San Jose FTB Attorney

Q: How long does the FTB have to audit me?

The standard period is four years from the later of the return due date or filing date under Cal. R&TC § 19057. A substantial income understatement (over 25%) extends this to six years. No time limit applies to unfiled or fraudulent returns. For equity compensation issues, the limitations period runs from when the income was required to be reported — which for vested RSUs is typically the year of vesting.

The California Franchise Tax Board operates statewide, but Silicon Valley taxpayers face a specific set of FTB issues that come up repeatedly in this market. The equity compensation questions here are the densest I see anywhere in California — RSUs, ESPPs, ISOs, QSBS, and the California-specific rules that don't conform to federal law in important ways. Here is what I typically see with San Jose and Silicon Valley clients and how I approach it.

What the FTB Does and How It Reaches San Jose Taxpayers

The California Franchise Tax Board is California's primary income tax authority — it taxes California residents on their worldwide income and nonresidents on income sourced to California.

If you lived in California at any point during the year, the FTB can tax all your income for that period. If you're a nonresident with California-source income — wages from a California employer, equity compensation traced to California workdays, income from a California partnership — the FTB has a claim on that income regardless of where you live now.

FTB audits most commonly start from information-matching: the FTB receives W-2s, 1099s, and K-1s and checks them against what you reported. A mismatch generates a notice. The second most common trigger is a federal audit. The IRS and FTB share audit information under a formal agreement, so an IRS adjustment to your federal return will almost always produce an FTB examination. Silicon Valley's high-income W-2 filers are a natural statistical target, and equity compensation is the most common line item that generates discrepancies.

The FTB collection statute is 20 years under Cal. R&TC § 19255 — twice the IRS's 10-year Collection Statute Expiration Date. That gap matters for taxpayers with older balances. The FTB's enforcement toolkit includes: intercepting California state tax refunds, Orders to Withhold against bank accounts, Earnings Withholding Orders to employers, driver's license and professional license suspension, and Notice of State Tax Lien against California real property — all without a court order.

Common FTB Issues in San Jose

ESPP (Employee Stock Purchase Plans) and California Tax

Employee Stock Purchase Plans present one of the more complicated equity compensation sourcing problems under California law.

ESPPs allow employees to buy company stock at a discount, typically 15% below the lower of the stock price at the offering date or purchase date. For federal purposes, the tax treatment of the ESPP discount and any additional gain on a qualifying disposition depends on whether the shares were held the required period (two years from offering date, one year from purchase date under IRC § 423). California generally conforms to the federal ESPP rules, but the sourcing question — how much of the gain is California income if you moved during the offering period — requires a day-count allocation similar to RSU sourcing.

The issue comes up most commonly for engineers and employees who joined a company, accumulated ESPP shares over multiple offering periods, and then relocated to another state. If California workdays during the offering period make up 80% of total workdays, California claims 80% of the compensation element. The employer's W-2 may or may not reflect this correctly, which is one reason ESPP income shows up in FTB audits.

H-1B Visa Holders and California Source Income

H-1B visa holders working in California have complex California source income questions, particularly when they rotate between California and other states or return to their home country.

For California tax purposes, an H-1B holder working in California is a California resident or nonresident based on the same rules that apply to citizens — physical presence, domicile, and closest connections. If you're physically present in California and your primary job location is California, you're likely a California resident for tax purposes for the period you're here. The complexity arises in several situations: (1) when the employer temporarily assigns you to another state or country during the year, (2) when you terminate and return to your home country, and (3) when you receive equity compensation that vested over a period spanning time in California and time elsewhere.

The FTB has the same sourcing rules for H-1B workers as for citizens — it follows the compensation wherever the work was performed. I see FTB notices issued to H-1B holders who have returned to India, South Korea, or China after their California employment ended, asserting California tax on equity compensation that vested during the California period. That kind of case requires both substantive analysis of the sourcing rules and practical thinking about how the FTB pursues collection across borders.

California's Nonconformity with Section 1202 QSBS

California does not conform to IRC § 1202, which means startup founders and early investors cannot exclude their qualified small business stock gain from California income tax — even if the full federal exclusion applies.

This is probably the most expensive surprise in California tax law for startup founders. Under federal law, if you hold Section 1202 QSBS (qualified small business stock) for more than five years, you can exclude up to 100% of the gain from federal income tax — potentially millions of dollars of exclusion. California explicitly decoupled from IRC § 1202. The California gain is taxable in full at California's ordinary income rates, up to 13.3%.

This means a founder who sells QSBS with a $10 million federal exclusion still owes California income tax on the full $10 million gain at up to 13.3%. FTB issues arise in this area when: (1) the taxpayer or their CPA didn't know about the California nonconformity and didn't report the California income; (2) the taxpayer moved out of California before the sale and didn't realize California still claims California-source income from shares that vested during California residency; or (3) the taxpayer attempted to structure the exit to minimize California exposure without adequate legal analysis.

California "Clawback" of Equity Compensation After Relocation

If you worked in California during the vesting period of your equity compensation, California claims its share of that income regardless of where you live when the shares vest or when you sell.

This is the same rule discussed in the San Francisco context, but it hits Silicon Valley particularly hard because the engineering workforce is highly mobile. The pattern is common: engineer joins a company in San Jose, RSUs vest over four years, engineer relocates to Texas or Washington in year three, shares fully vest in year four. California claims the portion of RSU income attributable to the California vesting period — roughly three years out of four, or 75% of the income, in this example.

