In a residency audit, the Franchise Tax Board (FTB) examines whether the facts support the residency status claimed on the return. Because residency depends on where a person actually lives and where his or her connections are, the audit is largely about documents and consistency.
How FTB Audits Are Conducted
According to the FTB’s Audit/Protest/Appeals guide (FTB 985), most FTB audits are desk audits conducted through correspondence and secure email, while a field audit takes place at the taxpayer’s residence, place of business, or another location. 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, or another formal notice.
The Legal Framework
Under Revenue and Taxation Code (R&TC) section 17014, a resident includes anyone in California for other than a temporary or transitory purpose and anyone domiciled in California who is outside the state for a temporary or transitory purpose. A person who spends more than nine months of the taxable year in California is presumed to be a resident, although the presumption can be overcome by satisfactory evidence of a temporary or transitory purpose (R&TC § 17016).
The audit therefore tends to focus on two questions: where the person’s domicile was, and whether time spent in or out of California was temporary.
The Factors and the Records That Address Them
FTB Publication 1031 lists the factors used to determine where a person has the closest connections. Each one points to records that can be gathered in advance:
Time in California versus elsewhere: calendars, travel itineraries, boarding passes, and credit card and bank statements.
Family: where a spouse or registered domestic partner and children live, and where the children attend school.
Principal residence and real property: deeds, leases, property tax bills, utility accounts, and homeowner’s or renter’s insurance.
Driver’s license, vehicle registration, and voter registration: the issuing state and the dates of each change.
Banking and financial activity: where accounts are held and where financial transactions originate.
Professional and personal ties: the location of doctors, dentists, accountants, and attorneys, professional licenses, places of worship, professional associations, and clubs.
Work: employment agreements and records showing whether work assignments in California were permanent or temporary.
The records should tell the same story as the return. Addresses on W-2s, 1099s, insurance policies, and account statements that conflict with the claimed residency or move date are the kind of inconsistency that draws questions.
Preparing a Response
A well-organized response follows the structure of the factors. It typically includes a clear chronology of the relevant period, including the move date if residency changed, with copies of the supporting documents arranged by factor. Explanations should be specific and consistent with the documents, and any gaps or inconsistencies are better addressed directly than left for the auditor to discover.
Deadlines in information requests matter. If more time is needed to gather records, it is better to ask before the deadline than after it.
If the FTB Proposes an Assessment
A residency audit that results in a change is concluded with a Notice of Proposed Assessment. The taxpayer may file a written protest within 60 days after it is mailed (R&TC § 19041), and the FTB will hold an oral hearing if the protest requests one (R&TC § 19044). The FTB’s decision on the protest, issued as a Notice of Action, can be appealed to the independent Office of Tax Appeals within 30 days of the date on the notice.
The Bottom Line
Residency audits are decided on facts. Gathering records that track the factors in FTB Publication 1031, presenting them in a clear chronology, and keeping the story consistent with the return give the FTB a complete picture and protect the taxpayer’s appeal rights if the matter is not resolved at audit.
Facing an FTB residency audit?
Tax attorney Cassra Minai, Esq. can review your records and response in a confidential consultation.