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Audited By The IRS? Don’t Forget About California!



Many people, including their accountants, are unaware that upon completion of an IRS audit, California law requires the taxpayer to notify the Franchise Tax Board (FTB) of the results of the IRS audit. The time period for any governmental agency to conduct an audit is governed by various statutes. For example, the IRS usually has 3 years to audit you after you have filed your tax return. If you file your return before the April 15th deadline, the IRS has 3 years from April 15th to audit you. The State of California has 4 years.

Did you know that if the IRS audits you, or you are involved in a tax controversy such as an administrative appeal or even litigation, the statute of limitations for audit, under California law, may remain open indefinitely. It is hard to believe but there are still ongoing IRS tax shelter cases from the 1980s where the statute of limitation for audit under California law remains open today and will continue to remain open indefinitely unless the taxpayer, his accountant or attorney complies with an obscure provision of the California Revenue and Taxation Code. Think of all the interest that has been compounding on these old tax debts!

California Revenue and Taxation Code Section 18622 is something you should know about. This provision states, in substance, that upon completion of an IRS income tax matter the taxpayer has only 6 months thereafter to notify the FTB that the IRS matter has been concluded. This notice can take the form of a written letter sent by certified or registered mail or by the preparation and submission of an amended FTB income tax return. The taxpayer has the duty to inform the FTB that they agree with the final IRS determination or where they specifically disagree with that determination. If you notify the FTB by a written letter, you must also attach the results of the IRS determination and also inform the FTB who to contact at the IRS and include a phone number whenever possible.

If you notify the FTB within 6 months after the final IRS determination, pursuant to Code Section 18622, the FTB must issue its “me too” assessment within 2 years from the time you notify them. If the FTB waits beyond the 2 year period, any FTB assessment thereafter is null and void.

If you fail to notify the FTB within the 6 month period required by Code Section 18622, the FTB literally has an unlimited time frame in which to issue its assessment against you. Remember the old Johnny Mathis song, “The 12th of Never”? Don’t put yourself in that position.

When notifying the FTB, pursuant to Revenue and Taxation Code Section 18622, always send your correspondence in a way that you can prove that it was sent. If you are going to send it by registered or certified mail, take the envelope to the Post Office and have them stamp your receipt showing it was sent out on a specific day. You may also use a carrier like FedEx or UPS as they track your letter from pick-up to delivery. You can not be to careful and you may have to one day prove that the FTB corresponding assessment is invalid because it is beyond the 2 year period set forth in the statute.