Awards & Recognition
Situated on the western coast of Southern California, Los Angeles is a sprawling metropolis with over 3.9 million residents. As the largest city in California and the heart of the entertainment, technology, and manufacturing industries, Los Angeles plays a crucial role in the state’s economy. The city’s economic vibrancy and diversity come with the heightened responsibility of navigating some of the nation’s most stringent and rigorously enforced California & Federal tax regulations. The Franchise Tax Board (FTB) and the IRS closely monitor compliance, conducting audits, investigating tax fraud, and assessing substantial taxes, interest, and penalties for any tax non-compliance they detect.
Aside from the obligation to file federal income tax, Los Angeles taxpayers are also required to pay state income tax. The California Franchise Tax Board (FTB) is responsible for administering and enforcing state income tax laws. For the 2024 tax year, California has nine income tax brackets, ranging from 1% to 12.3%, depending on taxable income. Specific individuals may also be subject to the Alternative Minimum Tax (AMT), which is set at 7%. Additionally, those with taxable income exceeding $1 million are subject to the Mental Health Services Tax of 1% on any income over this threshold. Residents of Los Angeles typically file their individual California Resident Income Tax returns using Form 540 or Form 540 2EZ. Taxpayers who fail to meet their federal or California state tax obligations may receive a notice of deficiency / proposed assessment from the relevant tax agency, often leading to penalties and interest.
You may have believed for years that illegally manipulating the figures to lower your income tax liabilities was a victimless crime. After all, you might have believed that the IRS or FTB would likely overlook a portion of your income tax liability, given the billions of dollars in tax revenues they collect annually. However, you may eventually be subject to an FTB audit. You might be incredibly anxious about the possibility of a California or federal jail sentence due to tax evasion being discovered, even though most taxpayers are scared about audits since they could lead to paying much more in taxes. This risk of criminal tax prosecution rises dramatically if you cheated on several occasions in previous or subsequent tax years because the audit may reveal a pattern of intentional non-compliance especially where badges of fraud for tax evasion are discovered.
The Tax Law Officer of David W. Klasing excel at representing clients under high-risk federal or California state tax audits, especially where they blatantly cheated on the tax return under audit and thus fear criminal tax prosecution. When facing tax audits from agencies like the IRS, CDTFA, EDD, or FTB, certain red flags, such as destroyed records, underreported income, or unfiled returns, can intensify the examination, leading to high-risk eggshell and reverse eggshell tax audits. As such, residents and businesses must be aware of potential criminal tax violations and the signs indicating that they might be under a more rigorous investigation by the criminal tax function of the FTB or by the IRS’s Criminal Investigation Division (CID). This is especially so when the taxpayer has a history of blatantly cheating on their federal or California tax returns and are now under audit and thus fears criminal tax prosecution. Contact the Tax Law Office of David W. Klasing online immediately to arrange a reduced-rate initial consultation, or call our Los Angeles tax office at (310) 492-5583 for help today.
Could FTB Audits in Los Angeles Lead to Criminal Tax Investigations?
For Los Angeles taxpayers, the potential for criminal tax exposure during an FTB audit can be substantial. If the Franchise Tax Board (FTB) detects intentional underreporting of income or other fraudulent activities, what starts as a routine audit could escalate into a criminal tax investigation. The consequences of such an escalation are severe and far-reaching, potentially resulting in imprisonment, hefty fines, and long-term reputational damage.
When Does an FTB Audit in Los Angeles Pose a Criminal Risk?
The FTB is relentless in its investigation and prosecution of tax fraud across California, including Los Angeles. Taxpayers who intentionally underreport or fail to report income are at significant risk. For example, if a Los Angeles resident neglects to report substantial income due to misplaced tax documents, the FTB may interpret this as a deliberate attempt to conceal income. This is especially true if there are other warning signs, such as missing records or unfiled returns. Alternatively, they can make a referral to the criminal investigation division of the IRS under an information sharing agreement.
Critical Criminal Tax Violations in Los Angeles Include:
- Claiming out-of-state residency while residing in Los Angeles.
- Fraudulently manipulating business records to reduce taxable income / cooking the books.
- Filing false claims for refunds or intentionally underreporting taxable income.
- Continuously closing and reopening new businesses to evade taxes.
- Participating in cash-based or underground economy activities without proper income and information reporting.
When the FTB suspects these or other fraudulent activities, it may initiate a criminal tax investigation in collaboration with agencies like the IRS or California Department of Tax and Fee Administration (CDTFA). The California Bureau of Investigation (CBI) also plays a crucial role, providing expert investigative services to assist the FTB in uncovering cases of extensive tax fraud.
How Eggshell and Reverse Eggshell Audits Can Lead to Criminal Charges
In an eggshell audit, the taxpayer might be aware that discrepancies could potentially lead to criminal tax charges. The FTB, during such audits, may identify “badges of fraud” like unreported income or missing records, suggesting deliberate misconduct. In contrast, a reverse eggshell audit occurs when the FTB already suspects tax fraud and uses a civil audit to gather evidence for potential criminal prosecution. The taxpayer might not realize that the investigation is criminal in nature, increasing their vulnerability / exposure during the process.
