Franchise Tax Board Audits, Procedures, and Penalties

Franchise Tax Board Audits, Procedures, and Penalties

Determining and Contesting California Taxation of Residency

Introduction

Like the Internal Revenue Service, the Franchise Tax Board is authorized to audit tax returns and assess additional tax liabilities, interest, and penalties. Although a Franchise Tax Board audit seems similar to an Internal Revenue Service audit, a Franchise Tax Board audit is very different in nature, and the outcome of a Franchise Tax Board audit may be dramatically different than an Internal Revenue Service audit. We are aware of these differences and have been navigating through the Franchise Tax Board audit process for years.

The Initial Franchise Tax Board Contact Letter

Just about every Franchise Tax Board audit will begin with an initial contact letter. In most cases, the Franchise Tax Board will send to a taxpayer an Information Document Request. The reason the Franchise Tax Board sends an Information Document Request to taxpayers is to determine if there was omitted taxable income from a tax return and to determine if a taxpayer can substantiate expenses claimed on a tax return. Nobody ever likes responding to an Information Document Request, but it is extremely important to timely respond to an Information Document Request.

What happens if you fail to timely respond to an Information Document Request?

Depending upon the facts of the particular case, the Franchise Tax Board may consider an untimely response as evidence of a badge of fraud and a reason to assess a seventy-five percent civil fraud penalty. The case may even be referred to a special investigations unit for criminal prosecution consideration. Consequently, it is extremely important to timely respond to a Franchise Tax Board Information Documentation Request, and carefully reply to a Franchise Tax Board Information Document Request.

Taxpayers should understand that if they participated in a tax shelter or had income from offshore accounts, they may receive a contact letter that is different than the usual Information Document Requests from the Franchise Tax Board. In these cases, it is extremely important to take a closer look at the initial correspondence received from the Franchise Tax Board. If the initial correspondence from the Franchise Tax Board states that the agency received information that the taxpayer may have participated in a tax shelter or received income from a previously undisclosed foreign financial account, it may be possible to avoid an audit and significant penalties by filing amended tax returns. With that said, the Franchise Tax Board must receive a response quickly.

If you received a contact letter from the Franchise Tax Board questioning a position you took on a tax return, you will need an experienced tax attorney that is aware of the differences in the correspondences sent by that agency and how to properly respond to protect your interests. At Moskowitz, LLP, we have substantial experience representing clientele before the Franchise Tax Board audit process. Let us aggressively represent you if you are contacted by the Franchise Tax Board.

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