Sam Brotman, JD, LLM, MBA December 27, 2013 5 min read

Franchise Tax Board Audit Tips

Throughout my years of practice, I have developed a few helpful tips for dealing with a Franchise Tax Board audit and auditors from the state of California. Franchise Tax Board audits are not nearly as common these days. Most of my clients who receive contact from the Franchise Tax Board are contacted after they are subject to an IRS audit and merely sent a bill based on the adjustment in taxable income that the IRS has already calculated. In other words, they let the IRS do all the hard work and send a supplemental bill later on. However, I hope that these few helpful tips will guide you in your dealings with the Franchise Tax Board. For more information on California state tax matters, please visit the Franchise Tax Board attorney services section of my website.

Keep in mind that the purpose of a Franchise Tax Board audit is to “effectively and efficiently determine the correct amount of tax based on an analysis of relevant tax statutes, regulations, and case law as applied to the taxpayer's facts”.[1] As such, you need to treat the Franchise Tax Board audit as a routine examination of your books and records and nothing more, unless you suspect some ulterior motive or that the Franchise Tax Board auditor is fishing for additional information for a criminal case. If you have done something criminal or feel that you are the target of a Franchise Tax Board criminal investigation, please do not delay and contact a qualified Franchise Tax Board audit attorney immediately.

The Flow of Information in a Franchise Tax Board Audit

Next, it is important to control the flow of information and how that information is communicated to the Franchise Tax Board. One of the things that I do for my clients when being retained to represent them in a Franchise Tax Board audit is to do a preliminary audit of their books and records. This helps me trace the history of reported income and substantiated deductions that the taxpayer has claimed on their return. I also will go the extra mile at looking at their bank accounts, where the situation warrants it, and will perform a bank deposit reconciliation. This is where I trace all the information in their bank statements to confirm that it was reported property on their California state tax return. Although these tasks involve extra work at the beginning of the audit, they can go a long way toward saving you a ton of potential tax liability. By pre-auditing a return, it will help me identify any issues that may become present BEFORE I meet with the Franchise Tax Board Auditor. This way, I can develop my audit strategy before walking into our first meeting with the FTB and know which directions I am going to try to steer the audit (trying to lead the auditor away from potentially disastrous queries for my client). In doing this, I can control the flow of information in the audit and usually will walk away with the best results for my client.

Read more about Franchise Tax Board audits

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Sam Brotman, JD, LLM, MBA

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