Both types of audits represent severe risks for taxpayers in Los Angeles. If fraud is detected, the FTB can collaborate with its Criminal Investigation Bureau, the IRS’s Criminal Investigation Division (CID), and the California Bureau of Investigation (CBI) to escalate the case to a criminal tax investigation. Given the collaboration between California state and federal tax agencies, taxpayers facing these audits should seek legal counsel immediately to protect their rights.
Why Consulting Your Original Tax Preparer Can Be a Critical Mistake in a Criminal Tax Investigation
If you knowingly cheated on your tax returns, one of the most dangerous missteps you can take is to consult your original tax preparer regarding an audit or criminal tax investigation. Often, the tax preparer becomes the government’s primary witness against you due to their conflict of interest. In their attempt to safeguard their own reputation, they may end up implicating you further.
It’s not just the tax preparer who can pose a risk—any third party, including a spouse, corporate officer, business partner or employee, may unwittingly become a government witness. If the IRS or FTB has contacted a third party, they might reach out to inform you of this interaction. In such cases, it is imperative to garner cooperation with these third parties in speaking directly with your dual-licensed criminal tax defense attorney and CPA as part of your counsel’s efforts to parallel the investigation.
The Limits of Accountant-Client Confidentiality in Criminal Tax Cases
Unlike in civil matters, there is no accountant-client privilege in criminal tax cases. This means that any communication between you and your accountant can be used as evidence in a criminal investigation. Our firm offers the unique advantage of combining both Criminal Tax Defense Attorneys and Kovel CPAs, ensuring the most strategic and efficient defense. This setup allows us to protect both your liberty and your financial assets, offering a platform for achieving the best possible outcome.
Your accountant might be comfortable handling civil tax examinations and other tax disputes. However, when fraud or false statements become part of the equation, the situation demands the expertise of a specially trained tax defense attorney. Our founder, David Klasing, is a former public auditor and a dual-licensed Tax Attorney and CPA. His deep understanding of federal and state auditing and investigatory practices allows our team to anticipate government strategies and respond effectively. All attorneys and CPAs at the Tax Law Offices of David W. Klasing possess extensive experience in both federal and state tax controversies, and many have decades of experience fighting aggressively for our clients.
Navigating the FTB Audit Appeals Process in Los Angeles, CA
If you’re audited by the Franchise Tax Board (FTB) in Los Angeles and disagree with the findings, the appeals process is available to challenge those results. This process is complex and can carry significant financial risks if not navigated carefully, but with proper guidance, you can protect your interests.
Step 1: Filing Your Appeal
After receiving the FTB’s decision, you have 60 days to file an appeal. It is crucial to provide detailed legal and factual arguments to support your case. Additionally, you have the option to request an oral argument to present your case in person. While paying the tax assessment upfront to avoid accruing interest may seem appealing, doing so could reduce your leverage in negotiations. Consulting with our dual-licensed Audit Appeals and Litigation Attorneys & CPAs can help you assess whether paying early is the right move.
Step 2: Making Your Case
Once your appeal is filed, the FTB will assign an impartial representative to review your submission. You will be allowed to present various forms of evidence, including legal documents and oral arguments, demonstrating why the audit findings were incorrect. The FTB will then either:
- Uphold the original tax assessment.
- Withdraw the assessment altogether.
- Modify the assessment based on new evidence.
Step 3: Escalating the Appeal to the Office of Tax Appeals (OTA)
Suppose the FTB’s internal review does not result in a favorable outcome. In that case, the next step is to appeal to the California Office of Tax Appeals (OTA), an independent body established by the Taxpayer Transparency and Fairness Act of 2017. The OTA hears appeals related to various taxes and aims to provide a fairer process than the Board of Equalization (BOE). However, it’s worth noting that OTA decisions often favor California taxing authorities. Furthermore, the administrative law judges at the OTA are frequently former employees of tax agencies, which could affect their judgment.
Nevertheless, with the proper legal counsel, appealing to the OTA remains a viable option. To appeal to the OTA, you must file your intent within 30 days of the FTB’s final decision. The OTA will then review the evidence from both parties and issue a binding decision.
Step 4: Rehearing Requests or Filing a Lawsuit
If the OTA’s decision is not in your favor, you may request a rehearing if you have new evidence or if you believe the OTA made a procedural or factual error. If you fail to do so, your final recourse is to file a lawsuit in California Superior Court. This is the last and most formal step in the appeals process and requires seasoned legal expertise to navigate successfully.
If you have any questions about protesting/appealing an FTB decision, contact our dual-licensed Los Angeles FTB Audit Attorneys & CPAs today at 310-492-5583 or schedule a reduced-rate initial consultation here at our Los Angeles tax law office or one of our other convenient locations across Southern California.
Our Los Angeles Office is Conveniently Located At:
10940 Wilshire Blvd 1600 Ste 1600
Los Angeles, CA 90024
(310) 492-5583
