Getting a tax audit notice can cause stress, especially if you don’t know what to expect. In California, you might face both a state and a federal audit. Although they sound similar, each follows its own set of rules. Knowing how they differ helps you prepare and respond effectively.
Different agencies handle the audits
The Internal Revenue Service (IRS) handles federal tax audits, while the Franchise Tax Board (FTB) manages California state audits. The IRS reviews your federal return, and the FTB examines your state return. These agencies often share information, so a federal adjustment can trigger a state review.
Audit methods and focus areas vary
The IRS usually flags returns with large deductions or missing income. The FTB often uses IRS data to spot differences between federal and state filings. The state pays close attention to residency, income sources, and business activity inside and outside the state. Residency questions often lead to longer reviews because auditors look at where you lived, worked, and earned money.
The process and timelines differ
Both agencies begin tax audits by sending letters requesting records or explanations. The IRS generally has three years to assess extra taxes, while the FTB has four years. The FTB may extend its review period if you fail to report federal changes or if residency remains unclear. Both may also request financial documents, receipts, and proof of income or deductions.
Preparing for both types of audits
Keep complete financial records and answer every audit notice quickly. Make sure your state and federal returns match and include accurate income and deductions. If you move between states or earn money from multiple sources, track where and when you earned it. Clear records help you explain your position and shorten the audit process.