FTB Tax Audit Lawyer

Awards & Recognition

The California Franchise Tax Board (FTB) is California’s primary tax authority, responsible for functions such as collecting and reviewing state tax returns, issuing tax refunds, assessing tax liabilities, and, where financial errors or suspicious activities are detected, conducting audits of businesses and individual taxpayers. The FTB collaborates with the Office of Tax Appeals (OTA), which was created by the Taxpayer Transparency and Fairness Act of 2017 to hear taxpayer appeals pertaining to sales and use taxes, corporate income taxes, and California personal income taxes. If you disagree with the results of an FTB audit, you may challenge or “protest” the outcome. However, due to the great complexity of this process – and the potential for debilitating penalties – it is crucial that you are represented by an experienced FTB audit appeals lawyer.

At the Tax Law Offices of David W. Klasing, we are nationally recognized, award-winning tax attorneys who bring over 20 years of combined experience to each appeal and protest we handle. We are well-versed in FTB and OTA appeal and protest procedures under the updated California tax laws, and can protect your best interests while working efficiently to resolve the controversy. We have four objectives in each case we handle: holding your tax liabilities to a minimum, providing you with the information you need to make informed and strategic decisions, protecting your liberty by minimizing the risk of prosecution for California tax crimes. and helping you comply with the law. If you have any questions about protesting an FTB decision, contact our California FTB audit attorneys online, or call the Tax Law Offices of David W. Klasing at (800) 681-1295 for a reduced-rate consultation or schedule online today.

Can I Dispute the Results of a Franchise Tax Board (FTB) Audit?

Just as the Internal Revenue Service (IRS) audits taxpayers and businesses at the federal level, the FTB audits California taxpayers to ensure compliance with state tax laws governing personal income tax, corporate income tax, excise tax, and other types of tax requirements. If a taxpayer submits information that appears to be outdated, incomplete, inaccurate, or indicative of criminal activity such as tax evasion, often involving non-filing, the FTB may initiate a desk audit or field audit to determine whether the taxpayer is complying properly with the law.

The audit may result in one of several outcomes, depending on the taxpayer’s unique situation. While some audits verify that no errors were made by the taxpayer, or even result in the issuance of a tax refund, most audits reach a more damaging conclusion. For example, the FTB auditor might determine that the taxpayer is ineligible for the tax refund he or she previously claimed.

In a worst-case scenario, the FTB will issue a form called a “Notice of Proposed Assessment,” or NPA, after conducting the audit. NPAs are issued in cases where the auditor determines that the taxpayer owes additional tax payments. NPAs may be issued to businesses using FTB Form 5830C, or individuals using FTB Form 7275. S corporations, C corporations, limited liability companies (LLCs), limited partnerships (LPs), limited liability partnerships (LLPs), and other types of business entities may all be audited.

It is never prudent to ignore an FTB notice, even if you disagree with its findings, or are unsure precisely what the notice is in reference to. Contrary to being forgotten, interest on any unpaid tax debts will simply continue accruing until your debt is satisfied.

The good news is that the taxpayer may dispute the outcome of an FTB audit, provided he or she follows certain rules and requirements. If the taxpayer is successful, this process could culminate in the FTB reaching different, more favorable findings: in short, a lower tax bill. A knowledgeable FTB tax appeals, and where necessary litigation, attorney can facilitate this process by providing financial and legal guidance while walking you through the criteria for filing an appeal.

Requirements for Appealing an FTB Decision

As with any tax matter, strict adherence to deadlines is of critical importance if the taxpayer hopes to prevail. Taxpayers generally have 60 days in which to protest a Notice of Proposed Assessment. The FTB will provide the taxpayer with the specific date by which the NPA must be protested. This date is called the “protest by date” and is displayed on the front page of the NPA.

Taxpayers must follow certain guidelines for making a written protest. First, the protest must be either (1) faxed or (2) postmarked by the indicated protest by date. Additionally, you must be sure to include each of the following with your FTB protest letter:

• Your name and address.
• Your Social Security Number (SSN) or Taxpayer Identification Number (TIN).
• Which amounts, in which tax years, you would like to protest.
• A statement providing a factual overview of the situation.
• A detailed explanation outlining why the FTB’s proposed assessment is incorrect.
• Facts, information, and evidence that supports your argument, such as statutes, IRS regulations, or precedents set by prior cases.
• A copy of the NPA you received.
• If you plan to appoint a tax attorney as your representative, a completed Form FTB 3520 (Individual or Fiduciary Power of Attorney Declaration).
• Your signature (or that of your attorney).
• Your phone number (or that of your attorney).

