Awards & Recognition
While the IRS audits federal income tax returns, California has several tax agencies of its own, which conduct state tax audits independently from the Internal Revenue Service. State tax agencies that conduct audits in California include the Franchise Tax Board (FTB), the California Department of Tax and Fee Administration (CDTFA), and the Employment Development Department (EDD). If you or your business has been chosen for a California tax audit by the FTB, CDFTA, EDD, or other state agencies, you risk costly tax assessments, interest charges, and civil penalties – or even referral for criminal prosecution. You should discuss the situation with a San Francisco state tax audit lawyer & CPA immediately.
At the Tax Law Office of David W. Klasing, our audit defense attorneys and CPAs have more than 20 years of experience representing taxpayers in FTB tax audits, CDTFA tax audits, and other types of California audits in San Francisco. Additionally, founder David W. Klasing has over a decade of public auditing experience, positioning our award-winning tax firm to deliver strategic, incisive, and effective representation throughout all stages of the auditing process. If you have been notified of an upcoming state tax audit in California or wish to dispute the results of a California tax audit that has already been completed, contact the Tax Law Office of David W. Klasing online, or call our San Francisco tax office at (415) 287-6568 today.
How Far Back Can You Be Audited in California?
A deadline known as the “statute of limitations” creates time limits for various legal actions, such as the filing of a lawsuit. The statute of limitations also limits the time for tax agencies, like the FTB, to audit taxpayers. While the statute of limitations typically gives the IRS up to three years to conduct a federal tax audit, California has unique regulations which allow the Franchise Tax Board to audit for up to four years, giving the FTB an extra 12 months.
Additionally, there are certain tax scenarios that give the FTB and other state agencies unlimited time to conduct examinations in California. For instance, if the taxpayer fails to file a California income tax return, there is no applicable statute of limitations, meaning the FTB can initiate an audit at any time – even many years after the four-year deadline has passed. In the meantime, not only does interest continue to accrue, but moreover, the taxpayer may face various penalties for noncompliance.
California State Tax Audit Triggers
Many “red flags” can cause you to be chosen for an audit by the FTB, CDTFA, or other California tax agencies. While these triggers do not necessarily indicate wrongdoing on the taxpayer’s part – for instance, some taxpayers are chosen arbitrarily by computer software – it is crucial to take the audit seriously due to the potential for serious tax, penalties and interest to be imposed. Common examples of reasons for a California tax audit include, but are not limited to:
- Claiming too many credits or deductions
- Earning a high or low level of income
- Failing to file a tax return
- Failing to report all income, including worldwide income contained in offshore bank accounts
- Improperly claiming tax credits or deductions
- Improperly classifying workers, if the taxpayer is a business owner (i.e. misclassifying employees as independent contractors)
- Underreporting income
While California’s tax agencies function independently from the Internal Revenue Service, the FTB and CDTFA receive IRS data reports, known as “federal audit reports,” whenever the IRS finishes auditing a taxpayer. As the FTB explains, the Franchise Tax Board “uses this information to identify any similar state tax issues on the California tax return.” Thus, if you are audited by the IRS, you are likely to be audited by a California state agency in addition. However, even if you have never been audited by the IRS, you may still be selected for an examination by the FTB, CDTFA, or EDD based on any of the aforementioned audit triggers.
Appealing an FTB, CDTFA, or EDD Tax Audit
If the auditor makes an error or overlooks a detail, or gets the law or the facts wrong, at any stage of the auditing process, the outcome can be an improper tax assessment, which can easily cost a taxpayer thousand once penalties and interest are factored in. Fortunately, there are ways to protest, appeal and litigate the results of a California state tax audit if you believe the auditor’s findings are in error.”
In California, tax audit appeals are handled by the Office of Tax Appeals (OTA), which was created in 2017 to hear appeals arising from CDTFA and FTB audits. The OTA is not to be confused with the similarly-named IRS Office of Appeals, which deals exclusively with federal audit appeals.
Once the FTB or CDTFA completes a state tax audit, the pertinent agency will send the taxpayer an Appeals Bureau Decision or Notice of Action. To request an appeal, the taxpayer must send certain materials to the OTA by the date provided on the Appeals Bureau Decision or Notice of Action. These materials include the taxpayer’s contact information, OTA Form L‐01 (Request for Appeal), copies of documents received from the FTB or CDTFA, and various financial records that support the taxpayer’s argument, such as bank statements.
California Tax Audit Lawyers and CPAs in San Francisco
If you or your business was chosen for an FTB tax audit, CDTFA tax audit, or EDD tax audit, you must take swift action to protect your rights and thoroughly prepare for the examination. To arrange a confidential, reduced-rate initial consultation concerning a state tax audit in California, contact the San Francisco state tax audit lawyers and CPAs at the Tax Law Office of David W. Klasing online, or by calling our San Francisco office at (415) 287-6568. Please note that our San Francisco office is by appointment only.