The California-source calculation uses a day-count ratio: California workdays during the vesting period divided by total workdays during the vesting period. The employer's W-2 typically reflects this (on box 16 with the California wages) if the employer's payroll department is doing it right. But the allocation is not always correct, and FTB audits frequently adjust it. I also see cases where the remote work element complicates things — if you were working for a California company from a non-California location during part of the vesting period, those days may not be California workdays.

FTB Audit Defense

An FTB audit begins with a written examination notice identifying the issues under review and requesting documentation.

Correspondence audits are handled by mail — the FTB requests records, you respond, and the FTB issues its determination based on what it received. Field audits involve a more in-depth review, sometimes with interviews, and are more common in larger dollar cases and residency disputes. For equity compensation audits, the document requests typically focus on grant agreements, vesting schedules, exercise records, brokerage statements, and payroll records showing where you were working during the vesting period.

If the audit goes against you, the FTB issues a Notice of Proposed Assessment (FTB 4107). You have 60 days from the NPA date to file a written protest. The protest is where you make your complete legal and factual arguments. After the FTB reviews the protest, it issues a Notice of Action. If that doesn't resolve the matter, you can appeal to the Office of Tax Appeals (OTA) in Sacramento, and from there to California Superior Court.

The 60-day protest window is a hard deadline. Missing it turns the NPA into a final assessment.

FTB Collections Defense

Once a final FTB assessment exists, the FTB has 20 years to collect it under Cal. R&TC § 19255 — and it uses that time.

A Notice of State Tax Lien is the FTB's first formal collection step. It attaches to California real property and is a public record, no court order required. From there, the FTB can issue an Order to Withhold against bank accounts and an Earnings Withholding Order to employers. Both can be released by entering into an installment agreement or demonstrating inability to pay.

California's Offer in Compromise program under Cal. R&TC § 19443 is available for taxpayers who can show that the FTB's realistic collection potential is less than the full balance. The program requires a complete financial disclosure and works similarly to the IRS OIC. For Silicon Valley clients whose FTB liability is tied to equity compensation income that has since collapsed in value — a startup that went through a down round, stock that's worth much less now than when the RSUs vested — the OIC is worth analyzing seriously.

California Residency and Source Income Issues

Even after leaving California, income sourced to California remains taxable to the FTB.

For San Jose and Silicon Valley clients, the most common post-departure California-source issues are equity compensation traced to California vesting periods (discussed above), QSBS gain on shares that vested during California residency, deferred compensation earned while a California resident, and K-1 income from California-based partnerships and S-corps. The FTB's sourcing rules are in Cal. R&TC § 17951 and the related regulations.

Remote work creates an additional layer. If you're working for a California company but your home office is in Nevada, Texas, or another state, the FTB will look at whether you're a California nonresident receiving California-source wages. The analysis depends on where you actually perform the work — California wages are taxable to nonresidents; wages from work performed entirely outside California generally are not. The FTB has been auditing this category of case more actively since the pandemic normalized remote work arrangements.

About Sam Brotman

I'm Sam Brotman, a tax attorney and CPA based in San Diego. I hold a JD and an LL.M. in Taxation. I've represented more than 400 clients in tax audits and disputes, with over $1 billion resolved across federal and state tax controversy — including FTB matters throughout California.

Equity compensation taxation is one of the areas I spend a lot of time on, particularly for clients who have moved out of California and are dealing with the FTB's source income claims on shares that vested years ago. These cases require both legal analysis and careful number work, and they almost always involve federal-California differences that need to be tracked separately. If you have an FTB notice, a residency dispute, or a QSBS question, I'm happy to discuss it. Book a free 15-minute call and we can walk through what you're dealing with.

Frequently Asked Questions

What is the difference between a California FTB audit and an IRS audit?

The FTB audits California state income tax returns; the IRS audits federal returns. The agencies share information, so a federal adjustment almost always triggers an FTB examination. FTB auditors issue a Notice of Proposed Assessment; the IRS uses a 30-day letter and Form 4549. The FTB protest process runs through FTB's own appeals unit and then to the Office of Tax Appeals (OTA) in Sacramento. For Silicon Valley clients, the California-specific issues — equity compensation sourcing, IRC § 1202 nonconformity, residency — require separate analysis from the federal questions.

How long does the FTB have to audit me?

Four years from the later of the return due date or filing date under Cal. R&TC § 19057, generally. A substantial income understatement (over 25%) extends the window to six years. For equity compensation issues, the limitations period typically runs from the year the income was required to be reported. Failing to report a federal adjustment to the FTB under Cal. R&TC § 18622 within six months of a final federal determination leaves the FTB's window on that adjustment open indefinitely.

Can the FTB garnish my wages or levy my bank account?

Yes. The FTB issues an Order to Withhold to financial institutions and an Earnings Withholding Order to employers, both without a court judgment. It also intercepts California tax refunds, suspends driver's and professional licenses, and records a Notice of State Tax Lien against California real property. The 20-year collection statute under Cal. R&TC § 19255 gives the FTB a long runway — FTB debts don't age out quickly.

Does California have an Offer in Compromise program?

Yes, under Cal. R&TC § 19443. You submit a financial disclosure and a settlement offer; the FTB accepts if its realistic collection potential is less than the full balance. California does not require a 20% non-refundable deposit with the offer, unlike the IRS. For Silicon Valley clients with large FTB liabilities tied to equity compensation that has since declined in value, the OIC is worth analyzing — the FTB's evaluation of your ability to pay is based on your current financial position, not what the stock was worth when you got the bill.