A hearing may then be held, if requested by the taxpayer. Otherwise, the FTB will notify you of its decision using a Notice of Action (NOA). If you agree with the NOA, you may comply with its terms with assistance from a California tax lawyer. If you disagree with the NOA, you may file an appeal with the OTA within 30 days of the date indicated on the NOA.

To avoid confusion, taxpayers should be made aware that appeals are no longer handled by the California Board of Equalization (BOE) as they were prior to the Taxpayer Transparency and Fairness Act of 2017. In accordance with the Act, appeals are now conducted by the OTA.

California FTB Tax Audit Attorney Handling Appeals and Protest Letters

Do not panic if the FTB has notified you of a greater tax liability than you were originally anticipating. It is possible that the FTB auditor made an error and reached an inappropriate conclusion regarding your liability. You may owe considerably less than the FTB plans to bill you for. It is worth exploring the possibility of filing a written protest, or, if the FTB has already issued a Notice of Action, appealing to the Office of Tax Appeals.

It is easy to become lost in California’s complicated tax appeal system. If you have any questions or concerns about a notice from the FTB, EDD, CDTFA, (formerly BOE), IRS, or other tax authorities, the best course of action is to promptly consult with a knowledgeable Attorney-CPA who is licensed to practice in the state of California. For a reduced-rate tax consultation concerning an FTB audit, an FTB protest letter, CDTFA or OTA procedures, or tax relief options, contact the Tax Law Offices of David W. Klasing online, or call us today at (800) 681-1295.

Helpful Q and A libraries:

https://klasing-associates.com/topics/tax-litigation-faq/

https://klasing-associates.com/topics/irs-appeals-representation-faq/

How do I survive an FTB audit where I cheated on the tax return under Audit?

Surviving a Tax Audit

Utilizing the services of our dual licensed California Tax Attorneys and CPAs for your tax compliance needs if the first place would ease your concerns regarding the risk of being audited since we file returns that make sense from the start, and consequently, very few of our ongoing compliance clients have ever been audited.

If you know for a fact you have a history of cheating on your returns and have anxiety over potentially being discovered, call our office to talk about the prospect of filing a federal domestic or offshore voluntary disclosure to get you sleeping soundly at night by removing any concern that you might be subject to a criminal tax prosecution due to a history of fraudulent returns you have filed in the past. While California does not have a sister program, we have never had a problem with California acting negatively towards a federal voluntary disclosure.  By accepting and abiding by the federal program terms, you can receive a federal assurance that you won’t be prosecuted on criminal tax charges and California will likely follow suit.

Do not get in touch with the original preparer if you get an audit notice and are positive that you filed a false return. If the federal or California government discovers the truth and decides to file charges against you, the original preparer will probably be government witness number one against you. Additionally, everything you tell them may be required of them when they are made to testify against you because of the government’s contempt of court authority. Engage our dual licensed tax audit attorney & CPAs to help you get through the audit and ensure that it is only about money and not being investigated for a possible tax crime.

How to Survive a FTB Tax Audit

You may have believed for years that intentionally manipulating the figures to illegally 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. You are now subject to an FTB audit. You might be especially 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 rises dramatically if you cheated on several occasions in previous or subsequent tax years because the audit may reveal a pattern of non-compliance especially where badges of fraud for tax evasion are discovered.

What if I Know I Cheated on My Taxes and the FTB Wants to Speak with Me?

If any agency, such as the IRS, California Board of Equalization (BOE), California Franchise Tax Board (FTB), or the California Employment Development Department has contacted you and you are aware that you made false statements or used inaccurate reporting techniques when filing your taxes, do not face the audit alone. All too frequently, taxpayers believe that they can resolve their tax issues by providing the examining agency with additional incorrect or implausible information.  Unfortunately, the taxpayer overlooks the fact that the auditor works in this field for a living, thus unrealistic claims made based on charisma or confidence will not be believed and can even double down on facing criminal tax charges. Instead, the taxpayer is more likely to increase their debt and trigger a criminal investigation. The best course of action for a taxpayer who discovers tax filing mistakes and probable irregularities on their tax return is to establish a barrier between themselves and the auditing agent. With the help of a tax fraud defense attorney, we can act as a barrier and stop the examining agent from inferring criminal admissions / confessions from your actions and words. Taking the taxpayer out of the picture minimizes the prospect that you may inadvertently supply the proof of fraud their audit is designed to locate. Generally, the only concrete proof they can get that you knowingly cheated will come directly from your representations, excluding circumstantial evidence of intent.

