In California, the “statute” that matters most at audit is the assessment clock. It governs how long a tax agency can propose additional tax for a filed period. Each California tax agency has its own rules. For income tax, the Franchise Tax Board (FTB) generally has four years to assess after a return is filed, subject to important extensions and exceptions. For payroll tax, the Employment Development Department (EDD) runs on its own timetable. For sales and use tax, the California Department of Tax and Fee Administration (CDTFA) applies different periods keyed to sales and reporting cycles. Understanding which clock applies, when it starts, what pauses or extends it, and when there is no limit is the first step to protecting your rights.
FTB Income Tax: The Baseline Clocks That Drive Most Audits
For personal and corporate income tax, California’s general rule is four years for FTB to mail a Notice of Proposed Assessment after a return is filed. If you file on or before the original due date, the return is treated as filed on that due date, so the four-year window usually runs from the original due date. If you file late, the four years runs from the actual filing date. Two major exceptions enlarge that window. First, if a taxpayer omits from gross income an amount properly includible that exceeds 25 percent of the gross income reported on the return, the assessment period is six years for that year. Second, if no required return is filed, or if a filed return is false or fraudulent with intent to evade tax, there is no statute of limitations. In those cases the FTB can assess at any time.
California also recognizes a distinct, longer clock for abusive tax-avoidance transactions. For defined abusive transactions that fall within California’s anti-abuse regime, the assessment period is extended beyond the standard four years. The takeaway is simple. The ordinary four-year window governs most compliant filers, but large omissions, abusive transactions, and fraud or nonfiling change the analysis dramatically.
A practical point that catches taxpayers by surprise: the statute that limits assessment is different from the statute that limits collection. Once an amount becomes due and payable, FTB generally has up to 20 years to collect, which is separate from the audit period discussed here.
When Federal Changes Reopen California and How Amended Returns Affect the Clock
Federal changes are one of the most common ways the California clock is reopened. If your federal taxable income is changed by the IRS, or if you file a federal amended return that changes your federal taxable income, you must report the change to the FTB within six months if it affects your California tax. Reporting on time starts a defined California assessment window on those changed items. If you report within six months, FTB generally has two years from the date of your report to assess those federal-change items. If you report after six months, FTB generally has four years from the date FTB is notified of the federal change. If you never report, FTB can assess those federal-change items at any time, even if the original four-year period otherwise would have expired.
Amended California returns that are not tied to a federal change do not, by themselves, reset the entire audit statute for the year. FTB can examine the amended items and any affected computations within whatever assessment period remains for that year, or within the special windows that apply when a timely federal change is reported as described above. If you choose to sign a statute extension agreement at FTB’s request, that agreement will keep the year open through the agreed date for the items covered by the agreement. Extension agreements are common where an audit is active close to the statute expiration.
Other FTB Extensions and “No-Limit” Situations to Know Before You Plan Strategy
Beyond the six-year substantial omission rule and federal-change reporting, several circumstances routinely affect the FTB assessment clock:
- Early-filed returns are treated as filed on the original due date for purposes of starting the four-year period. Late-filed returns start the clock on the actual filing date.
- Carryovers and attribute adjustments can be examined in an open year even if the year that generated the attribute is otherwise closed, but the FTB cannot assess additional tax for a closed year unless a special rule applies.
- Fraud or intent to evade removes any assessment limit for that year. “No statute” also applies if no required return was filed.
- Abusive tax-avoidance transactions have an extended assessment period under California law that exceeds the normal four-year window. If an audit references California’s abusive-transaction rules, assume the ordinary statute does not control and plan accordingly.
You should also distinguish assessment periods from refund claim periods. For most individuals, a claim for refund is timely if it is filed within four years of the original due date of the return or within one year of the date of overpayment, whichever is later. Refund statutes interact with assessment statutes, but they are not the same.
EDD Payroll Tax and CDTFA Sales and Use Tax: Different Agencies, Different Clocks
If your audit is not with the FTB, the timelines change. The EDD runs payroll tax audits under the Unemployment Insurance Code. As a general framework, the EDD has a limited period to assess additional contributions for filed periods, with no assessment limit where there was no required return or where fraud or intent to evade applies. The CDTFA administers sales and use tax and operates under the Sales and Use Tax Law. As a general framework, CDTFA has a limited period to issue a determination for filed reporting periods, with longer or unlimited periods in defined situations such as failure to file or fraud. Because these agencies apply their own statutes and special extensions in defined circumstances, you should not assume the FTB’s four-year rule applies outside the income-tax context. The safest approach is to identify the agency, the type of tax, the filing period, and then confirm the exact statute language that governs your audit.
Practical Timeline Management During Audit, Protest, and Appeal
Even with a favorable statute posture, process still matters. If the FTB proposes changes, it will mail a Notice of Proposed Assessment before the assessment clock runs. You generally have 60 days from the notice date to file a written protest. Interest accrues from the original due date and compounds daily at California’s published rate. If you pay all or part of the proposed amount within 15 days of the Notice of Proposed Assessment date, the FTB stops interest on the paid amount as of the notice date. Paying later stops interest as of the payment date while you continue the protest.
If the protest does not resolve the case, the FTB will issue a Notice of Action. You generally have 30 days from the Notice of Action date to appeal to the Office of Tax Appeals. For CDTFA and EDD matters, similar protest and appeal frameworks exist with their own deadlines. Throughout, keep filings and math aligned with federal positions where applicable, and use statute mapping to guide what you provide and when. If FTB requests a statute extension agreement near the expiration date, you can negotiate scope and duration so only the necessary issues remain open for only as long as required.
Contact the Tax Law Offices of David W. Klasing if You Need to Map or Defend a California Tax Statute of Limitations
Statute of limitations strategy is not academic. It controls whether a year is open, which issues the state can still reach, and how much leverage you have at audit or appeal. At the Tax Law Offices of David W. Klasing, our matters are Tax Attorney led, and our CPAs are employees of the firm who work under attorney direction as part of the legal team. From the first call we map the statute posture for each year, identify any six-month federal-change reporting obligations, calendar protest and appeal deadlines, and align your file to the exact California rules that apply to your audit type.
We then manage the process so it stays on the merits. We file your California power of attorney, take over communications with FTB, EDD, or CDTFA, and rebuild the schedules a reviewer will prepare anyway. If federal changes are in play, we handle the six-month reporting rule correctly, align California entries with the final federal report, and decide whether to pay amounts on account to stop interest while you contest. Where an extension agreement is requested, we negotiate scope and duration so you do not keep unnecessary issues open. If a Notice of Proposed Assessment issues, we draft a focused protest that ties controlling California authority to organized evidence. If the case proceeds, our dual-licensed Litigation Tax Attorneys & CPAs take it to the Office of Tax Appeals with a clean, well supported record.
You also get strategy that protects your wallet while you assert your rights. We model interest daily, advise on targeted remittances that stop interest on amounts you place on account, and evaluate One Time Penalty Abatement or reasonable cause where the facts support relief. If collections begin, we stabilize the file, address liens and levies, and secure workable installment agreements, and in limited no realistic ability to pay situations we evaluate a California Offer in Compromise. If you received an initial contact letter, an Information Document Request, a Notice of Proposed Assessment, or a Notice of Action, call 800-681-1295 or book a confidential, reduced-rate consultation online HERE with the Tax Law Offices of David W. Klasing. We will stabilize the file, protect your rights, and drive the matter toward the best outcome your facts allow.
