“I received a notice from the State of California for tax returns I did not file, or it indicated there was income I did not report, or it raised questions I don’t understand. What do I do now?”
It will help to introduce some general perspectives. California has an income tax, and many other taxes.
California has perhaps the most developed and complicated income tax code of all the states, as well as the highest tax rates.
The California return will begin with the federal figures and make adjustments. For example, the federal return generally taxes social security income at higher federal income levels. California has a blanket exemption when it comes to receipts of social security. But many taxpayers will find the federal-California differences often cause California taxable income to be more than federal income.
In 2020, one of the federal responses to the Corona-19 stresses was to liberalize the federal net operating loss tax rules. In June, 2020, California’s response was the opposite. California generally suspended the use of net operating losses and certain business tax credits. (AB 85, June 29, 2020).
The state of California is looking at the reduced economy yielding less taxes. The state’s response was to disallow some important loss deductions and credits.
Federal versus California planning is often a balancing act that only a tax professional may understand.
It is possible that the notice you received may also involve a federal tax issue.
However, your issue may also be unique to California, such as whether you meet California’s criteria for being a resident.
If you are a resident, the state taxes your worldwide income, whereas nonresidents are taxed only on California income. Measuring the degree of California income can sometimes require professional help to look in detail at the rules measuring such income.
You may also be dealing with part-year residency issues. The part-year resident considers worldwide income for the residency portion of the year, and California sourced income for the rest of the year.
Many people are looking at unusual changes affecting their mobility due to Corona-19. These unusual circumstances can also raise special considerations as to residency and taxability.
There are many different aspects that could affect your particular letter from the state.
You normally will not receive a demand for payment from California’s Franchise Tax Board (FTB) prior to them sending you a letter that you need to file. There will be a reply to FTB form where you can tell them, for example, that you have filed or you didn’t believe you had to file.
If you just don’t respond, the FTB will normally then estimate your income and issue a Notice of Proposed Assessment. The latter will include tax, a demand penalty, a delinquent filing penalty, and a fee. You will need to respond to the state’s tax correspondence.
Correspondence you may receive from the FTB can take any number of forms, including notice of an audit.
Is your issue one of unfiled returns or has the state questioned a particular deduction on your California return?
If the issue is a matter of payment and you clearly owe the tax, we can work toward an installment arrangement to meet the liability. If your financial circumstances warrant, it may be possible to achieve some delays, and some deferral of tax payments.
If there is a question as to your ability to pay, we can also approach California with an offer in compromise on your behalf.
California has a particular agency that focuses on offers in compromise. They consider such factors as current ability to pay, equity in assets, current and prospective income and expense, as well as the prospect of your circumstances improving, or your getting even less able to pay the full amount.
There may also be special procedures if you have issues of unpaid taxes in multiple states.
We are happy to discuss the tax correspondence you received from California’s taxing authority.