What Triggers a California FTB Audit? (Orange County Guide)

The California FTB Is Always Watching

While most people think of the IRS when it comes to audits, California residents have another powerful agency to watch out for: the Franchise Tax Board (FTB). The FTB audits thousands of taxpayers and businesses across the state every year — often faster and more aggressively than the IRS.

If you live or work in Orange County, it’s essential to understand:

• What triggers an FTB audit
• What they look for
• How audits differ from IRS procedures
• How to protect yourself
• And what to do if you've already been flagged

This guide walks you through everything you need to know to minimize your audit risk — or handle one proactively if you're already in the FTB’s sights.

What Is a California FTB Audit?

An FTB audit is an in-depth review of your California state tax return(s), income, and financial activity to verify the accuracy of what you’ve reported — or what the FTB believes you failed to report.

You may be audited as an:

• Individual taxpayer (especially high earners or non-filers)
• Business owner (including S corps and LLCs)
• Independent contractor or gig worker
• Self-employed professional
• Out-of-state taxpayer with California-source income

Top 10 Triggers for a California FTB Audit

1. Unfiled Tax Returns (Delinquency)

One of the most common FTB triggers is failure to file. The FTB cross-references data from:

• Employers (W-2s)
• Contractors (1099s)
• Financial institutions
• IRS records

If they see income reported but no return filed, you’ll likely be flagged. The FTB may even file a Substitute Return for you — often overstating your income and resulting in exaggerated tax liabilities. In some cases, the FTB will create a Substitute Return on your behalf — often inflating your income and resulting in a higher tax bill.

2. Mismatched Income Reporting

If your California tax return doesn't match your federal return, or if it leaves out 1099 income, capital gains, or stock sales, the FTB will notice.

Even minor mismatches can trigger automated notices — and unresolved notices may escalate into full audits.

3. Self-Employment Income Without Documentation

Sole proprietors and 1099 contractors in cities like Santa Ana, Anaheim, and Irvine are often audited if:

• Reported income seems low compared to industry standards
• They deduct business expenses without proper backup
• They fail to pay estimated taxes

The FTB uses data analytics to compare your return to others in your ZIP code and industry.

4. High Deduction-to-Income Ratio

If you claim excessive deductions relative to your income — especially Schedule A or C — you may be flagged for “audit potential.”

Watch out for red flags like:

• Home office deductions that don’t match business activity
• Travel or meal expenses not tied to business
• Charitable contributions that seem inflated

5. Unreported Out-of-State Income

California taxes worldwide income for residents — and California-source income for non-residents. If you live in Orange County but claim to work remotely from Nevada, but your records show otherwise, that can raise an FTB red flag.

6. Residency Issues and Part-Year Filers

Claiming non-residency while maintaining ties to California (e.g., address, employment, voter registration, driver’s license) often triggers an audit. The FTB is aggressive about tracking people who leave the state but still have California-sourced income.

7. Prior Audit History

If you’ve been audited by the IRS or FTB before, you’re more likely to be audited again — especially if:

• You owed substantial tax
• You failed to respond to the audit
• You didn’t comply with a resolution

8. Filing Late — Repeatedly

Filing past the deadline year after year may not trigger an audit by itself, but it can raise your risk score within the FTB’s internal system.

9. Business Owner with 1099 Contractors

If you run a business and misclassify employees as independent contractors — especially in industries like construction, consulting, or design — you may face:

• FTB audit
• EDD (Employment Development Department) audit
• Penalties and reclassification

10. Data Sharing from the IRS

The IRS and FTB share information. If the IRS audits you and finds discrepancies, they notify the FTB — which may launch its own audit based on the same findings.

How FTB Audits Work (Step-by-Step)

If you've already received a notice, this post breaks down what your FTB letter means and how to respond before deadlines.

1. Initial Notice Sent
   You’ll receive a letter requesting clarification or documentation.
2. Audit Initiation
   If not resolved, the FTB launches a formal audit. They’ll request:

• Bank statements
• Receipts
• Contracts
• Business records
• Travel logs, donation proof, etc.

1. Auditor Review
   An auditor reviews your file and schedules a phone call or meeting.
2. Proposed Assessment
   If they disagree with your return, they’ll issue a Notice of Proposed Assessment (NPA) — giving you time to protest or amend.
3. Final Assessment & Collections
   If unresolved, the balance becomes due — with penalties, interest, and enforcement actions like liens or levies. If your audit results in additional taxes, here’s how penalties and interest work in California.

What Happens If You Ignore an FTB Audit?

Ignoring audit notices can lead to:

• Automatic tax assessments
• Suspension of licenses (professional, contractor, driver’s license)
• Bank levies or wage garnishments
• Tax liens reported on your credit
• Potential criminal referral for large-scale fraud (rare, but possible)

How to Respond to an FTB Audit

1. Read the notice carefully
2. Do not respond emotionally or defensively
3. Gather all relevant documentation
4. Do not call the FTB without professional guidance
5. Hire a tax resolution CPA or representative
6. Respond before deadlines to protect your rights

How Boulanger CPA Helps with FTB Audits

At Boulanger CPA and Consulting PC, we help Orange County taxpayers through every stage of the audit process. We:

• Review and interpret your audit notice
• Respond directly to FTB auditors on your behalf
• Protect your rights and minimize risk
• Build a proactive strategy to resolve any tax balance
• Help avoid future audits and penalties

✅ Conclusion: Don’t Go Through an FTB Audit Alone

If you’ve received a letter or notice from the Franchise Tax Board — or if you suspect your return may be flagged — get professional help before it escalates. Explore your full California tax relief options — including settlements and payment plans — before collections begin.

📞 Call Boulanger CPA at  657-218-5700
🌐 Schedule a consultationatorangecounty.cpa

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