FTB Audits

Bakersfield FTB Audit Attorney

An audit by the California Franchise Tax Board (FTB) can put significant income, deductions, business transactions, residency issues, and years of tax returns under scrutiny. And because California tax law does not always follow federal tax law, an issue that appears straightforward on a federal return can become much more complicated when the FTB gets involved.

I represent individuals, business owners, professionals, corporations, partnerships, LLCs, and other taxpayers facing FTB audits in Bakersfield, Kern County, and throughout California.

If you have received an audit letter, request for documents, or other correspondence from the Franchise Tax Board, you do not have to deal with the auditor alone. As a tax controversy attorney, I can step between you and the FTB, determine what the agency is actually examining, organize the evidence supporting your return, and respond to the audit with a strategy designed to protect you before a proposed assessment becomes final.

What Is an FTB Audit?

The California Franchise Tax Board administers and enforces California's personal and business income tax laws. An FTB audit is an examination conducted to determine whether the income, deductions, credits, losses, residency positions, or other items reported on a California tax return were correct.

Some FTB audits are relatively narrow. The auditor may question a particular deduction or transaction and request a limited set of documents.

Others can become extensive examinations involving multiple years, bank records, business records, federal returns, ownership interests, real estate transactions, residency, or the source of a taxpayer's income.

The important thing is to determine what the FTB is looking for before responding.

Sending unnecessary records, providing an incomplete explanation, or answering questions without understanding the tax issue can sometimes expand an audit rather than resolve it.

Common Issues in California FTB Audits

FTB audits can involve virtually any issue affecting California taxable income. Common disputes include:

• California residency and domicile
• California-source income
• Business income and deductions
• Schedule C income and expenses
• S corporation and partnership income
• Shareholder or partner basis
• Pass-through entity losses
• Sale of a business or ownership interest
• Real estate sales and capital gains
• Like-kind exchanges
• Stock and investment transactions
• Apportionment and allocation of business income
• Research and other business tax credits
• Unreported or allegedly underreported income
• Differences between federal and California tax law
• Changes resulting from an IRS examination

The FTB itself identifies residency, income sourcing, sales of property, like-kind exchanges, pass-through entity basis, sales of pass-through interests, business credits, and apportionment among recurring audit issues.

These cases can become highly fact-specific. The right result often depends not only on what appears on the tax return, but on whether the taxpayer can reconstruct and substantiate what actually happened.

California Residency Audits

Residency is one area where an FTB audit can become particularly intrusive.

California residents are generally subject to California income tax on income from all sources, while nonresidents generally remain subject to California tax on income sourced to California. As a result, substantial amounts of tax can depend on whether someone was actually a California resident during a particular year and where the income at issue should be sourced.

An FTB residency audit may examine facts such as:

• Where you owned or rented a home
• How much time you spent in California
• Where your spouse and family lived
• Where you worked or operated a business
• Driver's licenses and vehicle registrations
• Voting registration
• Banking and financial activity
• Medical and professional relationships
• Social and community connections
• Location of valuable personal property
• Travel records
• Where you intended to make your permanent home

No single fact necessarily determines California residency. These cases should be approached as an organized factual presentation rather than simply turning over a pile of documents and allowing the auditor to draw his or her own conclusions.

FTB Business Audits

California business tax audits can involve corporations, S corporations, partnerships, LLCs, sole proprietorships, and their owners.

The FTB may examine whether income was properly reported, expenses were deductible, losses were allowable, shareholder or partner basis existed, income was properly sourced to California, or a multistate business used the correct allocation or apportionment methodology.

Business audits may involve review of:

• Bank statements
• General ledgers
• Profit-and-loss statements
• Balance sheets
• Payroll records
• Contracts and invoices
• Corporate records
• Partnership or operating agreements
• K-1s
• Basis calculations
• Purchase and sale agreements
• Closing statements
• Depreciation schedules
• Prior federal and California returns

A business audit can also affect more than one taxpayer. An adjustment made at the corporation, partnership, or LLC level may flow through to shareholders, partners, or members.

That makes it particularly important to understand the larger consequences of an adjustment before agreeing to it.

When an IRS Audit Creates an FTB Problem

Federal and California tax issues frequently overlap, but they are not identical.

The FTB reviews federal tax information and IRS data as part of its audit program. An adjustment made by the IRS can also create a California tax issue, and taxpayers may have an obligation to report a final federal change to the Franchise Tax Board.

But an IRS adjustment does not necessarily answer every California tax question.

California does not conform to every provision of federal tax law, and residency, sourcing, apportionment, and other California-specific rules may require a separate analysis.

If an IRS examination has resulted in an adjustment—or you believe one is coming—it is important to consider the California consequences before the problem reaches the FTB.

You Received an FTB Audit Letter. What Should You Do?

First, do not ignore it.

But you also do not need to immediately send everything the auditor requests without reviewing the request and understanding the issues.

I generally want to determine:

1. Which tax years are actually under examination?
2. What specific items is the FTB questioning?
3. Why was the return selected?
4. What records support the taxpayer's position?
5. Are there documents that require explanation or context?
6. Are there statute-of-limitations issues?
7. Could the audit expand into additional years or issues?
8. Could the examination affect another taxpayer or business entity?

Once those questions are answered, we can develop a focused response rather than simply reacting to each request as it arrives.

How I Handle an FTB Audit

When someone hires me for an FTB audit, my goal is simple: I want the audit running through my office instead of through the client.

Most people do not spend their lives dealing with tax auditors. I do.

I generally obtain authorization to represent the taxpayer, review the returns and audit correspondence, identify the issues the FTB appears to be developing, and communicate with the auditor on the client's behalf.

