Double Audit Nightmare, Fixing FTB Tax Issues

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A federal tax audit can be stressful enough, but California taxpayers may have an additional headache if they are notified by the Internal Revenue Service (IRS) of federal tax adjustments to the California Franchise Tax Board (FTB).

When you change your federal income, the state might follow with further investigation of your tax returns, even surprise you with assessments, interest, and penalties. Knowing these agencies and how they share information with each other can help you prevent double trouble on an audit.

FTB Tax


Shared Information by IRS and FTB

The IRS and FTB share information in order to enhance tax compliance and detect differences. Adjustments in federal taxable income may impact California's taxable income, as California state taxable income is calculated based on federal taxable income with certain adjustments.

An IRS audit, for instance, may find that you failed to report all of your business income, failed to include investment gains, or deducted incorrectly—all of these situations can impact your California return. The information may be used to check your state tax liability and to send a notice or assessment to you by the FTB. Hire a tax professional (like an attorney for an EDD appeal) to get much-needed help.

A federal adjustment doesn't necessarily trigger a state audit, though. The FTB analyzes the data and decides if a California tax change is needed.

What Makes a Federal Audit A State Tax Issue?

Suppose that a federal audit finds that a taxpayer has $50,000 more in taxable income. The taxpayer may have to pay more state tax, interest, and even penalties if that change also raises California taxable income.

There can also be issues with compliance as federal changes are not reported in time. Generally, California mandates that taxpayers comply with federal adjustments within six months of federal adjustments becoming final. If you do not notify the FTB in the timeframe required, penalties may be imposed based on the circumstances.

What Should We Do After an IRS Audit?

A swift response can help to minimize unnecessary expenditures and prevent unnecessary disputes.

·         Compare and contrast the final IRS determination: Check for income, deductions, credits, and other changes that may impact your California return. Don’t forget to consult with an expert (like an IRS audit attorney) before making any decision.

·         Re-calculate California taxable income: Federal and California tax laws are different, so a federal adjustment will not necessarily yield the same California adjustment.

·         Pay any undisputed state tax: If the tax is one that you willfully owe, it will help cap additional interest but will not exclude you from other penalties and charges.

·         Maintain full records: Save IRS audit records, amended federal returns, records, and internal communications with IRS and the state.

·         Get expert advice: Consult a tax expert for help determining if federal adjustment impacts California liability and for responses to FTB notices.

There are Some Tips to Avoid A Double Audit Nightmare:

1.      Don't expect to get an FTB notice. Check filing requirements in California as soon as a federal adjustment is final.

2.      Check state-specific rules. There may be differences between California and federal law regarding certain deductions, credits, and income items. Always rely on professionals for tax resolution in Pasadena.

3.      Track deadlines carefully. Even if the tax adjustment is legitimate, failing to meet notification deadlines can lead to further exposure.

4.      Answer notices timely. Confirm the proposed assessment, compare it with the federal assessment, and contest inaccuracies within the specified time frame.

Don't let taxes ruin your finances by not being proactive in your compliance.

While an IRS audit doesn't automatically mean a second audit, there are the following California tax implications if federal adjustments are made. Timely checking of your state obligations, filing of the correct amended return, and keeping proper records will help minimize unnecessary penalties and interest. If the adjustment is complex or significant, professional tax advice may be helpful in meeting both compliance requirements from the agencies and safeguarding your financial position.

Location: Los Angeles, CA, USA

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