A California state tax audit most often means an income tax examination by the Franchise Tax Board (FTB). Depending on your facts, it can also mean a payroll tax audit by the Employment Development Department (EDD) or a sales and use tax audit by the California Department of Tax and Fee Administration (CDTFA)(formerly BOE). The core playbook is similar across these three tax agencies: a selection event, an initial contact letter, information requests, interviews as needed, a proposed assessment, and defined protest or appeal rights.
How a California Audit Starts and What the First Letter Means
FTB selects tax returns in several ways: information matching to W-2s, 1099s, and K-1s; data analytics that flag high-risk patterns; residency and sourcing issues where California income may be understated; and referrals from federal tax audits or other California tax agencies. You will first see an initial contact letter that identifies the year or years, the scope of the exam, and the auditor’s contact information. The letter usually arrives with an Information Document Request and a deadline. If you want a representative to speak for you, file a California power of attorney through FTB’s e-POA system or the current FTB 3520 series form so the auditor can work directly with your representative.
If your audit stems from an IRS change, FTB will request the federal tax report and any schedules that tie federal income, adjustments, and credits to the California return. If residency or sourcing is the issue, expect FTB to request travel calendars, domicile indicators such as home, family, and business ties, electronic footprint evidence that shows your location for every purchase you make and employer documents showing where work was performed. For pass-through owners, FTB often requests partnership or S corporation workpapers to verify basis, apportionment, and credit computations reflected on your return.
What the Auditor Will Ask for and How Issues Are Developed
The auditor’s first request typically asks for the return file, general ledger, or account summaries, bank and brokerage statements, and any schedules that support positions taken. For individuals, common topics include residency, Schedule C income and expenses, basis and capital gains, real estate and like-kind exchanges, equity compensation, other state tax credits, and high-dollar charitable contributions. For businesses, the focus often includes gross receipts, cost of goods sold, intercompany charges, apportionment and allocation, and the accuracy of partnership or S corporation K-1 reporting to owners.
Expect follow-up Information Document Requests if initial records raise questions. Auditors may ask for interviews to understand how income was earned and where services were performed. If you agree to an interview, prepare with your representative so you can answer precisely and avoid speculation. For EDD payroll tax audits, the central question is worker status under Labor Code sections 2775 to 2787 and, where an exemption applies, Borello factors. For CDTFA sales and use tax audits, typical requests include sales registers, purchase invoices, resale certificates, exemption documentation, and reconciliations to income reported on the income tax return.
Timelines, Statutes, and Your Protest or Appeal Rights
For most filed returns, FTB generally has four years from the filing date to mail a Notice of Proposed Assessment. That period can be longer in defined situations, such as significant omissions of income, abusive tax avoidance transactions, late-filed returns, or fraud. If your federal taxable income changes, you must report the final federal change to FTB within six months. Reporting starts a defined assessment window on those changes. If you report within six months, FTB generally has 2 years from the date of your report to assess those items. If you report after six months, FTB has typically four years from the date you or the IRS notified FTB. If you never report, FTB may assess those changes at any time. There is no statute of limitations for assessment if you never file a required return or if a return is false or fraudulent with the intent to evade tax.
If the auditor proposes changes, FTB issues a Notice of Proposed Assessment. You generally have 60 days from the notice date to file a timely written protest. In a protest, you can provide additional facts, legal analysis, and documentation. If the protest is not resolved, FTB will issue a Notice of Action. You then have 30 days from the Notice of Action to appeal to the California Office of Tax Appeals. For CDTFA, a Notice of Determination starts a 30-day window to file a petition for redetermination. For EDD, a Notice of Assessment triggers a 30-day window to file a Petition for Reassessment with the California Unemployment Insurance Appeals Board. Missing these deadlines usually results in the assessment becoming final, although you may still pay and file a claim for a refund within the applicable refund period.
Penalties, Interest, and Keeping the Matter Civil
Interest accrues from the original due date and compounds daily at California’s published rate. Common penalties include failure to file, failure to pay, and accuracy-related penalties for substantial understatements or negligence. California now offers One-Time Penalty Abatement for eligible timeliness penalties if you have a clean recent history and otherwise meet the criteria. Separate reasonable cause relief may be available where facts support it. If the audit involves a federal change, paying any additional California tax when you report the change reduces interest and can help avoid piling on of penalties. Throughout the exam, keep filings consistent across federal and state, reconcile Schedule CA and credit schedules to your amended numbers, and answer document requests with organized, paginated support. Well-prepared responses keep the matter focused on the merits and reduce the need for interviews or broader fishing expeditions.
If an assessment becomes final, collection tools include installment agreements, state tax liens, bank and wage levies, and, in limited circumstances, California state’s Offers in Compromise for taxpayers with no realistic ability to pay fully. For payroll and sales tax audits, be aware that officer or responsible person liabilities can attach in defined circumstances. Address these exposures proactively during the audit rather than waiting for collections to begin.
Contact the Tax Law Offices of David W. Klasing if You Are Facing a California State Tax Audit
California state tax audits are won with a disciplined process, precise math, and a record that matches what an FTB, CDTFA, or EDD examiner actually needs to see. At the Tax Law Offices of David W. Klasing, our matters are attorney-led, and our CPAs are our employees working under attorney direction as part of the legal team. That structure lets you speak openly while we build an examiner-grade file. From day one, we map the statute posture for each year, confirm protest and appeal deadlines, and align your facts to the specific issues driving the audit, whether that is residency and sourcing, Schedule C substantiation, partnership and S corporation basis, apportionment, or credit computations.
Our dual-licensed California Tax Attorneys and CPAs will take over communications, file a California power of attorney, and narrow information requests to what the agency is entitled to receive. Then we rebuild the schedules an auditor will prepare anyway, reconcile books and bank data to returns, and present organized, paginated support that answers the questions before they are asked. Where a federal change is involved, we handle the six-month reporting rule, time any state amendment to preserve defenses while stopping interest and keep federal and California tax positions consistent. If a proposed assessment issues, we draft a timely protest that marries the legal theory to the evidentiary record and position the case for resolution at the protest level. If needed, our dual-licensed Tax Litigation Attorneys will litigate vigorously before the Office of Tax Appeals with a clean, well-supported file.
At the Tax Law Offices of David W. Klasing, you get a single team that can carry the matter from the first contact letter through final resolution. We quantify interest and penalties precisely, evaluate One Time Penalty Abatement and reasonable cause when the facts support relief, and coordinate collection options, as necessary, including installment agreements and Offers in Compromise in appropriate cases. If you have received an initial contact letter, an Information Document Request, or a Notice of Proposed Assessment, call the Tax Law Offices of David W. Klasing at 800-681-1295 or book a reduced-rate initial consultation online HERE. We will stabilize the file, protect your rights, and drive the case toward the best outcome the facts allow.
