It may surprise many Californians to learn your risk of a California tax audit may be higher than an IRS audit. You may have heard in the news the rate of IRS audits is down. While this is true for lower income Americans, the cost of living in California naturally means our citizens generally must earn more than the national average. The higher your income, the greater your odds of an IRS audit. What you may not realize is your risk of a California tax audit are even higher, especially if you own a business or an interest in a domestic or foreign corporation.
If you own a business or live and work in California you know we have some of the highest tax rates in the nation. Our personal and business tax systems are quite complex and the Franchise Tax Board (FTB), Board of Equalization (BOE) and Employment Development Department (EDD) are known for their overtly aggressive tactics. The state’s need for revenue alone has increased your risk of a California tax audit and recent collection and enforcement tactics confirm it.
The tax laws regarding audits in California also place taxpayers in a disadvantageous position when compared to the IRS. The IRS, in the absence of fraud or non-filing and substantial under-reporting of actual income, has three years from the day you filed a return to audit it. California gives the FTB four years from the date you file your return. If you have not filed either California or IRS returns this time limit, known as the “Statute of Limitations“, never begins. This means your ability to be audited for unfiled tax returns never ends. The 3 year statute of limitations in an IRS audit can be waived with the consent of the taxpayer, and it is often in the best interest of the taxpayer to do so. As a result, the actual time frame to complete an IRS audit can extend for years.
Also, the IRS and California’s tax agencies are in close communication with one another. An amended return or a change in your FTB return due to an audit will quickly bring a knock from the IRS and vice versa. In fact, you are required by law to notify California’s FTB within six months of any changes resulting from an amended federal return, an IRS audit or letter notifying you of a deficiency or adjusted tax regardless of whether it falls before or after the 4 year audit statute. California will collect it’s share of tax.
The tax attorneys, tax and accounting experts at Allen Barron represent taxpayers before the IRS, FTB, EDD and BOE. Our clients are pleased to learn they usually do not even have to speak with the IRS or California tax agency directly. In fact, it is not in their best interest to do so. Your risk of a California tax audit may actually be higher than your risk of an IRS audit. If you have been contacted by the IRS or a California tax agency we invite you to call 866-631-3470 for a free consultation. Learn about the protections of the attorney-client privilege which are not available from your tax preparer, CPA, accountant, bookkeeper or financial adviser.
Is your risk of a California tax audit higher than an IRS audit?
Yes. The present audit load of the IRS seems to be lower due to budget and personnel issues. California tax agencies are very aggressive especially if you own a business or an interest in a domestic of foreign corporation.
Why are California tax audits increasing?
California needs additional revenue and tax audits are fertile ground. California taxpayers are often no match for the skilled and highly trained auditors who are probing to expand the scope of any audit.
Do I need a tax attorney for an FTB or EDD audit?
Yes. Your face substantial exposure and risk in a California tax audit. We can handle all communications on your behalf and work to limit not only the scope of the audit but ultimately the financial impact it will have upon you or your business.
Do the IRS and California tax agencies share information?
Yes. And any California audit will usually be immediately followed by a knock on the door from the IRS and vice versa. The agencies cooperate and share the results of audits and your resulting new tax exposure with other agencies.