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If you are a resident of California, not only are you required to file a federal income tax return, you must also file a California state income tax return. While federal tax returns are processed by the IRS, your state tax return should be filed with the California Franchise Tax Board (FTB), which is the state agency responsible for administering California income tax regulations – and conducting California income tax return audits. Other types of state tax audits are performed by the Employment Development Department or California Department of Tax and Fee Administration, as this article explains in detail.
A state tax audit is as serious as – and indeed, may lead to – a federal tax audit. California government agencies, such as the Franchise Tax Board (FTB), frequently share taxpayer data with the IRS. If your California tax returns were chosen for auditing, you should discuss your situation with an experienced California tax lawyer as soon as possible. At the Tax Law Office of David W. Klasing, our legal team features former auditors, giving us an inside perspective supported by more than 25 years of experience. We know the procedures auditors must follow – and what tactics they use against taxpayers. We put our knowledge to work for you, seeking out effective strategies to mitigate penalties, interest, and tax liabilities.
See our Audit Representation Q and A Library
In addition to preparing for your audit and negotiating on your behalf throughout the examination process, we also provide California tax appeals representation. If you disagree with the results of your audit, our attorneys can help you challenge the outcome and vigorously dispute improperly assessed penalties, interest or tax where the government is wrong on the facts or the law at issue. Contact us online right away to set up a reduced rate consultation or call the Tax Law Office of David W. Klasing in San Jose at (805) 617-4566. Note – All consultations in our San Jose satellite office are by appointment only.
Are the IRS and FTB the Same?
No. The IRS is the Internal Revenue Service, a federal agency which is part of the U.S. Department of the Treasury. The FTB, or Franchise Tax Board, is a state agency that operates within the California Government Operations Agency.
The IRS administers all types of federal tax laws, from those dealing with federal income and employment taxes to federal estate and gift taxes. The FTB, on the other hand, specifically administers California income sales and employment taxes (personal and corporate).
Other types of California taxes are administered by different state agencies. For example, the Employment Development Department (EDD) administers California employment taxes, while the California Department of Tax and Fee Administration (CDTFA) administers California sales tax. The FTB conducts California income tax audits, the EDD conducts California employment tax audits, and the CDTFA conducts California sales tax audits. Our tax office has extensive experience representing taxpayers in EDD, CDTFA, and FTB tax audits, including online and out-of-state business entities.
FTB, EDD, and CDTFA Tax Audit Attorneys in San Jose, CA
When most people think about tax audits, they automatically picture the IRS. However, the Internal Revenue Service examines federal tax issues. If there is a problem with a California taxpayer’s state returns or other state tax documents, the appropriate California tax agency may initiate an audit. These agencies include the Employment Development Department (EDD), California Department of Tax and Fee Administration (CDTFA), and Franchise Tax Board (FTB).
For instance, EDD audits can be triggered by an employer’s noncompliance with California employment tax and payroll tax regulations. A common example is the misclassification of employees as independent contractors, which is illegal.
While EDD audits involve payroll tax issues, FTB tax audits generally arise from issues with a taxpayer’s California personal income tax return or business tax return. For example, the taxpayer might have claimed an expired tax credit or utilized an abusive tax shelter. Other common “problem areas” that trigger state audits include unfiled California income tax returns, delinquent returns, and the underreporting of income. Our FTB tax audit lawyers have experience representing all types of taxpayers against the Franchise Tax Board, including individuals, C corporations, S corporations, LLCs, partnerships, freelancers, and independent contractors.
CDTFA tax audits frequently involve sales and use tax issues, particularly with regard to internet sales tax compliance – a recent consequence of the Supreme Court’s 2018 ruling in South Dakota v. Wayfair, Inc. You should consult with an online business tax audit attorney right away if your business has been chosen for a California sales tax audit.
See our Sales Tax Q and A library
See our Employment Tax Law Q and A Library
See our Non-Filer Q and A Library
When Does California Audit Tax Returns?
Like IRS auditors, state tax auditors are trained to seek out and identify numerous tax fraud indicators and other informational discrepancies in your tax documents. The FTB or other California tax agencies may audit you or your business for the following reasons:
- Excessive claiming of credits or deductions
- Underpayments of state taxes
- Underreported income
- Unfiled or delinquent tax or information returns
- Unreported sources of income
Note that this is not an exhaustive list of all possible California audit triggers. If you are concerned that you are at high risk for an audit, get on top of the situation now by contacting an attorney for help.
How Long Can You Be Audited in California?
Many taxpayers are already aware that, depending on the circumstances, typically the IRS has three to six years to audit a taxpayer, with some exceptions. However, different statutes of limitations apply in the state of California. The Franchise Tax Board can, potentially, initiate an examination for up to four years, giving the state an additional 12 months. Moreover, either a state audit or federal tax audit may be initiated at any time in cases where the taxpayer has allegedly committed tax fraud, and/or has failed to file income tax returns. Throughout the auditing period, the FTB and IRS may communicate information, which means that an FTB audit could lead to an IRS tax audit, criminal tax investigation or vice versa.
How Far Back in Time Can a California State Tax Audit Go?
Another way of phrasing this question is, what is the California tax audit statute of limitations? The answer is generally four years, which is one year longer than the IRS has under normal circumstances. However, in cases involving fraud or non-filing, an audit may be conducted at any time.
What if I Disagree with the Results of a California Tax Audit?
Auditors strive for accuracy, but errors occur, nonetheless. Unfortunately, an audit error can translate to devastating outcomes for the taxpayer. If a taxpayer disagrees with the outcome of a California tax audit – for example, if the taxpayer believes that he or she was fined improperly – the taxpayer can request appeals. This initiates the process of disputing the audit’s outcome.
The California state equivalent of the IRS Office of Appeals is the California Office of Tax Appeals, or OTA, which was created in 2017 with the passage of the Taxpayer Transparency and Fairness Act. To file an appeal with the OTA, the taxpayer must:
- Receive either (1) an Appeals Bureau Decision or (2) a Notice of Action from the CDTFA or FTB
- Meet the appropriate deadline for filing the appeal (which will be specified on the taxpayer’s Appeals Bureau Decision or Notice of Action)
- Submit the appropriate documents, such as OTA Form L-01 (Request for Appeal)
To give your appeal the greatest likelihood of succeeding, it is vital to submit clear, detailed, and timely information that is well-supported by robust legal and factual evidence. As one section of OTA Form L-01 states, “You must identify what you believe is in error or has been omitted from the taxing agency’s decision and explain why the identified errors or omissions justify a different result” – without relying on frivolous tax arguments.
Appealing an FTB, EDD or CDTFA Tax Audit
When it comes to the results of your audit, there is both good news and bad news. The bad news is that, not only might the FTB, EDD or CDTFA determine that you owe additional tax, interest, or penalties – they could also reach an incorrect conclusion on either the law or facts of your case. While auditors are trained to be thorough and meticulous, errors resulting in highly inaccurate findings against the taxpayer are all too common.
The good news is that state tax regulations and the California legislature have created appeal routes by which taxpayers can dispute inaccurate audit findings. If you think the FTB made a mistake during your audit, and you believe that your auditor’s findings are flawed as a result, you can challenge the results of your FTB audit by requesting appeals. However, you must wait to appeal an FTB tax audit until you have received either an Appeals Bureau Decision or a Notice of Action from the FTB or CDTFA. Only once you have received one of these documents may you file an appeal.
From that time onward, it is vital to act quickly, as you will lose your right to appeal if you miss the “appeal-by” deadline provided to you. Your request for appeals must include, among other forms and information, any financial or legal records or helpful interpretation of pertinent tax law supporting your claim, in addition to copies of your FTB, EDD or CDTFA notices. In California, state tax appeals are heard by a relatively new organization called the Office of Tax Appeals (OTA), which was established in 2017.
San Jose Attorneys for a California FTB, EDD or CDTFA Tax Audit
An FTB, EDD, or CDTFA tax audit can spell financial peril for you and your business. Take steps to protect yourself by consulting with an award-winning tax audit and appeals lawyer serving San Jose, CA. We are always ready to deliver the counsel and guidance your business requires. To set up a reduced-rate appointment, contact the Tax Law Office of David W. Klasing online, or call our San Jose tax office today at (805) 617-4566.
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:
