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What Happens if I am Contacted by the California Franchise Tax Board?
When the California Franchise Tax Board (“FTB”) contacts you, it’s often the start of a complex process that may lead to an audit, protest, settlement discussions, or an administrative appeal with the California Office of Tax Appeals. Understanding each step can help you navigate this process more effectively. Here’s a guide to what you might expect.
Step 1: Audit
If you’re contacted by the FTB, the first step typically involves an audit. Unlike the IRS (which generally has three years[1]), the FTB generally has four years from the later of the date the return was due or the date the return was filed to assess additional taxes.[2] During this audit, the FTB will review your financial records to verify the accuracy of your tax return. They may require you, your employer, your financial institutions, or any other person to produce relevant records, or compel their attendance or testimony.[3] The FTB can also issue subpoenas including to anyone mentioned above.[4] If the FTB believes it has found discrepancies, and you and the auditor cannot come to an agreement which closes the case, eventually, the FTB will send you a Notice of Proposed Assessment (“NPA”), which outlines the additional taxes, penalties, and interest the FTB believes you owe.[5]
Step 2: Protest
After receiving an NPA, you have the right to protest the assessment. To initiate a protest, you must generally file a written protest within 60 days of receiving the NPA.[6] If you fail to do so, the FTB will automatically assess the proposed taxes, and a lien will arise by operation of law after notice and demand.[7] During the protest process, our experience is that it’s important to present new evidence and not simply reiterate what you told the auditor during the audit phase. This is your opportunity to address any errors or misunderstandings in the initial audit findings.
Step 3: FTB Settlement Bureau
The FTB has the authority to settle cases at the administrative level.[8] If your protest does not resolve the issue, you may consider taking your case to the FTB Settlement Bureau.[9] The Settlement Bureau is tasked with resolving cases, if possible, based on an evaluation of the hazards of litigation including costs and risks.[10]
In order for your case to be considered, a taxpayer must make a good faith settlement offer. A good faith offer means that you must present a reasonable and sincere offer including grounds that support your offer.[11] Unlike when dealing with the IRS Independent Office of Appeals (where either you or the IRS can offer to settle),[12] to get into the FTB Settlement Program, you must initiate the offer to settle.[13] Also, unlike the FTB’s Offer in Compromise Program, the FTB’s Settlement Program will not offer a reduction in liabilities based on your ability to pay.[14] This is why it is important to work with knowledgeable tax practitioner who can figure out the best strategy to craft an offer which may potentially get you through the door with the FTB.
Step 4: Office of Tax Appeals
After you file a protest, if the FTB disagrees, it may eventually send you a Notice of Action (“NOA”).[15] If settlement is not an option and you wish to continue with your case, you can file a petition with the Office of Tax Appeals (“OTA”) within 30 days of the date of the FTB mailing the NOA.[16] The OTA process involves briefing and a hearing where you can present your case.[17] The OTA website provides detailed information on the procedural aspects, but generally, this is a formal process where both sides present their arguments before an administrative law judge.
Strategy for Navigating the Process
A strategic approach to dealing with the FTB involves attempting to get the case closed during the audit phase. If that is not possible the next best step is to utilize the Settlement Bureau effectively. By presenting a well-prepared case during the protest phase and making a good faith offer during settlement negotiations, you may be able to resolve issues without needing to escalate to the OTA. However, if the settlement process does not yield a satisfactory result, you retain the right to resume your appeal with the OTA.
Conclusion
Being audited by the California Franchise Tax Board can be daunting, but understanding the steps involved—from audit to appeals—can help you manage the process more effectively. By timely protesting, presenting new evidence, making a good faith settlement offer, and preparing for potential appeals, you can navigate this complex landscape with greater confidence and clarity.
Authors: Steven Walker and Philip Wolf