A person under audit told me the IRS auditor stated the IRS no longer shares information with the CA Franchise Tax Board so he is not going to report his understated tax liability to the CA FTB. Has the IRS changed this policy? Should he file an amended CA return? Thank you.
You ask a very good question. The answer is yes, but requires a little explanation. We regularly handle both IRS and CA tax audit matters and often find information that one agency has already shared with the other. The IRS sends information to the CA Franchise Tax Board on a regular basis that includes wage, 1099 and other income type forms. In addition, BOTH agencies regularly cooperate on any tax return where they believe it will benefit one or the other for collection purposes (sort of like the local police department and the FBI would). While there are some limitations on the amount of information that can be shared (niether can share confidential info) your friend should plan on CA knowing, or eventually finding out the modified information. In our experience it may take some time and may not even happen every time, but better to be safe than sorry in most cases. And it may also make sense to look at amending the return to add additional deductions, but always report it to both the IRS AND the state taxing agency. Otherwise you're likely to run into an eventual perception that you were trying to hide things.
First of all your are required by California to inform to inform the FTB of any change to an an incividual income tax return resulting from an IRS audit. Second, I am not aware of any change in the reporting arrangement between the IRS and the FTB.
Phillip M. Smith Jr.
Los Angeles Tax & Business Attorney
Licensed in the United States Tax Court
Call: 323-292-4116 or 562-505-1004
THESE COMMENTS ARE NOT LEGAL ADVICE. They are provided for informational purposes only. Actual legal advice can only be provided after consultation by an attorney licensed in your jurisdiction. The answer to question does not create an attorney-client relationship or otherwise require further consultation. Mr. Smith is licensed to practice law throughout the state of California with offices in Los Angeles County. He is authorized to handle IRS matters throughout the United States, and is also licensed to practice before the United States Tax Court. His phone number is 323-292-4116 or his email address is email@example.com.
Yes - If your return is adjusted by the IRS (via CP 2000 or audit and then, 90 day letter) make sure you amend your California return within six months or the FTB is likely to wait until three years have passed, until penalties and interest have maximized to assess. California also has a statute requiring the amended return within 6 months of the federal assessment of additional tax. The IRS and CA also share information on tax collections and prosecutions.
A Califonia taxpayer is required to report an IRS adjustment within 6 months. If you do so, FTB has 2 years to issue an adjustmnent or notice of Proposed Asessment. FTB has a separate unit referred to as the RAR or revenue agents report unit to do so. ( I was an auditor and hearing officer with FTB prior to my life as an attorney). If no notice is provided, then there is no statute of limitations and an assessment may be issued by the IRS at any time in the future with interest. A more detailed discussion of these rules can be found on FTB Publication 1008 which is available with a google search.