony under both federal and California state law. While residency cases usually start as civil matters, if you falsify information or deliberately omit required filings, prosecutors can pursue charges that carry the possibility of fines and prison time. States like California have not shied away from making examples of individuals cheating on residency, particularly if large sums are at stake. The FTB’s auditors are trained to spot “badges of fraud,” such as forged documents, secret bank accounts, or repeated false statements. Even without criminal tax charges, the financial exposure is substantial: back taxes on potentially all of your income (if you’re deemed a resident when you claimed not to be), plus penalties and interest that can double or triple the original tax. And once you’re on the FTB’s radar, you can expect increased scrutiny on future filings as well.
Pro Tip: Your electronic footprint cannot be faked. Where you buy taco’s on taco Tuesday, where you buy gas. Every credit or debit card purchase is the best electronic indicator of where you are spending your time.
Fight Back: Contact The Tax Law Offices of David W. Klasing
Facing a California residency audit can be daunting, but you do not have to go through it alone. The stakes, both financial and legal, are simply too high. Engaging a seasoned dual-licensed Tax Attorney and CPA promptly can make all the difference. At the Tax Law Offices of David W. Klasing, our team of civil and criminal tax defense attorneys and CPAs has extensive experience defending clients in FTB residency audits. We understand the nuances of California’s residency laws and know how to build a compelling case to protect you. Our firm’s approach is both aggressive and strategic: we work to curtail your tax liabilities and safeguard you from potential civil or criminal tax repercussions. Our goal is to resolve the audit with the civil tax penalties and zero criminal tax exposure.
Why dual-licensed representation? It’s crucial because residency audits sit at the intersection of tax law and accounting. You need someone who can parse legal definitions and analyze financial evidence. Our team provides a “one-stop shop, where we offer comprehensive audit defense that covers every angle, from interpreting domicile statutes to reviewing your bank statements for supporting evidence. As both attorneys and CPAs, we can formulate the legal arguments and also meticulously reconstruct your timelines and records. We know what FTB auditors are looking for, and we preempt their moves. For example, we’ll develop an audit strategy that might include preparing a day-by-day log of your whereabouts (corroborated by receipts and digital data), assembling proof of your new out-of-state abode and community ties, and demonstrating the intent behind your move (e.g., employment contracts, new business ventures). We tailor our approach to your specific facts because no two residency cases are the same.
Crucially, working with our dual-licensed firm also means you get the protection of the attorney-client privilege for your communications and strategy. Communications with a non-attorney (like a regular CPA) are not privileged in a state tax audit. If you only use an accountant to handle a residency audit, the FTB could potentially subpoena that accountant to testify or turn over your communications. By contrast, when you work with us, everything you share for the purposes of obtaining legal advice is protected by attorney-client and work-product privilege. Even our in-house CPAs assist our legal staff in providing you legal advice and is thus their work is cloaked in privilege as well. This is a critical safeguard: it allows for open, honest discussions and analysis of your situation without fear that it will be used against you.
Ultimately, our mission is to protect you. Our insight into FTB tactics gives you a formidable advantage, and our strategic interventions aim to achieve the optimal result, ideally a “no change” letter from the FTB confirming you owe nothing more. Remember, a California residency audit doesn’t have to derail your finances or your life. Call us at (800) 681-1295 or contact us online today to have our nearly three decades of dual-licensed experience at your disposal. We will fight to keep you only as taxable as you rightfully should be – and not a dollar more.