Absent your representations, the FTB and other agencies can generally only establish criminal intent in relation to taxes through circumstantial evidence or through whistle-blowers or preparer investigations. The information in your tax records and books, what your staff may say, and proof that might come from a third party are all examples of circumstantial evidence. Fortunately, indirect evidence is frequently regarded as less convincing than direct evidence. You can avoid giving agents and auditors direct evidence, even though you have no control over the circumstantial evidence the FTB may discover. Regardless of your knowledge, keep in mind that you are battling against an entire California agency’s resource and are thus likely outgunned.

What Can I Do if I am Facing an FTB Tax Audit?

The kind of tax specialist you seek help from is crucial if you are subject to an FTB tax audit. It can be tempting for taxpayers and business owners to return to their initial accountant. Others might think about consulting a CPA. However, suppose the FTB decides to subpoena your accountant or CPA and force them to testify under the danger of being held in contempt of court. In that case, this decision could dramatically worsen your situation. In other words, everything you tell a CPA or accountant is not protected by any communication or work product privilege and can easily be used as evidence against you in court. That implies that anything you tell them about potential criminal intent may be used against you in court. You absolutely must avoid creating a primary government witness against you. They also have a vested interest in protecting their own reputation which may come at the expense of yours.

In contrast to the weak and inconsistently recognized accountant-client privilege, attorney-client privilege is strong and upheld in all state and federal courts. If the attorney-client privilege is upheld and safeguarded, almost anything you tell a tax attorney is protected, secret, and cannot be used against you. The attorney-client privilege enables a taxpayer to be open and honest about faults, errors, and other conduct which is necessary to craft a defense. Additionally, our staff accountants are generally granted derivative attorney-client privilege and work product protection as they work for a law firm and are assist in providing a legal service especially where we did not prepare the tax returns under audit.

You certainly already understand how severe your situation is if you are facing criminal tax charges or have worries that an eggshell audit or criminal tax probe is imminent or currently underway against you or your small business. The time has come to speak with a dual-licensed Criminal Tax Defense Lawyer & CPA who can assist you in organizing your defense and evaluating your choices to safeguard both your financial situation and your liberty. Understanding the audit, criminal tax investigation, tax crime indictment, and prosecution processes is essential. You should also be aware of the warning signs that could attract the attention of the IRS, the California Department of Tax and Fee Administration (CDTFA), or the Employment Development Department (EDD), setting off the entire chain of events. Additionally, you should be aware of the issues involved with the various criminal tax offences and how to assess plea bargain offers as they are made. Most California felonious tax offences either entail failing to file a return or filing a false return. Taxpayers risk severe fines, including jail time, if they submit false or fraudulent information on their returns or fail to file them on time.

Most criminal tax charges are brought by federal authorities. However, California has its own effective criminal tax investigation tools and regulations that outlaw individual and corporate tax avoidance and fraud. A specific field of practice is tax law. The practitioner must be knowledgeable about both the appropriate California tax laws and the California criminal tax legislation and procedure in cases where a taxpayer is singled out for breaking those laws. Instead of attempting to handle everything on your own, you should seek help from the Tax Law Offices of David W. Klasing.

Representing a client or company that is the focus of a criminal tax investigation necessitates specific education, training, and experience as well as a thorough grasp of the IRS and California taxing authorities’ internal investigative processes. We take great pleasure in our lengthy history of accomplishment in this field at the Tax Law Offices of David W. Klasing.

Avoiding Criminal Tax Charges and Prison

Facing criminal tax prosecution would undoubtedly be a terrifying nightmare for anyone unlucky enough to be charged with tax crimes. Even if the person falsely accused is ultimately found innocent, the mere allegation and following inquiry can have extremely negative emotional, financial, and reputational ramifications. It would be smart to speak with an experienced criminal tax defense attorney as soon as you suspect that you might be the target of a criminal or civil tax fraud investigation. Your exposure could come from the actions taken by your CPA, EA, tax preparer, or bookkeeper. In order to minimize the potentially disastrous effects of a criminal tax investigation or suspected charges of tax fraud, tax evasion, embezzlement, or neglecting to file tax returns, you stand the greatest odds of an acceptable outcome with a competent dually licensed Criminal Tax Defense Attorney& CPA on your side.

What is at Stake where California Tax Fraud is Proven to Have Occurred?

R&TC Section 19164 provides for the imposition of a fraud penalty. This penalty is determined in accordance with IRC Section 6663. At best, a civil tax fraud penalty equal to 75% of the additional tax owed as adjusted in the civil tax audit, plus interest on the penalty back to the original filing date of the return being audited, is at risk when there are Badges of Fraud in a taxpayer’s fact pattern entering a civil tax audit or FTB’s Criminal Investigation Bureau (CIB) criminal tax investigation. At worst, you may receive up to one year in prison, a fine of $20k. The FTB has previously obtained criminal tax convictions is a large percentage of its criminal tax prosecutions. Because the stakes are so high, you must speak with a skilled criminal tax defense lawyer to greatly improve your chances of avoiding such a potentially devastating range of penalties. Keeping the possibility of a criminal referral from a civil investigation to the FTB CIB as low as possible is the greatest defense for avoiding California criminal tax charges.

