California Franchise Tax Board Audits: How They Differ from IRS Audits

The FTB Applies California Law

The FTB administers California’s personal income tax and the franchise and income taxes on businesses. California’s income tax law incorporates many federal rules, but it does so as of a fixed date and with its own modifications. According to the FTB’s 2025 Form 540 instructions, for taxable years beginning on or after January 1, 2025, California conforms to the Internal Revenue Code as of January 1, 2025, and generally does not follow later federal changes without specific legislative action.

As a result, an item that is correct on a federal return can still be adjusted on the California return, and the reverse is also true. Federal changes enacted after that date, including those in the One Big Beautiful Bill Act signed on July 4, 2025, apply for California purposes only if and to the extent the Legislature adopts them.

Four Years, Not Three

The IRS generally has three years to assess additional tax. The FTB generally has four. Under Revenue and Taxation Code (R&TC) section 19057, the FTB must mail a notice of proposed deficiency assessment within four years after the return was filed. A return filed before its due date is treated as filed on the due date (R&TC § 19066).

Longer periods apply in some cases. The FTB has six years if the taxpayer omits from gross income an amount greater than 25 percent of the gross income stated on the return (R&TC § 19058). There is no time limit if no return was filed, or if a false or fraudulent return was filed with intent to evade tax (R&TC § 19087).

Federal Changes Must Be Reported to California

If the IRS changes a federal return, California law requires the taxpayer to report the change to the FTB within six months after the final federal determination and either concede it or explain why it is wrong (R&TC § 18622). When a change is reported on time, the FTB may issue an assessment within two years of the report, or within the regular period if that ends later (R&TC § 19059). If a required report is never made, the FTB may assess at any time (R&TC § 19060).

Because the California return starts from federal adjusted gross income, a federal adjustment often leads to a California adjustment as well. Coordinating the federal and state responses, and reporting federal changes on time, avoids leaving a California tax year open indefinitely.

How FTB Audits Are Conducted

According to the FTB’s Audit/Protest/Appeals guide (FTB 985), most FTB audits are desk audits handled through correspondence and secure email. A field audit takes place at the taxpayer’s residence, place of business, or another location where records can be examined. The FTB states that taxpayers may have a representative, such as an accountant or tax attorney, at any time during an audit.

An audit ends with a no-change letter, a Notice of Proposed Assessment (NPA) explaining the proposed changes, or another formal notice.

Disputes Go Through a Protest, Then the Office of Tax Appeals

At the federal level, a taxpayer who disagrees with an examination can generally ask for review by the IRS Independent Office of Appeals. California uses a different sequence.

First, the taxpayer may file a written protest with the FTB within 60 days after the NPA is mailed (R&TC § 19041). If no protest is filed, the proposed assessment becomes final when the 60 days expire (R&TC § 19042). When a protest is filed, the FTB reconsiders the assessment and, if the protest requests one, holds an oral hearing (R&TC § 19044).

Second, the FTB issues a Notice of Action that affirms, revises, or withdraws the proposed assessment.

Third, the taxpayer may appeal the Notice of Action to the Office of Tax Appeals (OTA) within 30 days of the date on the notice. OTA is an independent agency, separate from the FTB, and its appeals are heard by administrative law judges.

Settlement is handled separately from the protest. FTB 985 explains that the FTB Legal Division’s Settlement Bureau is responsible for settling tax, penalties, and interest for cases that enter its Settlement Program.

Interest and Collection

Interest continues to accrue on unpaid tax while a dispute is pending, and filing a protest does not stop it. The FTB’s published interest rate on personal income tax underpayments is 7 percent for July 1 through December 31, 2026.

Once an assessment is final and unpaid, the FTB can use collection tools such as state tax liens, bank levies, and earnings withholding orders. Payment plans and offers in compromise are available to taxpayers who qualify.

The Bottom Line

An FTB audit should be treated as its own proceeding. California’s four-year assessment period, its fixed-date conformity to federal law, the duty to report federal changes, and the protest-then-OTA appeal path all differ from the IRS process. Reading each notice carefully and calendaring its deadline are the most important first steps.