Preparing for a California Residency Audit

California taxing authorities aggressively pursue state revenue through taxation, and devote a significant amount of their resources to residency audits and litigation.

Gilbert Hyatt made history and $90 million when he invented the integrated circuit microprocessor (the computer microchip). Little did he know at the time that he would also make history as the subject of a 26 year-long tax residency case, stemming from California’s efforts to collect state income tax on patent royalties Hyatt collected after he moved to Nevada.

The State of California aggressively pursues its tax revenue and can impose taxes on individuals who are not residents if they have income linked to the state. At 13.3%, California has the highest state income tax rate in the country, and it is no wonder that many individuals who come into great wealth attempt to establish residency elsewhere. In addition, seasonal visitors to Palm Springs and other locations throughout the state are prime California Franchise Tax Board (FTB) targets – they tend to find themselves the subject of California resident income tax bills, which are often both large and unexpected.

The FTB residency audit

All residency disputes begin with an FTB audit. These audits can be very difficult, as they are both time consuming and personally intrusive.

Once a residency audit commences, the FTB is likely to visit any location in the state that may be your principal residence or business location. In addition, you should expect a review of canceled checks, credit card statements, and bank charges to determine your physical presence in California as compared to other states.

Winning a California residency dispute

The best way to win a California residency dispute is to prepare for it before it happens. Keeping detailed records of all your connections with the state is crucial to a successful defense. For one thing, keeping track and documenting all time you spend in California plus appointments, expenses, phone bills, travel, etc. will help your tax attorney prove your activities and whereabouts for the tax year at issue.

If you are a former resident and/or are in the process of leaving the state, you should work on breaking ties with California as soon as possible. Things you can do include, but are not limited to:

  • relinquishing your California driver’s license and obtaining one in your new state of residence
  • finding new doctors and other healthcare professionals in your new state
  • changing your cell phone plan and bank branch
  • registering to vote in your new state of residence, and
  • filing state tax returns and federal tax returns with your new out-of-state address.

Keep in mind that the FTB cannot base your residency in California on home ownership if you are not residing in the home for most of the year.

By filing California nonresident tax returns, it may be possible to commence the running of the statute of limitations on income tax assessments. This could be an extremely valuable tool in a future residency audit.

Seasoned California tax attorneys

The issue of California residency is a contentious issue that frequently results in litigation. We have aggressively represented people through residency audits and litigation for over 30 years – if you believe that the FTB may attempt to classify you as a California resident, let the tax attorneys at Moskowitz, LLP advise you as early as possible how to plan accordingly.

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