My extensive education in criminal tax defense, tax planning and tax compliance  and experience as an Attorney, CPA, and tax consultant, as well as my membership on the California State Bar Tax Procedure and Litigation Committee make me uniquely qualified to limit your criminal tax exposure and to reduce the potential harm if this exposure results in a criminal tax investigation. It’s important to prepare for an audit, especially if it has the potential to turn into an eggshell or reverse eggshell audit despite appearing to be a civil audit. We try not to be shocked by anything brought up by the FTB agent conducting the audit or disclosed by you to the FTB during the audit.

When faced with important choices like whether to speak openly and honestly with a civil tax examiner or FTB CIB Agent or whether to remain silent, it is crucial to hire a skilled criminal tax defense attorney. Only a criminal tax defense attorney is qualified to counsel you on when to take advantage of the potent constitutional safeguards provided by the fourth amendment’s restrictions on unreasonable searches and seizures and the fifth amendment’s prohibition on self-incrimination in the context of criminal tax exposure. Your intentionality is the toughest thing for the government to show, making it the weakest portion of their case. In order to demonstrate that you weren’t intentionally trying to defraud, I’ll employ your constitutional protections. Finding out what the FTB agent likely knows is an important component of a strong defense.   Due to the likelihood that FTB agents will often withhold much material from your representative, it is necessary to obtain what is needed for your defense from the taxpayer, third parties, the preparer, the taxpayer’s records, third parties’ records, etc. The tax defense attorney must follow the investigation closely, keeping track of any contacts the FTB agents make with third parties and conducting interviews with them as soon as is practicable.

It is strongly advised that copies of the third party’s documents being produced and handed over to the FTB agents be obtained from the third party if the FTB agents have served process on third parties. The subject taxpayer can help in this area since it frequently happens that the subject learns that third parties have been contacted. Instead of engaging in substantive conversations with outsiders, the investigation’s target should report them right away to the defense attorney, who can look into this potential source of information. As criminal tax defense attorneys, we are also responsible for constructing a case using the evidence at hand. A defense based on the third party’s written and verbal testimony is considerably more likely to be accepted by FTB agents. In order to properly investigate this, we will need to speak with outside parties. There is no requirement to wait until the special agents have spoken with a specific witness. Interviews with important witnesses, such as the accountant or preparer, should be conducted as soon as feasible, and copies of any records these individuals may hold should be acquired. Frequently, witnesses’ hand over their original paperwork to the FTB agents, precluding the taxpayer’s tax defense lawyer from later seeing it. In turn, this would prevent a tax defense counsel from deciding what knowledge or belief logically flows from the evidence the FTB most likely obtained.

How you can appeal an FTB audit

The Internal Revenue Service (IRS) manages federal tax rules and penalties. The Franchise Tax Board (FTB), which collects and examines California tax returns for businesses and individual taxpayers, is the state’s equivalent to the IRS in California. According to the California Revenue and Taxation Code, the FTB routinely audits to ensure that firms and individuals are disclosing their revenue, paying their tax debts, and adhering to other state tax regulations (RTC). The outcomes of an FTB audit may also be contested, or “appealed,” by taxpayers who disagree with the FTB conclusions, just as the outcomes of an IRS audit.

How does the FTB choose whom to audit? To determine whether it is necessary to perform a tax audit, the FTB will analyze the following:

• The audit and law enforcement history of the taxpayer.
• Referrals from other California Tax Authorities: i.e., EDD, CDTFA.
• Computerized statistical analysis of the taxpayer’s California and federal tax returns, especially differences between the two mandated by California law.
• Any statistically unusual deductions or exclusions claimed.
• IRS & third-party data regarding the taxpayer including W2’s and 1099’s.
• Professional licenses & real estate within the state coupled with non-filing or perceived underreporting of income compared to like professionals or property owners.
• Egg Shell Audits.
• Reverse Egg Shell Audits.
• Information gleaned from an IRS audit (most common cause of FTB audit).
• Suspected non-reporting of California sourced income by a non-resident of California.
• History of Net Operating Losses.
• Taxpayers with a standard of living that is not supported by their history of reported income.
• Suspected underreporting or nonreporting / evasion of income from pass through entities & related suspected basis issues.
• Excessive or suspect unreimbursed employee expenses.
• Suspect charitable contributions.
• Suspect other state tax credits.
• Suspect filing status like head of household.
• Unreported or suspect sales of California real and personal property and 1031 exchanges.
• Abusive tax shelters.
• Suspected involvement with California’s Underground Economy
• Suspect apportionment of entity net income to California by multi state businesses.
• Referrals from the California Bureau of Investigation or FTB’s Criminal Investigation Bureau.

The aforementioned could be used by the FTB to support a civil, eggshell, or reverse eggshell tax audit or criminal tax inquiry in a number of different ways. For instance, the FTB could consider it a purposeful attempt to conceal some of your income if you misplaced tax paperwork and as a result failed to disclose substantial sums of revenue from a brokerage account. It is essential for a taxpayer to be aware of the warning signs that could lead to an audit, eggshell audit, reverse eggshell audit, or criminal tax inquiry in order to reduce their chances of being audited in the first place and to get a good outcome if they are audited or investigated by the FTB .

How Do You Appeal an FTB Audit in California?

A taxpayer has the choice to challenge the FTB’s audit conclusions within 60 days following the latter’s ruling. When objecting to the FTB audit, you must state your complaint’s legal and factual justification and ask for a date to present your oral arguments. The most compelling case for hiring our dual-licensed Tax Attorneys and CPAs to handle your appeal is that we are excellent at presenting legal and factual arguments. You may choose to pay the FTB tax assessment at this time to avoid interest from accruing while the case is in progress, but that may not be a good idea given that, in our experience, doing so just strengthens the FTB’s resolve once they have the money in question. An independent FTB official will preside over the initial appeal of an audit. You will be permitted to use legal documents, oral arguments, and other evidence to establish that the audit’s findings were factually or legally incorrect. The tax assessment will be upheld, withdrawn, or altered following hearings with the taxpayer and the FTB.

You also have the choice to pursue an appeal through the Office of Tax Appeals if you are unsuccessful with the FTB’s internal appeals process (OTA). The Board of Equalization, which was made up of elected officials who, for the most part, rubber-stamped the decisions of the various California Taxing Authorities from which they appealed, was why the OTA was founded. For decades, California residents and in-state and out-of-state businesses complained to the California Legislature about only being given 20 minutes to present their case. California tried to emulate the apparent justice provided to taxpayers by the Federal Tax Courts through the OTA. Most of the administrative law judges currently employed by the OTA were previously employed by the same California Taxing Authorities from whom they are tasked with hearing cases. Regrettably, the OTA has converted the BOE’s prior rubber stamping to precedent-setting case law, and it now follows the written conclusions of the BOE as precedent-setting rulings. In any case, you must notify the OTA of your intention to appeal within 30 days of the FTB hearing’s completion. Before taking your appeal to this level, you would be wise to consult a FTB appeals lawyer.

The OTA will review the proof provided by you and the FTB and render a binding judgement on the issue, which has thus far been mostly in the California taxing authorities’ favor. If the judgement is not in your favour, you can ask for a second hearing if you have fresh information to offer or if you wish to attempt to show that the OTA erred during the first hearing. In order to contest the FTB tax audit and the OTA, your only remaining choice is to file a lawsuit in California Superior Court. As you can see, managing an appeal for an FTB audit is a difficult undertaking. If an FTB appeal is in your future, you can have several months of work ahead of you. This is why you should contact our offices to help ease the process.

How to Protest a Proposed FTB Assessment Online or in Writing

You may make your protest online, by mail, or by fax. Needless to say, filing online ensures faster delivery with no risk of lost mail. You may make a protest online by following these instructions:

1. Navigate to the FTB website.
2. If you have an account already, log in. If not, you will need to register as a new user.
3. Once you have created or logged into your account, click the “Account” link.
4. Click the “Proposed Assessments” link.
5. Choose the correct NPA number, and follow the prompts to complete the online submission process.

If you submit a written protest, which may be either mailed or faxed, be sure the protest includes all the following information. Failure to include the following may cause processing delays that complicate your case:

• Your contact information
• Contact information for the person handling the protest
• Your TIN or SSN
• The amount in question
• The tax year in question
• A statement of facts (an overview of your argument), which must be supported by evidence, laws, and factual information
• Whether you agree with any detail or aspect of the proposed assessment
• Your signature (or that of your attorney)

Finally, keep the following points in mind:

1. Whichever method you choose, you must file the protest within 60 days of the date specified on your NPA.
2. Filing a protest will not prevent interest from accruing, which can be accomplished only by making a payment to the FTB. However, before issuing a payment to the FTB, you should discuss your tax liabilities with a knowledgeable Los Angeles tax attorney.
3. You have the option to have a representative handle your documentation for you. It is highly advisable to hire a tax professional for FTB audit representation. In addition to managing deadlines and paperwork, your tax lawyer will also ensure that your rights are not being violated and will work to keep any financial penalties to a minimum.

Appeals will be directed to the California Office of Tax Appeals (OTA), created last year. An expert tax attorney should be consulted if you plan to contest the results of an FTB audit to make sure you are acting in your own best interests. Our tax professionals at the Tax Law Offices of David W. Klasing have more than 20 years of experience representing Californians in tax appeals before the FTB and IRS. If necessary, we will litigate your case to give you the best chance of success. We will put forth endless effort to advance your interests starting on the first day of your case because we have a thorough understanding of FTB audits and OTA procedures. For a discounted initial tax consultation on an FTB audit or appeal, contact the tax law offices of David W. Klasing.

Why Are Many Tax Audits in California Seemingly Open-Ended?

In California, the law allows the Franchise Tax Board four years, under regular circumstances, to conduct a tax audit. However, experience and case law dictate that the statute of limitations for the FTB to audit and assess unpaid taxes is actually much more open-ended. While the FTB, like the IRS, can also audit in perpetuity for unfiled taxes or tax fraud, additional California-specific provisions further expand this ability.

Consider the fact that California law requires taxpayers to notify the FTB of certain changes to previously filed taxes. If the taxpayer files an amended tax return that creates new tax liabilities, he or she is supposed to notify the FTB. Likewise, if the IRS modifies a taxpayer’s tax return creating a new tax liability, the taxpayer is also supposed to provide notification to the FTB within six months. If a taxpayer fails to notify the FTB in either of these circumstances, the statute of limitations on a subsequent assessment never begins to run and the FTB can theoretically audit or adjust your return at any point in the future.

Results of FTB audit could lead to inclusion on the FTB’s lists of top 500 tax debtors

Revenue and Taxation Code § 19195 (public disclosure of tax delinquencies) provides the following “Notwithstanding any other provision of law… the Franchise Tax Board shall make available as a matter of public record at least twice each calendar year a list of the 500 largest tax delinquencies in excess of one hundred thousand dollars ($100,000)….”Cal. Rev. & Tax Code § 19195(c) provides various details that must be featured on the list, which include, but are not limited to, the taxpayer’s name (Cal. Rev. & Tax Code § 19195(c)(1)), the outstanding amount (Cal. Rev. & Tax Code § 19195(c)(2)), and what type of tax is owed (Cal. Rev. & Tax Code § 19195(c)(4)).

The list is required by law, but the FTB must follow certain procedures before naming individual taxpayers. Pursuant to Cal. Rev. & Tax Code § 19195(d), the FTB must supply the taxpayer with a written warning (“preliminary written notice”). This creates a 30-day window in which the taxpayer may pay off the debt or, as an alternative, “make arrangements with the Franchise Tax Board for payment of the amount due,” such as an FTB installment agreement. Note that the taxpayer must meet various requirements to qualify, including having filed all of his or her tax returns.

Are you out of state and being audited?

Not a California Resident? You Could Still Owe California State Income Taxes

The OTA’s panel explained, “Pursuant to the provisions of the UDITPA relating to the sale of services and the regulations thereunder, appellant’s physical presence does not determine whether he had income derived from California, but rather it is determined by where the benefits of appellant’s services were received” (italics our emphasis). The acronym “UDITPA” refers to the Uniform Division of Income for Tax Purposes Act, passed in California in the 1960s.

California Tax Compliance + FTB Audit Defense Attorneys for Businesses and Individuals

You may be liable for filing and paying California income taxes if you are an out-of-state resident with California source income such as a remote worker or independent contractor. Along with sales, employment, and other state taxes, business entities, including online enterprises, may also be subject to California income tax. Contact the Tax Law Office of David W. Klasing online for a discounted consultation regarding California tax compliance, a California state tax audit, or other California tax matters. You can reach us any time by calling (800) 681-1295 at our main office in Irvine. The Tax Law Offices of David W. Klasing have satellite offices in Los Angeles,  San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento that we maintain specifically to have a place to meet with FTB auditor’s or FTB CIB investigators that is outside of your home or business.

What is a FTB California Income Tax Fraud Investigation?

The California FTB aggressively investigates and prosecutes California income tax fraud which it defines as intentionally underreporting or failing to report income.

Examples of California FTB Criminally Prosecutable Income Tax Fraud include:

• Claiming to be a resident of another state while residing in California
• Making false claims for refunds or intentionally underreporting California taxable income
• Closing and reopening a business to evade taxes
• Falsifying business records
• Participating in the underground economy

Does the FTB, CDTFA and EDD Discover Tax Fraud?

