Like all tax authorities, the California Franchise Tax Board (FTB) conducts audits on tax returns. There are three types of FTB audits that California taxpayers might encounter. This blog post will discuss these three types of audits.

Regular Audits

The first type is the regular audit. These audits are typically random and may be triggered by state or federal agencies. They involve reviewing the taxpayer’s records, such as bank statements and receipts, to check for errors in the tax return. At the end of the audit, the FTB auditor might issue a Notice of Proposed Assessment. Taxpayers have the right to appeal this notice and can do so through the Tax Appeals Assistance Program or by settling through the FTB’s settlement program.

Substitute for Return (SFR)

The next type, technically not an audit, is the Substitute for Return (SFR) process. If a taxpayer fails to file a California income tax return, the FTB can file one on their behalf using estimated figures. The FTB has broad discretion in estimating income, which can sometimes result in figures that are far from the taxpayer’s actual income. These estimates can be based on documents like W-2s and 1099s, or on the taxpayer’s profession or other factors.

Federal Audit-Based Audits

The third type is an audit based on a federal audit. If the IRS audits a taxpayer and finds discrepancies, it will communicate these results to the FTB. The FTB will then issue an assessment based on the federal findings. For instance, if the IRS audit reveals an underreported income of $25,000, the FTB will assess taxes based on this figure. While the FTB assumes the IRS assessment is correct, taxpayers can challenge this by providing evidence such as receipts or other documentation that counters the federal assessment.

Steps to Avoid Large FTB Audit Bills

California residents and non-residents can take steps to avoid significant FTB audit bills. The first step is to file California income tax returns or non-resident returns on time. The FTB actively pursues non-residents with any connection to the state. Non-residents, especially those who have left California, should file state tax returns if there is any doubt. Both residents and non-residents should also ensure their addresses are current with the FTB.

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