A California Franchise Tax Board audit commences with an initial contact letter that explains why the FTB has selected an individual or business’ tax return for audit. Throughout the course of the audit, the FTB auditor will issue Information Document Requests that serve to gather facts and documents necessary to understand and verify items that the taxpayer reported on the tax return.
At the end of the audit, the FTB auditor will provide the results in writing. A notice of proposed assessment shows the additional tax that the FTB believes the taxpayer owes. If a taxpayer does not agree with the proposed adjustments, the taxpayer may be able to file a written protest. At that point, an FTB hearing officer will be assigned to the case, and he or she will determine the correct amount of tax based on the evidence that the taxpayer submits and the law.
An important strategic move is to present new evidence or legal argument and not simply re-hash the information already provided to the FTB auditor. Many cases are lost at protest because the taxpayer re-states the evidence and arguments already made and rejected at audit. Additionally, an in-person protest hearing can be helpful on complex cases as opposed to simply discussing the case over the telephone with the protest hearing officer. Another key point to remember is that a protest hearing officer is not like an IRS Appeals Officer and lacks the ability to negotiate settlement. That occurs at the FTB Settlement Bureau.
If a taxpayer is unable to reach an agreement at protest, the next step may be to enter the FTB Settlement Bureau. The purpose of the settlement program is to negotiate settlements of civil tax matters in dispute consistent with a reasonable evaluation of the costs and risks associated with the protest, appeal or refund claim of these matters. A taxpayer must make a good faith settlement offer as part of the taxpayer’s request for settlement. The FTB Settlement Bureau will then consider the taxpayer’s request for settlement to determine if the case is a proper candidate for the settlement program. Except for a public record statement, the settlement information is confidential and the taxpayer enterers into a Nondisclosure Agreement. This means that there is confidentiality, which is important to many taxpayers seeking to resolve their tax case with the FTB.
For additional information, see FTB Notice 2007-2, Settlement of Administrative Civil Tax Matters in Dispute; FTB 985, Audit/Protest/Appeals (The process).
Individuals or companies with an FTB tax issue should contact competent tax counsel, who can evaluate the case, explain the options, and provide adequate representation.