The California FTB, CDTFA, or EDD employees may refer a return for an audit or a criminal tax inquiry if they discover something suspicious while examining it. The FTB, CDTFA, and EDD give its employees intensive training on how to spot what are known as “badges of fraud” within the organization, which are indications on the return or the client’s records that the taxpayer is attempting to deceive a California tax agency in some way. This is why it is imperative to seek professional help to assist you through such a stressful process.

FTB’s Criminal Investigation Bureau (CIB)

While you may be familiar with the Audit and Legal programme areas of the Franchise Tax Board (FTB), you might not be aware of the FTB’s Criminal Investigation Bureau (CIB). Their goal is to serve Californians by investigating alleged violations of the California Revenue and Taxation Code in a way that upholds public confidence and promotes voluntary compliance. State income tax evasion, state income tax fraud, asset concealment, and many other offences are all investigated by the CIB. The (CIB) has fully sworn peace officers (special agents) who carry out criminal tax investigations of the most egregious cases of California tax evasion, tax fraud, refund fraud, and preparer fraud in order to enforce the criminal tax provisions of the California Revenue and Taxation Code. Special agents may find evidence of additional financial crimes like money laundering, embezzlement, and theft as part of their investigations. Special agents conduct witness and subject interviews, issue and carry out search and arrest warrants, compile investigative reports with suggestions for felony criminal tax charges, and testify as expert witnesses in criminal tax proceedings.

Additionally, the CIB employs non-sworn staff members who assist with criminal tax investigations by reviewing bank data, creating tax computations, processing payments, overseeing probation, and gathering money due to the court. Following the conclusion of an investigation, special agents will continue to cooperate as appropriate with district attorneys’ offices or the attorney general’s offices. Many different sources refer cases to CIB. These referrals can come from internal sources like the Fraud and Discovery Section, Collections, Audit, and the Attorney General’s Office as well as external sources like informants, district attorneys’ offices, the attorney general’s office, other state agencies, and local law enforcement.

“Intent” can often be the key factor to differentiate a criminal tax case from a civil audit or collection case. CIB will consider and review a number of questions to determine whether a criminal tax investigation should be initiated. Here are a few of the questions that may be considered.

• Did the individual intentionally under-report their income, or over-report their deductions?
• If a return was not filed, was the intent to evade tax?
• If a tax liability exists, is the individual working actively to pay off the debt?

What leads to criminal tax charges in California?

California tax fraud is intentionally underreporting or failing to report California taxable income. This could include:

• Claiming to be a resident of another state while residing in California
• Making false claims for California refunds
• A tax preparer aiding and abetting the California income tax evasion of a client
• Closing and reopening a business to evade California taxes
• Falsifying business records

 Criminal tax fraud in California’s underground economy?

Coordinated joint effort amount all of California’s taxing authorities and intra agency referrals leading to multiple potential avenues of facing California criminal tax exposure.

State law  On October 26, 1993, Governor Wilson signed Executive Order W-66-93, which created the Joint Enforcement Strike Force (JESF) to combat the underground economy. The JESF is led by the Employment Development Department (EDD) and comprised of the Department of Consumer Affairs (DCA), the Department of Industrial Relations (DIR), the Department of Insurance (CDI), and the Office of Criminal Justice Planning. Other agencies encouraged to participate include, the Franchise Tax Board (FTB), the former Board of Equalization (BOE) known now as the California Department of Tax and Fee Administration (CDTFA)

The JESF is responsible for enhancing the development and sharing of information necessary to combat California’s underground economy, improving the coordination of enforcement activities, developing methods to pool, focus, and target enforcement resources, and reporting each year on its activities. In January 2005, Governor Schwarzenegger’s budget established the Economic and Employment Enforcement Coalition (EEEC), a targeted joint effort by state and federal agencies to combat the underground economy to ensure safe working conditions and proper payment of wages. This coalition consists of investigators and auditors from California’s DIR, EDD, DCA, the Contractors’ State License Board (CSLB), the Bureau of Automotive Repair (BAR), the former BOE (now CDTFA), CDI, and the federal agencies of the Department of Justice (DOJ), Department of Alcohol and Beverage Control (ABC) Internal Revenue Service (IRS). The IRS provides audit leads to California’s EDD. The EEEC was renamed the Labor Enforcement Task Force (LETF) in 2012.

What is an “Underground economy”?

Is a term that refers to people and businesses that deal in cash or use other schemes to hide their activities and their true tax liability from government licensing, regulatory, and taxing agencies. The underground economy is associated with tax evasion, tax fraud, cash pay, tax gap, payments under-the-table, and off-the-books type activity.

How does the underground economy affect you?

Reports on the underground economy show significant impacts on:

• The State of California.
• Businesses that comply with the law.
• Workers who lose benefits and other protections provided by state law when the businesses they work for operate in the underground economy.

