What an FTB Audit Is

The California Franchise Tax Board administers the state’s personal income tax and corporate tax, and it audits California returns the same way the IRS audits federal returns — by examining the underlying records, income, deductions, and credits to determine whether the reported amounts are correct.

The FTB audits individuals (Forms 540 and 540NR), C corporations (Form 100), S corporations (Form 100S), partnerships (Form 565), and LLCs (Form 568). The agency has broad examination authority under the California Revenue and Taxation Code, including the power to subpoena records, interview third parties, and assess tax, interest, and penalties for any year within the applicable statute of limitations.

An FTB audit is a separate proceeding from an IRS federal audit. Resolving your IRS examination does not automatically resolve a California examination, and vice versa. The agencies share information — the FTB receives IRS audit results as a matter of course — but they apply different legal standards and reach independent conclusions. A settlement with the IRS is not binding on the FTB, and a concession on the federal return does not always mean the same concession on the California return.

What Triggers an FTB Audit

The most reliable predictor of an FTB audit is a federal audit of the same year — the FTB receives IRS examination results automatically and acts on them.

The other triggers the FTB uses to select returns for examination include:

Computer-scoring models: Like the IRS’s Discriminant Information Function (DIF) system, the FTB uses its own electronic scoring to flag returns with statistical anomalies — unusually high deductions relative to income, credit claims that are disproportionate to the industry, or income patterns that differ from prior-year returns.

Self-employment income and Schedule C activity: Large deductions on Schedule C (business expenses, home office, vehicle), particularly where the reported net income is low relative to gross revenue, are a recurring audit trigger. The FTB looks at these the same way the IRS does — and it can coordinate with IRS data on the same taxpayer.

Large charitable deductions: Conservation easements, donated property, and non-cash charitable contribution deductions are areas of concentrated FTB scrutiny. The FTB has been active in auditing California taxpayers who participated in syndicated conservation easement transactions, sometimes in coordination with IRS examination activity.

California-specific credits: The FTB audits California credit claims — including the Research and Development credit, film and television production credits, NOL (net operating loss) carryforward claims, and enterprise zone credits (which are now largely legacy issues) — at elevated rates compared to routine income items. California has its own R&D credit rules that differ from IRC § 41, so federal R&D credit compliance does not guarantee California compliance.

Part-year and nonresident returns: Form 540NR (Nonresident or Part-Year Resident Return) is subject to elevated scrutiny, particularly in years where California-source income is high or where a taxpayer is changing residency. Part-year returns require allocation of income between California and non-California periods, and errors in that allocation are common audit targets.

Federal audit referral: Under the IRS-FTB data sharing agreement, the FTB receives the results of federal examinations. If the IRS proposes changes to your federal return, the FTB will learn about it. The taxpayer is also independently required to report federal audit results to the FTB under R&TC § 18622.

The FTB Audit Process

Most FTB audits begin as correspondence audits — a letter requesting documentation for specific items on your return, with a 30-day response window.

Correspondence audit: The FTB mails an audit notice (sometimes called an FTB Audit Notice or an Initial Contact Letter) identifying specific items — a deduction, a credit, a reported income figure — and requesting supporting documentation. You have 30 days to respond. This is the most common type of FTB examination. Most are resolved at this stage, either by providing the requested documentation or by negotiating with the examiner over the scope of the review.

Field audit: Less common. An FTB auditor comes to your business location or your representative’s office to conduct a more thorough examination. Field audits are more typical for corporations, complex pass-through structures (partnerships and multi-member LLCs), and high-income individuals with complex Schedule C activity. A field audit involves a broader review of records and a more formal examination process.

After the examination, the FTB issues formal notices if it proposes changes to your tax:

Notice of Proposed Assessment (NPA): The FTB’s proposed change to your tax liability. Receiving an NPA does not mean you owe the money. It is the FTB’s opening position. You have 60 days from the date of the NPA to file a written protest. This is a critical deadline — missing the 60-day protest window limits your appeal options significantly.

Notice of Action (NOA): Issued after the FTB reviews your protest and either accepts or rejects it. If the protest is denied in whole or in part, the NOA is the decision you appeal to the California Office of Tax Appeals.

Notice of Tax Lien: A separate document indicating the FTB has filed a lien against your property. This occurs on the collections track — after the assessment has become final and the FTB is pursuing collection. Receiving a lien notice means the audit dispute has run its course and the agency is collecting.

Your 60-Day Protest Right

When the FTB issues a Notice of Proposed Assessment, you have 60 days to file a written protest — and the protest is your primary opportunity to resolve the audit at the FTB level before it becomes a formal appeal.

A well-prepared protest includes the factual background, the specific items disputed, supporting documentation, and the legal basis for disagreement. It is not sufficient to simply disagree with the proposed assessment — the protest needs to give the FTB auditor and their manager a concrete reason to change the result.

After receiving the protest, the FTB assigns it for review and issues a Notice of Action. The NOA is the FTB’s final position. If the NOA is adverse, you have 30 days to file with the California Office of Tax Appeals.

The full appeal path looks like this:

• Protest (60 days from NPA): File with the FTB. Written protest with supporting documentation and legal argument.
• Office of Tax Appeals (30 days from NOA): File a petition with the California Office of Tax Appeals. The OTA is an independent agency — it is not part of the FTB — and its decisions are appealable to Superior Court.
• Superior Court: If the OTA’s decision is adverse, you may petition for a writ of mandate under Code of Civil Procedure § 1085.
• Refund claim alternative: Pay the assessment, then file a claim for refund with the FTB. If denied, you have one year from the denial to sue for refund in Superior Court. Some taxpayers prefer this path because it avoids accumulating interest while the appeal is pending.

The 6-Month Federal Audit Reporting Rule

Under R&TC § 18622, California taxpayers are required to file an amended California return within six months of the date a federal audit becomes final.

This is one of the most commonly missed obligations in California tax compliance. When the IRS audits your federal return and proposes changes — and you sign an agreement accepting those changes (a Form 4549-A or a closing agreement) — you have six months from the date of that final federal determination to file an amended California return reflecting the changes.

If you do not report the federal change, the FTB will find out. The IRS-FTB data-sharing agreement means the FTB receives IRS audit results as a matter of course. What happens next is an FTB audit opened outside the standard statute of limitations — the FTB has a separate, longer limitations period for cases where the taxpayer failed to report a federal change.

A few things that matter here:

• The six-month clock starts from the final federal determination — not from the date you file an amended federal return. If you sign a closing agreement with the IRS, that date is your trigger. If the Tax Court issues a decision that becomes final, that is your trigger.
• The federal changes do not automatically flow through to California. Because California does not conform to all federal provisions (see the next section), the same audit change may produce a different California result. An IRS adjustment to a federal deduction that California does not allow to begin with does not change your California tax.
• If the federal change produces no California tax difference, you are still required to file an amended California return reporting the federal change — you just report zero California impact.

How FTB and IRS Audits Interact

An IRS audit result does not automatically translate to the same California result, because California tax law diverges from federal law in several significant ways.

California conforms to most federal income tax provisions by reference to the Internal Revenue Code as of a specific date, but it has a substantial list of non-conforming items. The most practically significant:

• No bonus depreciation: California does not conform to IRC § 168(k) (bonus depreciation). If you claimed federal bonus depreciation, your California depreciation is different, and you have separate California depreciation schedules to maintain.
• No Qualified Business Income (QBI) deduction: California does not conform to IRC § 199A. The federal 20% QBI deduction for pass-through income does not exist in California.
• No QSBS exclusion: California does not conform to IRC § 1202 (Qualified Small Business Stock exclusion). Capital gain excluded from federal income under § 1202 is still taxable in California.
• NOL differences: California has its own NOL rules, including different carryback and carryforward periods, and has suspended NOL deductions in certain prior years.
• California-specific credits: California has credits that have no federal equivalent (film credits, R&D credits with different computation rules), and federal credits that California does not match.

The practical consequence: a federal audit that results in a specific disallowance may produce a different California calculation, because the starting point is different. This works in both directions. Sometimes a federal audit change that is adverse has no California impact (because California already disallowed the item). Sometimes a change that looks small on the federal return has a larger California impact because of California’s higher income tax rates and its own basis and depreciation rules.

When you receive a federal audit result, the first step before filing the amended California return is to translate the federal changes into California terms — not simply copy the federal adjustments onto the California return.

FTB Statute of Limitations

California’s standard statute of limitations for FTB income tax assessments is four years — one year longer than the federal three-year period.

The specific rules under the California Revenue and Taxation Code:

• Standard period (R&TC § 19057): Four years from the later of the original return due date or the filing date. If you file on extension, the four years runs from the extended filing date or the actual filing date, whichever is later.
• Six-year period: Applies when there is a substantial omission of income — specifically, an omission of more than 25% of gross income reported on the return.
• No limitation: For fraud or failure to file, there is no statute of limitations. The FTB can assess at any time.
• Federal audit period: When a taxpayer properly reports a federal audit change under R&TC § 18622, the FTB has two years from the date of that report to assess any additional California tax arising from the federal change. If the taxpayer fails to report, the FTB has an extended period — generally running from when the report should have been made, not when it was made.

The four-year California period means that the FTB can potentially audit a year that the IRS can no longer touch. If the IRS is closing its examination window on a particular year, that does not mean California is closing too. California tax exposure can survive the federal limitations period by a full year.

How Brotman Law Helps

An FTB audit is a legal dispute over what you owe under California law. The examination process, the 60-day protest, the OTA appeal — these are adversarial proceedings, not collaborative reviews. The FTB auditor’s job is to determine whether your return was correct, not to find reasons to leave it unchanged.

We handle FTB audits at every stage: responding to the initial correspondence audit notice, preparing the written protest, representing at the Office of Tax Appeals, and litigating refund claims in Superior Court when that is the right path. We also work with taxpayers and their CPAs to translate IRS audit results into California terms and file the required amended returns under R&TC § 18622 — a step that is easy to overlook and expensive to miss.

If you have received an FTB audit notice, a Notice of Proposed Assessment, or a Notice of Action, or if you are working through the aftermath of a federal audit and need to address the California side, book a free 15-minute call. We can tell you where you stand and what the realistic options are.

Sam Brotman, J.D., LL.M. (Taxation), MBA
Brotman Law | Last updated June 2026