The question often arises how to address a taxpayer’s FTB tax returns after an IRS audit. In addition, generally how long is the time period during which the FTB can audit a taxpayer’s return? The Revenue and Taxation Code provides final deadlines for the Franchise Tax Board (FTB) to assess additional taxes and to propose assessments. This time limit is called the statute of limitations. Revenue and Taxation Code section 19057 provides the general time limit for the FTB to assess additional California state income and franchise tax liabilities. In special circumstances, such as if the Internal Revenue Service has made federal adjustments, or if the taxpayer has failed to report 25% or more of the gross income required to be reported on his or her tax return, assessments may be allowed after the statute of limitations has expired.

FTB Tax Returns Filed on or Before the Original Due Date of the Return – General Four Year Statute of Limitations

Taxpayers frequently seek guidance from a tax attorney when they receive an FTB audit letter. The Revenue and Taxation Code generally requires the FTB to mail a proposed deficiency assessment to the taxpayer within four years after the filing date of the taxpayer’s return. Under Revenue and Taxation Code Section 19066, tax returns filed before the original due date of a personal income tax return (April 15 of the year after the tax year) are considered as filed on the original due date. For example, the original due date of a return for the 2012 tax year was April 15, 2013. If the taxpayer filed a return before this deadline, the return is considered as filed on April 15, 2013. The statute of limitations for the FTB to assess tax for this tax year would therefore expire on April 15, 2017.

Depending on the tax year involved, the deadline may be computed from either the tax return’s April 15 due date, October 15 extended due date, or the date a late tax return was filed. For personal income taxpayers, the process of automatic “paperless” extensions began in the 1991 tax year and remains in effect. Under this process, the taxpayer is no longer required to request an extension on a paper form. If the taxpayer files a return on or before October 15, an extension is automatically granted. If the taxpayer fails to file a return by October 15, no extension exists. Under the paperless extension process, the return is timely if it is filed on or before October 15.

Taxpayer Did Not File a Return or Taxpayer Files a False or Fraudulent Return – No Statute of Limitations

If the taxpayer did not file an FTB tax return, or filed a false or fraudulent tax return, there is no time limit for the FTB to assess tax. The FTB may estimate net income from any available information and assess tax based on that estimate. See Revenue and Taxation Code section 19087. If the taxpayer asserts that the tax return was mailed but the FTB has no record of it, the taxpayer must provide convincing evidence, such as a certified mail receipt, of mailing the return to substantiate that the tax return was mailed.

Notice of Action by Statute of Limitations Deadline

The purpose of the statute of limitations is to specify the time within which the FTB must initiate its assessment procedures. As such, there is no time limitation requiring that the assessment process be completed within any specific time period. Therefore, there is not statute of limitations applicable to the FTB’s notice of action, which is used to finalize the assessment. See Appeal of Jenkel-Davidson Optical Company, 81-SBE-101, May 19, 1981; Appeal of Peter I. and Inga M. Kune, 84-SBE-106, June 27, 1984.

Notification Requirements to the FTB if the IRS makes an Assessment – Two Year Statute of Limitations

Taxpayers are required to notify the FTB if the IRS adjusts or corrects the taxpayer’s gross income or deductions. The taxpayer’s notification to the FTB should include any IRS assessed penalties, adjustments or corrections resulting from math errors, tax credit adjustments, other tax adjustments, or supplemental income even if the IRS did not examine these adjustments. The taxpayer should notify the FTB within six months of each final federal determination. The final federal determination is the date each IRS examination adjustment or resolution is assessed as described in Internal Revenue Code Section 6203. If the FTB receives the federal changes within the six month period, the FTB has two years from the date they receive a report of the federal changes to apply the federal changes to the taxpayer’s California tax return(s). Notification of a change or correction by the taxpayer or IRS must be sufficiently detailed to allow computation of the resulting California tax change.

Untimely Notification of the IRS assessment or adjustment – Four Year Statute of Limitations

A notification to the FTB is considered untimely if the taxpayer or the IRS notifies the FTB more than six months after the date of the final federal determination. IfThe FTB will have four years from the date they receive “sufficiently-detailed” information to apply the federal changes to your California return. “Sufficiently-detailed” information is defined as enough information to allow us to compute the resulting California tax change.

If the FTB receives no notification from the taxpayer or the IRS

If the FTB does not receive notification of a taxpayer’s federal adjustments, the statute of limitations for assessment by the Franchise Tax Board remains open, and the FTB may issue an assessment at any time. Interest accrues from the original tax year due date until you fully pay the tax liabilities and penalties.

Who Long Does the FTB Have to Assess Tax?

Have you received an FTB audit letter? If the FTB has issued additional assessments or adjustments to your FTB tax return, contact a Los Angeles tax attorney at Disparte Tax Law for a free consultation to discuss your options and the best strategy to resolve any unwanted penalties and interest.