Many taxpayers assume there is a fixed “six-year rule” or that old unfiled years eventually fall off the radar. Under California state law, that assumption is almost always wrong. For unfiled returns, the assessment clock either stretches dramatically or does not start running at all. The result is that unfiled California state tax years can remain legally exposed for decades and can grow into substantial civil and, in severe cases, life-altering criminal tax problems.
Three state agencies are central here. The Franchise Tax Board (FTB) handles California personal income tax and corporate income and franchise taxes. The California Department of Tax and Fee Administration (CDTFA) administers sales and use tax, as well as many special taxes and fees. The Employment Development Department (EDD) administers payroll and unemployment insurance contributions. Each agency has its own statute of limitations rules for assessment and collection, and each treats unfiled returns more harshly than late-filed ones. Understanding those differences is the first step in deciding how to clean up old exposure before one of these agencies chooses to do it for you.
Why Unfiled Returns Are Treated More Harshly Than Late Returns
Statutes of limitations do two different things in tax. The assessment statute limits how long an agency has to issue a bill after a return is filed or should have been filed. The collection statute limits how long the agency can use enforcement tools, such as liens and levies, after a liability becomes “due and payable.” For taxpayers who file on time, California generally applies fairly standard assessment periods: four years for FTB income and franchise tax, three years for CDTFA sales and use tax, and three years for most EDD payroll tax quarters, subject to specific exceptions.
Unfiled tax returns are different. For all three agencies, failure to file either removes the assessment time limit entirely or extends it out to eight years per unfiled period, and fraud or intentional evasion can eliminate even that protection. Interest runs from the original due date of the tax, not from the date you first hear from the state. Penalties for failure to file, failure to pay, and, in egregious cases, civil fraud are layered on top. That is why relatively modest unreported income or taxable sales from many years ago can snowball into a massive state tax bill when California finally reconstructs the missing years.
On the collection side, once a liability is assessed, FTB generally has 20 years to collect, measured from when the latest tax liability for that year becomes due and payable, and specific later-assessed fees can restart that 20-year clock. CDTFA and EDD have their own collection timetables and can also keep older debts alive through renewals, payment plans, and other enforcement activity. The key point is that nonfiling does not make issues “too old” to matter. It tends to make them both larger and longer lived and creates criminal tax exposure.
FTB: Unfiled California Income and Franchise Tax Returns
For personal income and corporate franchise taxes, FTB’s own guidance makes the basic rule very clear. If you file, FTB generally has four years from the date you filed, or from the original due date if you filed early, to issue an assessment. If you do not file a return for the tax year, FTB can issue its assessment at any time. The same “at any time” language applies if you are required to notify FTB of an IRS change and fail to do so.
In practice, that means there is no statute of limitations on assessment for a never-filed California income or franchise tax return. A year from a decade ago, or even earlier, can still be reconstructed and audited once FTB discovers the omission through information sharing with the IRS, Forms W-2 and 1099, K 1s, residency audits, or data analytics. Older case law and Revenue and Taxation Code provisions on fraudulent returns point in the same direction: if there was fraud or willful failure to file, the standard four-year assessment limit does not apply.
Once FTB issues a Notice of Proposed Assessment and the time to protest runs or a protest is resolved, the liability becomes “due and payable” and moves into the collection system. Revenue and Taxation Code section 19255 and FTB’s collection guidance state that, except for narrow exceptions, FTB can collect unpaid tax for twenty years after the date the latest tax liability for a year becomes due and payable. The latest liability for that year may include a collection cost recovery fee, lien fee, or installment agreement fee. Those fees themselves have their own due and payable dates. FTB has publicly stated that when a new qualifying fee is assessed for a year, the twenty-year clock restarts from that later date.
The bottom line for unfiled FTB years is stark. On the assessment side, if you never file, there is effectively no outer time limit at all. On the collection side, once FTB finally assesses, it has a long, and in practice sometimes renewable, twenty-year period to collect. For taxpayers with multiple unfiled years, or where the pattern appears intentional, that combination is a classic high-risk civil and potential criminal tax scenario.
CDTFA: Unfiled Sales, Use, and Special Tax Returns
For California sales and use tax and many other special taxes, the primary assessment rule is found in Revenue and Taxation Code section 6487. For registered taxpayers who actually file, CDTFA generally must serve a notice of deficiency determination within three years after the last day of the month following the reporting period, or three years after the return is filed, whichever is later. That is the standard three-year lookback most businesses expect.
When no return is filed, the statute explicitly extends that window. Section 6487 provides that, in the case of failure to make a required return, every notice of determination must be served within eight years after the last day of the calendar month following the quarterly or annual period for which the tax is proposed to be determined. The statute now expressly provides that, in the case of a required return that was never filed, CDTFA must issue its notice of determination within eight years of the end of the period at issue, rather than having an open-ended assessment window, except in cases of fraud or intent to evade, where the usual limitation periods do not apply.