I do not believe in giving an auditor more information than necessary simply because it was requested. At the same time, I do not believe in playing games with legitimate document requests. The better approach is to understand what the auditor is trying to establish and then provide an organized, accurate response supported by the documents and the law.

That may mean reconstructing records, tracing transactions, reviewing bank statements, explaining an unusual business event, establishing basis, documenting a move out of California, or showing why the FTB's interpretation of a transaction is incorrect.

Whenever possible, I want to identify the weak points in the government's position during the audit—not after an assessment has already been issued.

And I want my client to understand what is happening.

If I believe we have a strong argument, I will explain why. If there is a legitimate problem with the return, I will explain that too, and we can decide how best to contain it.

You will deal with me directly, not simply hand your tax problem to an office and wonder what is happening with it.

Responding to FTB Information Document Requests

The documents produced during an audit can determine the outcome.

A good response should do more than attach hundreds of pages of records. It should make it easy for the auditor to understand why those records support the tax return.

Depending on the case, that may involve:

• Creating schedules or summaries
• Reconciling deposits to reported income
• Separating transfers from taxable receipts
• Tracing the source of funds
• Establishing cost basis
• Reconstructing expenses
• Explaining accounting entries
• Connecting invoices to payments
• Documenting business purpose
• Providing declarations or third-party documentation
• Presenting relevant California statutes, regulations, or tax authorities

The objective is not simply to produce documents. It is to use those documents to tell the taxpayer's side of the story.

What Happens if the FTB Proposes Additional Tax?

If the FTB concludes that additional tax, penalties, or interest should be assessed, it may issue a Notice of Proposed Assessment, commonly called an NPA.

An NPA is important because it begins a limited period to formally challenge the proposed assessment.

In most cases, a taxpayer has 60 days to file a protest of the proposed assessment.

A protest should not be treated as a generic letter saying, "I disagree." A meaningful protest should identify the disputed adjustments, explain the relevant facts, present the taxpayer's legal position, and provide the documents or other evidence supporting that position.

If the FTB ultimately issues a Notice of Action sustaining the assessment, additional appeal rights may be available before the California Office of Tax Appeals (OTA).

Deadlines matter. Waiting until the FTB begins collection can eliminate much better opportunities that existed earlier in the case.

Do I Need a Tax Attorney for an FTB Audit?

Not every FTB letter requires an attorney.

But representation becomes much more valuable when:

• A substantial amount of tax is involved
• Multiple years are under examination
• The FTB is questioning residency
• Significant business deductions are challenged
• The audit involves an S corporation, partnership, or LLC
• The auditor alleges unreported income
• Bank deposits are being analyzed
• A business sale or major transaction is involved
• The audit resulted from an IRS adjustment
• Penalties are being proposed
• You disagree with the auditor's interpretation of the law
• The examination may lead to an administrative protest or appeal

Getting counsel involved early can also preserve options that become more difficult once the audit is completed.

FTB Audit Representation in Bakersfield and Kern County

I represent taxpayers in Bakersfield and throughout Kern County in disputes with the California Franchise Tax Board.

Having a local tax controversy attorney can be particularly helpful for business owners, professionals, real estate investors, agricultural businesses, contractors, and other taxpayers whose returns involve transactions or business activities that cannot be understood simply by looking at numbers on a tax return.

My practice is focused on resolving disputes with taxing agencies. I represent clients before the California Franchise Tax Board, California Department of Tax and Fee Administration, and Internal Revenue Service, as well as in tax-related administrative proceedings and litigation where appropriate.

Whether the FTB has just opened an examination or has already proposed a substantial assessment, the sooner I can review the case, the more options we are likely to have.

Speak With a Bakersfield FTB Audit Attorney

If you have received an audit notice from the California Franchise Tax Board, do not assume that the FTB's proposed adjustments are correct—and do not wait until the matter becomes a collection problem to address it.

I can review the audit notice, the tax returns at issue, and the documents supporting your position and help determine the best way forward.

Contact my Bakersfield office to discuss your FTB audit and how I can help protect your interests before the California Franchise Tax Board.

Frequently Asked Questions About FTB Audits

Can an attorney represent me during an FTB audit?

Yes. The FTB permits taxpayers to designate an authorized representative, including a tax attorney, to represent them during an audit. Once authorized, I can communicate with the FTB and handle much of the audit process on your behalf.

Does the FTB only audit businesses?

No. The FTB audits both individual taxpayers and business entities. Individual audits can involve residency, investments, real estate, pass-through entities, business income, deductions, and California-source income.

Can the FTB audit me after an IRS audit?

Yes. Federal tax information can lead to California adjustments, and certain final IRS changes must be reported to the FTB. However, California tax law differs from federal law in several important areas, so the California result should be separately evaluated.

How long do I have to challenge an FTB Notice of Proposed Assessment?

Generally, 60 days from the date of the Notice of Proposed Assessment, subject to the Protest By date stated on the notice. Missing that deadline can cause the assessment to become final.

Can I fight an FTB audit before the assessment becomes final?

Yes. The audit itself is an opportunity to present documents, factual explanations, and legal arguments. If the FTB nevertheless issues a Notice of Proposed Assessment, formal protest rights are generally available.

What if the FTB says I was a California resident?

Residency determinations are highly fact-dependent. The FTB may examine your connections to California and another state, including where you lived, worked, owned property, maintained family and financial relationships, and intended to make your permanent home. These cases should be developed carefully and supported with objective evidence.

Do you represent clients outside Bakersfield?

Yes. Although my office serves taxpayers in Bakersfield and Kern County, FTB matters are statewide, and I can represent taxpayers located throughout California.