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If you live, work, or do business in the state of California, you may someday come face to face with one of the state agencies responsible for performing California tax audits. Just as the IRS audits taxpayers who fail to comply with federal tax laws, California government agencies audit state residents and businesses that fail to comply with the state’s tax regulations, which are codified in the California Revenue and Taxation Code (RTC).
See our Audit Representation Q and A Library
r and anxiety often accompany learning that you are the subject of an IRS Audit of your federal business or personal income tax returns. Typically, these audits can look at your records going back 3 years, but in extreme cases they may be able to look even further back. An IRS audit can either be a correspondence audit, an office audit, or a field audit. A correspondence audit is conducted entirely through the mail, over the phone, or by electronic messaging. Most audits during Covid will be correspondence audits. You will receive a letter asking for certain documents or records to back up positions taken on your tax returns. If you are unable to substantiate the return you filed, you may need the assistance of a dual licensed Tax Lawyer and CPA to gather or reconstruct these records before submitting a response to avoid civil and even criminal fraud penalties including the potential for jail time.
The second type of audit is an office audit. For this type of audit, you will be asked to come into the IRS office for an in-person meeting. An experienced Tax Lawyer & CPA can help you gather the documents you will be required to produce and can appear with you at the meeting to facilitate a smooth process. The third type of audit, a field audit, is the most serious type and is usually reserved for cases where civil and criminal penalties are being considered. The auditor will come to your home or place of business to examine records in person. As soon as you receive notice that a field audit will occur, you should contact a Tax Defense Lawyer & CPA right away.
Whether you are a Sacramento business owner, a recent transplant to California, or a lifelong resident, you will require legal assistance when preparing for and dealing with your audit. At the Tax Law Office of David W. Klasing, we are award-winning California tax attorneys and CPAs with nearly three decades of audit defense experience preparing us to deal effectively with FTB, EDD and CDTFA auditors, obtain evidence that aids your case, hold tax penalties to a minimum, and minimizes your risk of criminal tax prosecution. If you or your business is facing any type of state tax audit in the Sacramento area, count on the Sacramento tax lawyers at the Tax Law Offices of David W. Klasing for guidance you can trust.
Who Performs State Tax Audits in California?
Most taxpayers are already aware that the Internal Revenue Service, or IRS, examines income tax returns and other federal tax forms for accuracy. When errors, omissions, discrepancies, or other problems are detected, the IRS may request more information or, where necessary, initiate a tax audit.
The same ideas apply to state taxes, with one key difference between California and IRS audits: California audits are conducted by state agencies rather than the IRS, which deals exclusively with federal tax issues. These agencies are:
- The Franchise Tax Board (FTB), which performs California income tax audits
- The California Department of Tax and Fee Administration (CDTFA), which performs California sales tax audits
See our Sales Tax Q and A library
- The Employment Development Department (EDD), which conducts California employment tax audits
See our Employment Tax Law Q and A Library
Why Might the FTB, CDTFA, or EDD Start a California Tax Audit?
Even though some audits are triggered by seemingly random or innocuous details – for example, some audits are triggered because the taxpayer earns a high salary, or because they happen to operate a certain type of business – it is critical to take the audit notice seriously and seek immediate legal counsel. There are many issues that can prompt an EDD, CDTFA, or FTB tax audit in California – and what begins as an examination of one issue can snowball into a much broader criminal tax investigation. Examples of tax compliance problems or audit “red flags” that can spur an examination include, but are not limited to, the following:
- Claiming California tax credits you are not qualified for
- Claiming dependents who do not exist
- Failing to file California income tax returns
- Failing to pay your estimated state income tax due
- Failing to report taxable income
- Filing multiple delinquent returns
- Inflating your business expenses
- Misclassifying employees as independent contractors
- Possessing assets that greatly outvalue your reported income
- Reporting very high or low income
- Running a cash-based business
- Using stolen information or identities on a state tax return
What Are the Potential Outcomes of a California State Tax Audit?
Some audits end uneventfully: the questions at hand are satisfactorily answered, and there is no need for the taxpayer to take further action. Unfortunately, most audits do not have such a tidy resolution for the taxpayer. In many instances, the auditor will discover an issue (such as an unpaid tax debt) that requires the taxpayer to take additional steps after the audit ends. Depending on what the auditor finds, potential outcomes of an audit include the following:
- The auditor may determine that you owe additional tax, such as an unpaid California income tax liability.
- The auditor may determine that, in addition to any unpaid taxes you might owe, you should also be charged interest, which accrues on unpaid taxes (subject to certain limitations).
- The auditor may determine that you have engaged in civil tax violations and should be penalized or fined accordingly.
- The auditor may find evidence to suggest that tax crimes have occurred, in which case the audit will likely be terminated as the case is referred for a criminal investigation.
You may dispute, or “appeal,” the outcome of an FTB, CDTFA, or EDD tax audit with which you disagree. However, be forewarned that your California tax appeal must be thoroughly supported by objective factual evidence, such as case law and pertinent tax regulations. Our office can assist you with this process. The issue to be argued to succeed in an appeal or tax litigation is why does the FTB, EDD or CDTFA have either the facts or the law wrong and therefore have not reached a proper conclusion in your audit. A dually licensed California Tax Attorney and CPA is in the best position to prevail in any subsequent appeal or litigation.
California Franchise Tax Board (FTB) Audit Representation
The California Franchise Tax Board (FTB) conducts audits related to California state income taxes. Such an audit will usually occur if the FTB believes you have underreported income on your tax return or falsely claimed deductions, exemptions, or credits. Additionally, state law requires you to amend your California return within 6 months of a federal audit to reflect any related additions to California taxable income. If you fail to do so, the FTB may not actually conduct an audit but may merely “piggy-backs” off the findings of a federal audit done by the IRS and add penalties and interest. Even if the IRS finds that you did not owe the federal government money, you may owe money to the California due to differences between state and federal tax law.
The FTB also conducts numerous independent income tax audits for general compliance and delves into issues specifically related to California state tax law. An audit by the FTB should be treated just as seriously as one by the IRS and can also lead to criminal tax exposure. A tax lawyer can help you prepare your records and documents and can explain the difference between what the state will be looking at and what the IRS could look at. If you are found to owe additional tax penalties and interest to the state, your tax lawyer can file a protest to challenge their audit findings or negotiate directly with the FTB auditor (and if need be their manager) to negotiate a reasonable audit resolution.
California Employment Development Department (EDD) Audit Representation
The California Employment Development Department (EDD) conducts audits related to California payroll tax and worker classification issues (Independent Contractor Versus Employee). Each employer must take a certain amount out of their employees’ paychecks to forward to the proper state and federal agencies that require payroll taxes to be remitted. If you fail to take the money out of employees’ paychecks or take it out but do not remit it to the proper agency, you could face serious consequences.
Many times, the issue being investigated by the EDD is related to whether your company has been properly classifying its workers as either employees or independent contractors. While employers are required to withhold and remit payroll taxes for all employees, they are not required to withhold or remit for independent contractors who provide services for them. The rules regarding who is an employee and who is an independent contractor are complex. An experienced tax attorney can fight to prove that you have been properly classifying workers and work to mitigate any consequences if you made improper classifications.
California Department of Tax and Fee Administration (CDTFA) Audit Representation
The California Department of Tax and Fee Administration (CDTFA) conducts audits related to the collecting and remitting of sales taxes by businesses. There are complex rules that vary by locality and product about the amount of sales tax each company must charge and remit to the state. Issues investigated by a CDTFA auditor might include the failure to charge proper sales taxes on purchases or failing to remit the sales taxes charged to the proper state agencies as required.
These types of audits can be very invasive, with the CDTFA looking into every aspect of your business in addition to requesting a multitude of records and documents related to every sale that you have made. An experienced Tax Lawyer can help you gather and reconstruct the necessary documents and can try to work out a deal with the CDTFA if you have underpaid. If a final decision about an amount owed is issued by the CDTFA and you do not believe it is accurate, you will only have 30 days to file a petition challenging this, so having a lawyer on top of dates and deadlines can be crucial in fighting your case.
Our Sacramento, CA State Tax Lawyers + CPAs an Help with EDD, CDTFA, and FTB Audits
Even if you believe you are in full compliance and have kept meticulous tax and financial records, you could still be in jeopardy of interest charges, fines and penalties, or a higher-than-expected tax assessment. A Sacramento tax audit attorney can lower the risk of these outcomes by negotiating tactically with auditors, ensuring that evidence is presented clearly and effectively, and making sure that no avenues toward resolution are overlooked.
For a reduced-rate consultation with the Sacramento tax attorneys at the Tax Law Office of David W. Klasing, contact us online right away, or call our Sacramento tax office at (916) 290-6625. Please be advised that all meetings at our Sacramento office must be scheduled in advance.
Note: If you have concerns about the privacy of our initial or subsequent communication and are unable to easily travel to our Irvine / Orange County Main Office, consider scheduling a GoToMeeting to safely and securely establish an initial or maintain an existing attorney client relationship. With end-to-end encryption, strong passwords and top-rated reliability, no one is messing with your meeting. To schedule a reduced rate initial consultation via GoToMeeting follow this link. Call our office and request a GoToMeeting if you are an existing client. We are generally happy to travel to any of our appointment only satellite offices for a subsequent meeting in appropriate circumstances once a relationship is established via a signed engagement letter and the payment of an initial retainer or where enough retainer is available where a current client to cover the reasonable travel time and time required for the meeting.
Will it cost me more to hire the Tax Law Offices of David W. Klasing, who’s main office and the vast majority of the firm’s staff is located in Irvine California, but an appointment only Satellite office is close to my location, as opposed to a local company? Absolutely not! See our policies that address this issue here:
Our Sacramento Office is Conveniently Located at:
180 Promenade Cir Suite 300
Sacramento, CA 95834
(916) 290-6625
