By Robert S. Schriebman
You have just completed an IRS income tax audit. The IRS has assessed taxes, penalties, and interest. You have agreed to the IRS adjustments. You do not wish to file any type of appeal or challenge the IRS audit in the U.S. Tax Court. Must you notify the FTB of the results of your IRS audit?
On September 1, 2014, the FTB issued a news release reminding taxpayers of their duty to notify the FTB at the completion of an IRS income tax examination. There is no duty on your part to notify the FTB if the IRS conducts an employment tax, estate/gift tax, or excise tax examination. The rules relating to notifying the FTB relate only to final IRS income tax assessments.
On the other hand, you do not have a duty to notify the IRS if you are audited by the FTB, EDD, or SBE. The duty to notify the FTB is very limited and only relates to finalized IRS income tax changes. In other words, if you disagree with an IRS audit and you wish to file an appeal or take your matter to the U.S. Tax Court there is no duty to notify the FTB until your pending IRS matter becomes final.
Your Responsibility to Notify the FTB In A Nutshell
According to the FTB press release of September 1, 2014, if the IRS audits you and completes its examination you must notify the FTB of the final federal determination within six months. The notification should disclose 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 statute of limitations for assessment of California income tax based on the federal changes is two years, four years, or open, depending on whether the FTB receives notification of the federal changes (a) within six months; (b) receives notification after six months or; (c) does not receive notification at all
FTB refunds are tricky. One must be constantly vigilant because the FTB refund statutes are numerous and complicated.
Closed IRS Matter
If your IRS matter is completed and the IRS changes decrease your income or increase tax credits and you are eligible for an FTB tax refund, your refund claim must be filed within the normal statute of limitations or within two years after the final federal determination, whichever is later.
Unresolved IRS Matter
If your IRS matter is ongoing but there is a risk that you will lose your FTB refund if you do not file a timely FTB claim then file a claim for refund on Form 540X (Amended Individual Income Tax Return) or Form 100X (Amended Corporation Franchise or Income Tax Return). You should write “PROTECTIVE CLAIM” in red ink at the top of the completed Form 540X or Form 100X. This will leave the statute of limitations open for a claim for your FTB refund.
California Revenue and Taxation (R&T) Code § 18622 Explained
R&T § 18622 is the key provision of California income tax law dealing with your duty to notify the FTB upon the final IRS determination of an income tax examination. It is surprising to me how many lawyers and accountants fail to comply with this law. The code section has essentially three parts:
- If you notify the FTB within six months after the final federal determination the FTB has only two years to issue its “Me Too” assessment.
- If you notify the FTB after six months after the final federal determination the FTB has four years to issue its “Me Too” assessment.
- If you totally fail to notify the FTB after the final federal determination there is no time limit for the FTB to issue its “Me Too” assessment.
- Once the FTB issues its “Me Too” assessment the FTB has a twenty year statute of limitations to collect any deficiency.
- Interest continues to compound on any unpaid deficiency.
What Must You Include In Your Notice?
Before discussing what goes into the notice let us discuss some of the basics for making sure the notice is timely received by the FTB.
- Your notice must be in writing. The notice must be sent to the following address: Franchise Tax Board, Audit Section, Attention: RAR/VOL, P.O. Box 1673, Sacramento CA 95867.
- Send the notice by Certified Mail with Return Receipt Requested at the USPS. Make sure your receipt gets a “round stamp” from the postal worker. Round stamp proves the date you sent the notice.
- The notice should include a complete copy of the official IRS income tax changes. Usually this is IRS Form 4549, or equivalent, entitled “Income Tax Examination Changes.” Attach all schedules and accompanying documentation. SEND ONLY A COPY, DO NOT SEND ORIGINALS.
- Give the FTB all contact information of the IRS auditor, IRS Settlement Officer, IRS Appeals Officer, etc. This includes the person’s name, address, telephone and fax numbers.
- For more information see Internal Revenue Code § 6203.
Some tax practitioners simply file an amended California return based upon the IRS final determination. This may be just as effective as the formal notice described above.
Consider Prepaying Your FTB “Me Too” Assessment
Instead of preparing and filing a tax return you may have your accountant calculate your FTB exposure and send payment with your written notice. This can save you about one year of FTB accrued interest.
How Long Does It Take the FTB to Send You Its “Me Too” Assessment
It usually takes about one year after the FTB receives your written notice to issue its “Me Too” assessment. This may be in the form of a Notice of Proposed Assessment (NPA). It is always a good idea to have your accountant review the NPA for accuracy. Sometimes the FTB assesses penalties that the IRS did not assess. You are entitled to challenge any NPA that is incorrect or contains penalties that were not in the original IRS deficiency.
Send Written Notice to the FTB Even if You Received a “No Change” From the IRS
It is always great to get a “No Change” from the IRS or a “Zero” deficiency. You are still required to notify the FTB as explained above. Your notice will start the FTB Statute of Limitations for Examination. The FTB does not always agree with the results of an IRS audit. The FTB is free to conduct its own examination as a result of your notice. If the FTB is barred because of your timely notice this works to your advantage.
An EDD attorney, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States.
As a trusted EDD lawyer, Robert S. Schriebman has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure”, both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure”, both published by Commerce Clearing House.
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