If you get a notice from the California Franchise Tax Board (FTB), you might be wondering what comes next. It can feel very intimidating, but many of the steps you take before the audit starts will determine how it progresses. The FTB is known for strict enforcement, but having an experienced tax and audit attorney at your side can make all the difference.
At Weed Law Group, PC, our California tax attorneys assist you with FTB audits and in protecting your rights. Be proactive to safeguard your interests.
1. Read the Audit Notice Carefully
FTB audit notices vary depending on the issue. Some are simple document requests; others signal a full-scope examination. Before responding, identify:
- Tax years under review
- The specific issues they have raised
- Deadlines for response
- Documents the FTB is requesting
Missing a deadline can trigger penalties or escalate the audit, so mark all dates immediately.
2. Gather and Organize All Relevant Records
The FTB expects complete, well-organized documentation. Before the audit begins, collect:
- W-2s, 1099s, K-1s, and other income statements
- Bank and credit card statements
- Business ledgers, receipts, mileage logs, and invoices
- Proof of residency
- Brokerage statements and capital gains records
- Real estate documents (closing statements, depreciation schedules, rental records)
- Prior-year tax returns and workpapers
The FTB frequently cross-checks your return against employer filings, IRS data, property records, and third-party reports. If something doesn’t match, they will ask about it.
3. Identify Potential Red Flags Before the Auditor Does
Before the audit meeting or document submission, review your return with a critical eye. Common FTB audit triggers include:
- Large or unusual business deductions
- Residency claims when you live or work across multiple states
- Unreported 1099 income
- Cryptocurrency transactions
- Real estate sales or 1031 exchanges
- Pass-through income from S-corps or partnerships
- High charitable deductions
- Cash-intensive businesses
Spotting these issues early allows you to prepare explanations and supporting documentation.
4. Do Not Contact the Auditor Until You Understand the Issues
Many taxpayers panic and call the auditor immediately. Don’t do this without first speaking to an experienced California tax attorney. Anything you say can affect the audit. Before responding:
- Review your return
- Gather documents
- Speak with a tax professional if needed
- Understand the scope of the audit
5. Consider Hiring a Tax Professional Early
FTB audits are more aggressive than IRS audits in several areas. A CPA, enrolled agent, or tax attorney can:
- Communicate with the auditor on your behalf
- Identify weaknesses in your return
- Prepare documentation packages
- Prevent the audit from expanding
- Negotiate penalties or adjustments
If your audit involves residency, business income, or multiple tax years, professional representation is strongly recommended.
6. Reconstruct Missing or Incomplete Records
If you’re missing receipts or documentation, begin reconstructing records immediately. The FTB does allow reasonable reconstruction when original documents are unavailable. Examples include:
- Bank statements to support expenses
- Mileage logs recreated using calendars or GPS data
- Vendor statements or invoices
- Affidavits from clients or contractors
The earlier you begin this process, the stronger your documentation will be.
7. Review Your Residency Status if Applicable
Residency audits are among the most complex FTB examinations. If your audit involves residency, gather:
- Travel logs
- Domicile evidence
- Property records for all states involved
- Employment contracts
- School enrollment records
- Medical provider locations
- Voter registration and driver’s license information
California applies a “closest connection” test, and the burden is on you to prove you were not a resident if the FTB believes otherwise.
8. Prepare a Clear, Organized Response Package
Before the audit begins, assemble your documents in a clean, logical format. This helps:
- Reduce follow-up requests
- Prevent the audit from expanding
- Demonstrate credibility
- Speed up the process
9. Avoid Common Mistakes That Make Audits Worse
Before the audit starts, avoid:
- Volunteering unnecessary information
- Providing incomplete or inconsistent records
- Ignoring deadlines
- Making statements without documentation
- Attempting to “explain away” missing records without evidence
Get Help with a California Franchise Tax Board Audit
While an audit by the FTB is serious, it doesn’t have to be overwhelming. You can have help preparing for the audit, presenting your case, and creating a strategic response.
Our team at Weed Law Group, PC are ready to help with your tax and audit needs. Contact us today for a consultation.