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California State Tax Resolution Services
The attorneys at Segal, Cohen & Landis have extensive experience resolving California state tax matters with the Franchise Tax Board (FTB), the Employment Development Department (EDD), and the California Department of Tax and Fee Administration (CDTFA), including California Residency Audits. If you are the subject of an FTB, EDD or CDTFA audit, and/or if you owe California state tax, whether individual income tax, business income tax, payroll tax, or sales tax, we encourage you to speak with one of our attorneys today.
California State Income Tax: The Franchise Tax Board (FTB)
The FTB is the agency responsible for enforcing the income tax laws in the State of California. It reviews tax returns, issues refunds where appropriate, collects tax when due, conducts audits and can assess additional tax liability against individuals or businesses that reside in the state. The FTB aggressively pursues audits and enforcement action to such extent that personal income tax constitutes a significant source of revenue for the state.
The FTB will often examine the tax returns and accounts of taxpayers based on specific transactions or information presented on their tax returns. Some of the common FTB audit triggers include:
- IRS audit that resulted in increased tax liability for the taxpayer (FTB will make similar adjustments)
- Sale of personal or real property, including like-kind exchanges
- California residency and sourcing of income (see Residency Audit below)
- Owner’s basis in a pass-through entity
- Head of Household (HOH) filing status
- Employee business expenses
- Inconsistent income information
It is noteworthy that other state agencies cooperate with the FTB to provide it access to records and information (e.g., DMV records, property tax records) which yield information about taxpayer activity and can influence the scope and/or outcome of an audit. Under certain circumstances, the California DMV can suspend the driver’s license for failure to pay income taxes.
If the FTB determines that you owe additional tax, it will issue a Notice of Proposed Assessment (NPA) to which you can appeal and request a hearing. There are specific timelines and guidelines for filing an FTB appeal and as such you are encouraged to consult with a tax attorney.
California Residency Audit
Your California state income tax liability will be determined based on your residency status. California’s residency laws make the following distinctions based on residency:
- Resident: A taxpayer who is determined to be a resident of the state will be taxed on income from all sources, including income from sources outside of California.
- Part-Year Resident: A taxpayer who is determined to be a part-year resident of the state will be taxed on all income received while a resident and only from California sources while a nonresident.
- Nonresident: A taxpayer who is determined to be a nonresident of the state will be taxed only on income from California sources.
California’s Revenue and Taxation Code defines a resident as an individual who is in the state for anything other than a temporary or transitory purpose or who is domiciled in California but physically outside the state for a temporary or transitory purpose.
The FTB considers the following factors in determining an individual’s residency status:
- Amount of time spent in the state vs out of the state in a calendar year
- Location of the individual’s spouse and children
- State of the individual’s principal place of business
- State that issued the individual’s driver’s license
- State in which the individua’s vehicles are registered
- State in which the individual’s professional licenses are maintained
- State in which the individual is registered to vote
- Location of the individual’s bank accounts
- Origination points of the individual’s financial transactions
- Location of the individual’s doctor, accountants, and attorneys
- Location of the individual’s social ties such as worship, country club and professional associations
- Location of the individual’s real estate property and investments
- Permanence of the individual’s work assignments in California
Based on the foregoing, determining whether the taxpayer is a “resident” of California for income tax purposes becomes critical. The FTB conducts residency audits to make this determination. If you are the subject of a California residency audit, consult with a tax attorney to determine how you can minimize your tax liability.
California State Payroll Tax: The Employment Development Department (EDD)
The EDD is the agency responsible for collecting and administering payroll taxes in California. It is the largest tax agency in the state and will take immediate and severe action against any California employer that fails to timely pay payroll taxes.
Payroll taxes are comprised of unemployment insurance (UI), employment training tax (ETT), state disability insurance (SDI), and personal income tax (PIT). The UI and ETT are paid via employer contribution while the SDI and PIT are paid via withholding from the employee’s wages.
The EDD will impose significant penalties for unpaid payroll taxes as well as pursue enforcement action including but not limited to:
California State Sales Tax & Use Tax: The California Department of Tax and Fee Administration (CDTFA), Formerly Board of Equalization (BOE)
The CDTFA is the agency responsible for enforcing sales tax laws in the state of California. California sales tax is imposed on all retailers that sell merchandise within the state. The tax is administered by CDTFA and calculated based on the business gross receipts minus non-taxable sales. Sellers are required to obtain a seller’s permit and to report and pay taxes to CDTFA.
There are several reasons why a business may be flagged for CDTFA audit, including:
- Engage mostly in cash transactions
- Large number of exempt sales
- Repeatedly filing sales and use tax returns and paying tax late
- Failing to report sales and use tax
- Operating in an industry with a history of non-compliance
- Filings from a prior audit indicating the presence of sales tax problems
If your business is the subject of a CDTFA audit, documents which can substantiate the gross sales claimed on the tax return will be requested. Some of these may include books of account (general ledger, balance sheet), sales invoices, purchase orders, contracts, bank statements, exemption certificates, resale certificates, sales tax returns including working papers and schedules. Frequently a business does not have adequate records to defend the gross receipts claimed on the tax return. The attorneys at Segal, Cohen and Landis can help you determine whether your records are adequate and provide guidance in terms of document reconstruction where necessary.
The CDTFA will share information with the IRS and the FTB which can result in the assessment of additional taxes against the business. Accordingly, it is advisable to challenge any sales tax audit adjustments. If an agreement cannot be reached during the sales tax audit, the CDTFA will issue a Notice of Determination. Failure to appeal the Notice will result in the tax becoming due and final. The attorneys at Segal, Cohen & Landis have experience filing petitions and participating CDTFA hearings to appeal a Notice of Determination.
If a corporate taxpayer cannot pay the sales tax, the CDTFA may pursue dual assessment in which case it also holds the persons in control of the filing or payment of corporate sales tax personally responsible for the tax liability. This can include officers and shareholders of the business as well as non-owners. In such case, a separate Notice of Determination will be issued against the individual.
The CDTFA sales tax audit and appeal processes are very complicated requiring knowledge of California sales tax laws and procedures. Our tax attorneys have extensive experience representing businesses with sales tax issues, whether facing CDTFA enforcement action, defending a tax return at audit, or appealing a Notice of Determination.
California State Tax Issues: Why You Need an SCL Tax Attorney
The attorneys at Segal, Cohen & Landis have been successful in minimizing assessment of additional tax against clients, resolving outstanding tax liabilities and avoiding FTB, EDD, and CDTFA enforcement action. We can help you with:
See What the FTB Has to Say About California State Tax Collections:
Need Help with California State Tax Resolution?
Please feel free to contact us regarding your California State Tax Resolution. Every tax matter is unique because every person’s situation is unique. We can quickly and efficiently analyze your circumstances and propose various options of resolution.
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