It is important to note two things about that eight-year rule. First, it is per period, so a business that has failed to file for many years may face a long string of quarters or years, each open for eight years from the end of that period. Second, the three and eight-year limits apply “except in the case of fraud or intent to evade” the statute or applicable regulations. In fraud and intentional evasion cases, CDTFA is not confined by the usual limitation periods, and older years may be brought into play if the department can support a fraud theory.
CDTFA audits of unfiled taxpayers are also numerically dangerous because the department will estimate tax from indirect methods such as bank deposits, purchase records, markup analyses, and industry averages. For cash-intensive or record-poor businesses, that often results in higher reconstructed taxable sales than the actual historical reality. When you combine that inflation with eight open years and ongoing interest, unfiled sales or use tax returns can quickly become a huge problem.
EDD: Unfiled Payroll Tax Returns and Worker Misclassification
For California payroll and unemployment insurance taxes, Unemployment Insurance Code section 1132 creates a graduated system of assessment periods. In the general case, “except in the case of failure without good cause to file a return or report, fraud or intent to evade,” every notice of assessment must be made within three years after the last day of the month following the close of the calendar quarter in which the contribution liability accrued, or within three years after a deficient return was filed or due, whichever is later.
Where an employer fails without good cause to file a required return or report, the statute extends that period. In those cases, every notice of assessment must be made within eight years after the last day of the month following the close of the calendar quarter in which the contribution liability accrued. An employing unit may also waive this limitation period or consent to its extension, which EDD sometimes requests during ongoing audits. The statute explicitly carves out fraud and intent to evade; in those circumstances, the protective three- and eight-year limits do not apply in the usual way, and EDD has broader assessment reach, subject to its burden of proving fraud.
In real-world audits, this plays out as follows. If you have generally filed your California payroll tax returns, but there are suspected errors or omissions, EDD usually looks back three years. If you have not filed required returns or reports and cannot show “good cause” for that failure, EDD can typically audit and assess up to eight years of quarters. If the audit uncovers evidence of intentional schemes to avoid payroll taxes, such as systematic off-the-books payments or knowing misclassification of employees as independent contractors to avoid withholding, the exposure can extend even further, and separate criminal provisions of the Unemployment Insurance Code and Penal Code come into play.
Why Unfiled Returns Are a High Risk Civil and Criminal Tax Problem
From a civil perspective, unfiled returns for FTB, CDTFA, and EDD all share the same dangerous features. Assessment periods are extended or eliminated, so there is no natural “aging out.” Interest accumulates from the original due date, not the date the state contacts you. Penalties for failure to file, failure to pay, negligence, substantial understatements, and civil fraud can be stacked. Collection statutes, particularly FTB’s 20-year regime with restart events, give the agencies a long runway to pursue enforcement once liabilities are assessed.
From a criminal perspective, long-term nonfiling can be even more problematic. Patterns of unfiled returns, missing books and records, cash skimming, or consistent misclassification of workers are precisely the kinds of fact patterns that can turn a civil audit into an “eggshell” examination, where every admission may determine whether the matter remains civil or is referred for criminal investigation. The civil statutes of limitation on assessment and collection are not the same as criminal statutes of limitation, and even when older years fall outside a criminal charging period, they can still be used as evidence of willfulness and intent.
All of this is why waiting out old California tax exposure is usually a losing strategy. The legal framework is built to allow FTB to assess unfiled income or franchise tax years at any time, CDTFA to reach up to eight years of unfiled sales and use tax periods, and, further, in fraud cases, and EDD to reach eight years of unfiled payroll quarters, with the possibility of unlimited reach in fraud or intentional evasion situations. Those rules exist so the state can reach long-standing noncompliance, and the state uses them.
Contact the Tax Law Offices of David W. Klasing if You Have Unfiled California State Tax Returns
If you have one or more years of unfiled California income tax returns, unfiled sales or use tax returns, or unfiled payroll tax reports, you are already inside California’s state tax controversy system, whether you have received a notice yet or not. The combination of extended or unlimited assessment periods and long collection windows makes long-term nonfiling a classic high-risk situation, where experienced guidance can mean the difference between a manageable resolution and a catastrophic one. At the Tax Law Offices of David W. Klasing, our nationally recognized dual licensed Civil and Criminal Tax Defense Attorneys and CPAs focus on precisely these kinds of state tax problems.
We help clients inventory their unfiled years across FTB, CDTFA, and EDD, identify which statutes of limitations apply to each agency and period, and design catch-up filing and voluntary disclosure strategies to minimize audit triggers and criminal exposure whenever possible. When a state audit is already underway, we step in to take over communications, manage document production, and position the case to give it the best chance of remaining a civil matter and resolving on the most favorable terms available. Because the firm’s CPAs are employees of the Tax Law Offices of David W. Klasing and work as part of the legal team under attorney supervision, their analysis, calculations, and consultations are generally protected by the attorney-client privilege and work product doctrine, which is critical when you are disclosing many years of unfiled California tax exposure.
We offer confidential, reduced-rate initial consultations in which we review your situation, explain in plain terms how far back each California agency can go in your case, and outline concrete options for moving forward before the state comes knocking. To schedule a consultation, call the Tax Law Offices of David W. Klasing at (800) 681 1295 or contact us online HERE today.
