California Residence Tax Audits

The California Franchise Tax Board (“FTB) has a reputation for aggressively targeting nonresidents with significant connections to California for California residence tax audits. If you become the focus of their attention, the FTB considers many factors, types of information and documents at their disposal to determine whether to pursue a residence tax audit against you. For the FTB, those factors and documents, and that information, are part of a “cost-benefit” analysis by which the FTB try to determine whether you are “worth” the cost of a tax audit to them and their chances of success.

First, the information and documents that become available to the FTB (usually electronically, but sometimes gratuitously or unwittingly, by your actions) is assessed for possible follow-up inquiries (most often via the Form 4600 inquiry letter, questionnaire and request for a tax return filing discussed above). The information provided in your response to the Form 4600 inquiry is then evaluated (making a response crafted for you by an experienced California cross-border tax lawyer extremely important – see discussion under heading “’FTB Form 4600 Tax Return Requests”). Additionally, information and documents the FTB obtains about your California source income and investments via direct receipt of a copy of your Forms W-2 (wages and compensation from an employer), K-1 (income from entities or trusts), 1099 (various types of income received directly from the payor), 1098 (interest paid on a mortgage on a California property), 593 (California source income or gains subject to nonresident withholding tax), and so on, are considered.

If your response to the FTB’s Form 4600 inquiry letter is met with additional questions and/or document requests, that may well be the beginning of a residence tax audit. Such an audit can be extremely intrusive, time-consuming and document intensive – you can expect to be asked for all manner of information and documents that may indicate your whereabouts on each day of the tax year in question, including credit card and bank statements showing ATM withdrawals and local purchases, cell phone bills indicating initiation or receipt of calls locally, utility and trash bills, passports, airline tickets, hotel bills and other travel records, newspaper bills, and so on. You will also be asked for comprehensive documentation of your finances, including federal and other state or country tax returns and supporting documentation. Additionally, your neighbors, friends and relatives may be questioned and asked to provide affidavits concerning their responses and your social media accounts scoured for pictures and things you have said about your whereabouts and intentions as to residence. FTB auditors may also question third party suppliers or others with whom you have done business and obtain documents from them.

Although the foregoing sounds daunting, we will guide you through every step of this process, prepare professionally-crafted responses to FTB information and document requests, assist you to prepare evidence supporting your status as a nonresident, obtain affidavits supporting your status as a nonresident and otherwise assist you to proactively prepare a winning defense to a residence tax audit.

At Lance Cross-Border Law and Tax, we have considerable experience in helping our clients to avoid residence tax audits if they receive an FTB Form 4600 inquiry letter, questionnaire and/or request to file a tax return. We also have decades of experience handling tax audits and appeals of tax assessments. If you, your spouse or someone close to you has become the target of an FTB inquiry or residence tax audit, contact us at (760) 578-5093, via email at Brent@LanceCrossborder.com or by using our online contact form. We will respond to all relevant inquiries quickly without any obligation on your part and help you to formulate a plan for defending your nonresident status.