The Franchise Tax Board (FTB) is California's tax authority responsible for collecting state income tax for individuals and businesses. If you live or work in California, you could be audited. Learn what to expect if you get audited, how to protest audit findings and how to prepare for an audit.
A California Franchise Tax Board audit is a formal review of an individual's or a business's tax filing and supporting documents. An audit verifies that the information reported on a tax return is accurate and complete and determines whether the correct amount of tax was paid. Auditors look for potential tax problems, such as unpaid taxes or fraud, and objectively evaluate tax returns and other relevant documentation. They ensure audits and results comply with tax laws and support their recommendations with facts.
Generally, here's what you can expect during an FTB audit:
You'll get a letter from the FTB informing you that you're being audited. The letter will include information about what tax year or years they're reviewing, issues with the return, additional information you need to provide, and how to contact the FTB. Timelines vary based on the complexity of the audit. However, the FTB aims to complete an audit within two years of initial contact or four years from when the tax return was filed.
You may have a representative with you anytime, such as an accountant or audit advisory specialist. To authorize someone else to represent you, you must submit California FTB Form 3520-PIT, the Individual or Fiduciary Power of Attorney Declaration.
You may get a desk or field audit. A desk audit is performed from the auditor's office via correspondence, while a field audit occurs where the records are. A field audit is generally done where a company does business, but it can also happen in an FTB office or a representative's office.
During the audit, you may need to schedule appointments, review documents you provided and respond to the FTB's findings. You may receive Information Document Requests asking for more documents or information.
Once the FTB has completed the audit, they'll notify you of their findings. Possible audit outcomes include:
If you receive an NPA but disagree, you can file an official protest. Your notice will include a “Protest By” date, after which the proposed assessment is final and becomes billable. Note that filing a protest doesn't stop interest or penalties from accruing. You can file a protest online, by fax or by mail. The FTB will notify you once they receive your protest.
During the review, the FTB may request more information. You can also request a hearing where you can present supporting evidence or additional documents. Once the FTB has reviewed your protest, they'll send a Notice of Action (NOA) to let you know whether they've decided to withdraw, revise or affirm the audit results. Depending on the result, you may receive additional notices.
If you still disagree with the findings, you can appeal for up to 30 days after the date on the NOA. Include all the information and documents you received from the FTB when you appeal to the Office of Tax Appeals. Remember that interest and penalties continue to accrue.
Taxpayers have certain rights under the California Taxpayers' Bill of Rights and the Taxpayers' Rights Conformity Legislation. Under these laws, you have the right to confidentiality, courteous treatment, clear and concise requests, and completion of the audit in a reasonable time. You also have the right to a representative and to protest and appeal audit findings.
In return, you have certain responsibilities toward the FTB. You should pay any taxes promptly and in full or make arrangements with the FTB for a payment plan. You should also keep communicating with your auditor. If they request a document, get it to them promptly. If you have difficulty fulfilling a request, let them know so you can work together to find the needed information. An audit isn't meant to punish you, but being uncooperative or nonresponsive can invite deeper inspections and additional penalties.
If you receive a letter that you're being audited, start by organizing your financial records, such as tax returns, bank statements, receipts and invoices. You may want to review your tax returns yourself to ensure you've reported all income and deductions accurately. If you do discover mistakes, you can file an amended return, which could stop the audit.
It's often best to consult with a tax professional during an audit, especially if you find tax law and regulations confusing. A professional audit advisor can explain the process and walk you through all the steps. They'll help you understand your rights and can represent you during the audit.
Here are the answers to some common questions about audits in California:
If you live or own a business in California and need audit advisory services, SD Mayer & Associates is here to help. We offer a holistic approach to financials and provide comprehensive support beyond audits. Our personalized services and strong communication can help you make strategic financial choices to put yourself in the best position tax-wise and maintain compliance with laws and regulations.
Contact SD Mayer today to learn more about how we can support you.
Links: