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What is the Statute of Limitations for a California Tax Audit

We’ve noted here previously that the IRS usually works in a 3 year audit window from the date you file your tax return.  This can be extended to six years in many cases, and the clock does not start if you fail to file a federal return or if you understate your income by a substantial amount.  What is the statute of limitations for a California tax audit and how is that different from the federal regulations and laws?

The Franchise Tax Board or FTB, California’s income tax agency, has four years from the date of filing to complete an audit.  This is strategically important as it provides the FTB with an extra year to see if anything happens with the IRS.  It is well known that the agencies communicate with one another, and a change order in one audit is very likely to result in a knock on the door from the other agency.   Like the federal law, California law extends the statute of limitations indefinitely in the event of a non-filer or substantially misrepresented or fraudulent California tax return.

It is absolutely possible to agree to waive the federal statute of limitations in an IRS audit or the State of California statute of limitations in an FTB audit, and in some cases this is in our client’s interests.  In many cases we need to ensure that the “file” in your case has all of the information necessary to ensure a rightful determination resulting in the lowest possible finding or a “zero additional tax” decision.  But this is not a strategy to avoid paying additional taxes to California if and when the IRS issues a Notice of Determination declaring you owe additional taxes.  Californians are required by law to notify the FTB within six months of an IRS Notice of Determination – even if it is passed the 4 year statute established by California law.  You will in all likelihood be required to pay additional taxes to the FTB if the IRS Notice of Determination increased your tax obligations at a federal level.

The failure to provide this notification to the FTB results in the suspension of the statute of limitations for a California tax audit indefinitely.  Its also interesting to note that you are actually more likely to be audited by the FTB than by the IRS at this point in time.  The only good news for California income tax payers is when an FTB audit passes the three year federal statute of limitations, the IRS cannot come back on you.

IRS audits and FTB audits are quite painful for most taxpayers.  If you have received notification of an IRS audit or FTB audit we invite you to download our free white paper “What to Expect from an IRS Audit” (helpful information for California audit targets as well), and contact us for a free consultation at 866-631-3470.