The California Franchise Tax Board, or FTB, is responsible for collecting personal and corporate income tax in the State of California. The mission statement of the FTB is to help taxpayers file tax returns timely, accurately, and pay the correct amount to fund services important to Californians. To this end, the FTB regularly audits taxpayers looking for compliance with the tax code and mistakes. If you’re a California taxpayer, you could be facing an FTB audit sometime in the future. Here are the answers to some commonly asked FTB audit questions to help you get through the process.
Why Am I Being Audited?
There are several different ways or reasons that your tax return may have been selected for an audit. These include:
- Selection of Tax Returns for Automated Auto Review System, or STARS: This is an automated program run by the FTB that compares federal tax information with state tax returns. If there are significant discrepancies between federal and state returns, the state return may be flagged for audit;
- The FTB’s CP-2000program which is based on the IRS’s automated computer 2000 program was developed to identify taxpayers who underreport their income.
- When the IRS conducts an audit, they forward the results of that audit to the FTB. The FTB then “piggybacks” on the IRS information oftentimes causing a state tax audit;
- Head of Household Filing Status: The FTB selects tax returns where the taxpayer claims head of household status to substantiate that claim.
What Happens During an FTB Audit?
In general, the average audit entails the following steps:
- Tax returns that are flagged for audit go into a pool and are assigned to specific auditors.
- The auditor does a pre-audit analysis, analyzing the return and looking to see if the taxpayer has been audited in the past for similar issues. The auditor then uses this information to decide whether the time and energy that will need to be put into the audit would justify the potential result.
- In cases where the audit is determined to be justified, a Notice of Audit is sent to the taxpayer. This Notice informs the taxpayer of their rights during the audit and asks him or her to supply the auditor with specific documentation regarding their tax return.
- The auditor uses the supplied documentation, IRS and FTB information, and tax law to analyze the return. In some cases, examining the original issue may give rise to additional issues that also need to be dealt with.
- At the conclusion of the analysis, the auditor will issue one of the following documents to the taxpayer:
- A Notice of Proposed Assessment, or NPA, notifying the taxpayer that they owe additional taxes and penalties;
- A refund of over-assessed tax; or
- A determination that there is no change to the tax return.
- If an NPA is issued, the taxpayer must either pay the new assessment or file a written protest within 60 days of the date the NPA was issued.
Can I Have Someone Represent My Interests During the Audit?
Yes. You have the right to be represented by the person of your choice. Your representative may be a tax attorney, CPA, accountant, enrolled agent or even a friend. However, the FTB requires that a separate Power of Attorney be filed by each person who filed the tax return in question. That means, if you filed married filing jointly, a separate POA needs to be filled out by the taxpayer and his or her spouse.
What If I Cannot Find the Documents Requested By the Auditor?
In general, the FTB will work with you to try and find alternative documentation that will satisfy the auditor’s request. If you absolutely cannot find a document, the auditor will ask you what method of search you used. Ultimately, it is your responsibility to keep the records that justify the information on your tax return.
In addition, if you cannot provide the documentation before the date requested by the auditor, contact the auditor immediately and request an extension of time.
If the Audit Reveals That I Owe Money to the FTB, Will I Also Have to Pay Interest on the Additional Amount?
Yes. Under California law, interest accrues on a tax debt from the date the tax is due until the date the tax is paid.
Do I Have to Pay This Additional Tax Electronically?
The FTB requires taxpayers who file an original tax return reflecting tax liability that exceeds $80,000 for any taxable year, or those who are making an estimated or extension payment in excess of $20,000 for any taxable year, to send all future payments electronically.
A 1% penalty on the amount paid is assessed if said payment was not submitted electronically.
Can I ever Request a Waiver from Paying my taxes Electronically?
You can request a general or permanent waiver from the mandatory e-pay requirement. You can request a general waiver from mandatory e-pay if one or more of the following is true:
- You have not made an estimated tax or extension payment in excess of $20,000 during the previous income year; or your tax liability reported for the previous income year did not exceed $80,000;
- The amount you paid is not representative of your tax liability.
To request the waiver you must complete and submit form FTB 4107, Mandatory e-pay Election to Discontinue or Waiver Request. The FTB will review your waiver request and notify you in writing when it is approved or denied.
Is It Possible to Pay My Additional Assessed Tax in Installments?
If you are unable to pay the full amount of your proposed assessment following an audit, you can request an installment payment plan from the FTB. An Installment Agreement Application can be made online, by phone, or by mail.
What If I Disagree With the Result of My Audit?
If you disagree with the result of your audit, you must file a written protest with the FTB within 60 days of the date the NPA was issued. If you do not file a written protest within this time, you lose your right to contest the audit results.
Once a written protest is filed, the auditor in charge of the case must either affirm, revise, or withdraw the result of the audit. Once the auditor has taken this step, a Notice of Action, or NOA, is sent to the taxpayer informing him or her of the auditor’s decision.
If the taxpayer continues to disagree with the auditor’s decision, they must file an appeal within 30 days of the issuance of the NOA. Formerly, the appeal was filed with the California Board of Equalization, or BOE. However, beginning on January 1, 2018, all income tax appeals will be heard by the newly created California Board of Tax Appeals, or BTA.
If you’re facing an impending FTB audit, an experienced California tax attorney, or tax professional can help you to successfully navigate the audit and tax appeal process. They can guide you through issues involved and help you avoid having additional taxes assessed against you. Contact us today for a free and confidential consultation.