Businesses

When companies operate in the underground economy, the money allocated for insurance, payroll taxes, licenses, employee benefits, safety equipment, and safety conditions is unlawfully reduced. Therefore, compared to companies that abide by the different business laws, these employers enjoy an unfair competitive advantage. This leads to unfair market competition and increases law-abiding enterprises’ taxes and expenses.

Workers

Employees of noncompliant businesses are also affected. Their working conditions may not meet legal requirements, which can put them in danger. Their wage earnings may also be less than those required by law, and benefits they are entitled to can be denied or delayed because their wages are not properly reported.

Consumers

Consumers can also be affected when contracting with unlicensed businesses. Licensing provisions are designed to ensure minimum skill and knowledge levels to protect the consumer.

Underground economy operations

The California legislature and tax authorities are concerned where employees lose state-mandated benefits and other safeguards when the companies they work for engage in the underground economy. Businesses that operate in the underground economy have an unfair edge over those that abide by the law. Due to this, businesses that follow the law and all Californians are forced to pay greater taxes, leading to unfair market competition. Our Underground Economy Operations (UEO) department was created in 1993 to carry out and oversee the Joint Enforcement Strike Force’s operations. The UEO’s goal is to lessen unfair business competition and defend workers’ rights through:

• Coordinating the joint enforcement of tax, labor, and licensing laws.
• Finding and deterring payroll tax violations in the underground economy. This includes unreported cash pay, wages reported on Forms 1099, and unreported or unpaid payroll tax deductions.
• Conducting research to identify strategies to increase compliance with payroll tax laws.
• Educating customers on UEO programs to increase compliance with payroll tax laws.

How you could go to jail in CA for tax fraud

Watch out for a referral to IRS Criminal Investigation from the FTB and vice versa

If you owe the FTB, every collection notice from FTB will be treated by FTB as restarting the 20-year collection statute. Under California Revenue and Taxation Code Section 19255, the statute of limitations to collect unpaid state tax debts is 20 years from the assessment date, but there are situations that may extend the period or allow debts to remain due and payable. The stakes are particularly high in criminal tax prosecution cases.

What is a Zapper?

A certain kind of software program known as a “zapper” has the ability to change transaction and sales data. A USB drive generally puts the zapper program onto a retail point of sale (POS) system. The zapper application enables business owners to lower the amount of revenue they ascribe to sales once it has been deployed and configured. The company might illegally lower its sales tax burden by lowering income. The owner then keeps the proceeds from the scam or gives them to other participants in the plan. Because there are no other or supporting documents for the transaction, zappers work best when the sale is made in cash. When a credit card is used to complete the purchase, the processing business creates and keeps a transaction record, which makes this practice unnecessarily risky. However some more resourceful fraudsters have taken to editing invoices with Photoshop and other tools to cover their tracks. According to state officials in California and throughout the nation, a sufficient number of businesses are committing fraud on these cash transactions and states are feeling the squeeze of reduced revenues.

California and Other States Pass Laws to Criminalize Zappers

The California legislature passed a bill that was backed by the CDTFA and made it illegal to just have a zapper device or the zapper software. Any company found deploying a zapper in California risks harsh penalties, up to and including three years in state jail. Additionally, business owners who are found utilizing zapper software are financially responsible for unpaid sales and income taxes and related fines and penalties.  California is not the only state to enforce laws against the practice of using a software device to evade taxes. The 2013 Senate Bill 5715 was supported by the Washington State Department of Revenue in 2013. The proposed law designates using an electrical device, such as a zapper, to perpetrate tax fraud as a Class C crime for both private citizens and corporate executives. Manufacturers or suppliers of electronic devices may be subject to fines of up to $10,000 or the amount of lost tax revenue, whichever is greater. The Kentucky legislature likewise approved a law making it a Class D crime to possess a zapper or gadget that works similarly.

Contact a Tax Lawyer with Audit and Zapper Experience

Consulting with an experienced tax lawyer is probably the best course of action if you are concerned that you are under criminal tax investigation and know for a fact you have utilized zapper software. At the Tax Law Offices of David W. Klasing, our Tax Attorneys and CPAs have years of experience fiercely defending our clients in audits and criminal tax investigations. We also have expertise defending taxpayers who are the subject of zapper law investigations. When facing the CDTFA FTB or the IRS, nothing positive can come from travelling alone. For a discounted initial consultation rate click here to book with the Tax Law Offices of David W. Klasing right away.

You would struggle to find a more knowledgeable, skilled, or experienced tax law firm to assist you in getting the best outcomes for your audit, appeal, or criminal tax case.

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