California Code of Regulations › Title 18 - Public Revenues › Division 3 - Franchise Tax Board › Chapter 2.6 - Administration of Franchise and Income Tax › Subchapter 4 - Payments and Assessments › Article 3 - Deficiency Assessments › Section 19032 - Audit Procedures

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(a)
					 General.
(1) The purpose of the audit is to
					 efficiently determine the correct amount of tax based on an analysis of
					 relevant tax statutes and regulations and case law as applied to the facts of
					 the audit.
(2) In general, the
					 audit of a tax return must be completed in sufficient time to permit the
					 issuance of a notice of proposed deficiency assessment or proposed overpayment
					 within the applicable statute of limitations. Consequently, audits must be
					 completed within four years after the date the original tax return was filed
					 unless a longer period for issuance of a notice of proposed assessment is
					 provided for under the Revenue and Taxation Code, or the taxpayer consents to
					 extend the period of assessment under Revenue and Taxation Code sections
					 19065,
					 19067,
					 or
					 19308.
					 To facilitate the timely and efficient completion of an audit within the
					 above-referenced statutory timeframes, the taxpayer should have the expectation
					 that the audit of the tax return would be conducted in a manner so that
					 resolution of the audit will be achieved within a two-year period commencing
					 with the date of "initial audit contact" as subsequently defined. This two-year
					 guideline will not apply in the following circumstances:
(A) False or fraudulent tax returns. False or
					 fraudulent tax returns are those filed where an activity or conduct as
					 described under Revenue and Taxation Code section
					 19701
					 or
					 19705
					 has occurred.
(B) Audits that are
					 delayed as a result of the taxpayer's bankruptcy proceedings.
(C) Audits in which a demand for information
					 letter citing the failure to furnish information penalty, Revenue and Taxation
					 Code section
					 19133
					 has been sent to the taxpayer or the taxpayer's representative.
(D) Audits involving proceedings concerning
					 the enforcement or validity of a subpoena or subpoena duces tecum.
(E) There is a request for consideration of
					 Revenue and Taxation Code section
					 25137
					 petition, but only in relation to the effect of the petition request. The
					 issuance of notices may be delayed pending the outcome of the petition
					 request.
(3) Taxpayer's
					 Duty to Respond. A taxpayer, or the taxpayer's representative has the duty to
					 make a timely response to requests for information or documents by the
					 Franchise Tax Board that are relevant and reasonable or provide an explanation
					 as to why additional time is necessary to respond or state why the request is
					 not relevant or reasonable.
The auditor and the taxpayer or the taxpayer's
						representative should work together to make information requests relevant and
						reasonable including the use of alternative sources of information in order to
						substantiate the facts and circumstances of the issue under audit. For example,
						the auditor and the taxpayer or the taxpayer's representative may agree to a
						procedure in which the auditor would draft an information request, discuss the
						information request with the taxpayer or the taxpayer's representative, and the
						auditor would take into account such comments before issuing the formal
						information request.
(4)
					 Duty of Franchise Tax Board Staff. Franchise Tax Board staff has the duty to:
(A) apply and administer the law in a
					 reasonable, practical manner consistent with applicable federal and California
					 law and the Statement of Principles of Tax Administration, which is
					 incorporated by reference. (See Statement of Principles of Tax Administration,
					 at <http://www.ftb.ca.gov/other/Mis&Prin.html > [March 21,
					 2003]),
(B) take into account the
					 materiality of an issue being audited as defined in subsection (a)(7) of this
					 regulation,
(C) make relevant and
					 reasonable information requests for the issues under examination as provided
					 for in Revenue and Taxation Code section
					 19504:
1. The auditor shall explain the relevance or
					 reasonableness of the request when asked to do so,
2. Requests for information are relevant if
					 the requested information is germane to or applicable to the audit issue,
					 and
3. The auditor and the taxpayer
					 or the taxpayer's representative should work together to make information
					 requests relevant and reasonable including the use of alternative sources of
					 information in order to substantiate the facts and circumstances of the issue
					 under audit.
(D) timely
					 analyze information received or responses submitted and to request additional
					 relevant information or inform the taxpayer of the potential audit
					 determination.
(E) apply the
					 relevant statutes and regulations in a consistent manner regardless of whether
					 the determination of the correct amount of tax results in a proposed assessment
					 or proposed overpayment.
(5) Duty to Maintain Records. Generally, it
					 is the taxpayer who will be in possession or control of the necessary
					 information, documents, books and records and who will have the knowledge
					 regarding the circumstances of the relevant activities such that a
					 determination of the correct tax can be made. The inability, or failure, of a
					 taxpayer to supply requested relevant information in support of the tax return
					 as filed may result in a Notice of Proposed Assessment being issued. A taxpayer
					 has a duty to maintain relevant records and documents pursuant to normal
					 accounting or regulatory rules and the rules set forth in the Revenue and
					 Taxation Code or the Internal Revenue Code as applicable for California
					 purposes. The Franchise Tax Board recognizes that taxpayers are sometimes not
					 able to respond to each and every request for data. The auditor should work
					 with the taxpayer to resolve difficult information requests or any other
					 problems in generating information document request responses.
(6) Application of Time Limits. The
					 guidelines of this regulation are intended to provide for an orderly process
					 that leads to a quick conclusion to the audit and are not to be used to
					 foreclose or limit a taxpayer's right to provide information in support of the
					 tax return as filed or amended.
(A) The
					 Franchise Tax Board recognizes that some Information Document Requests, Audit
					 Issue Presentation Sheets or Position Letters can be responded to in less than
					 30 days while other responses will require time in excess of 30 days. (See
					 subsection (b)(5) of this regulation for definitions of referenced documents.)
					 The auditor has discretion to take into account the taxpayer's facts and
					 circumstances in establishing the original response time or to allow extensions
					 of time to respond.
(B) The auditor
					 shall take into account responses to Information Document Requests and Audit
					 Issue Presentation Sheets received after the established date for a response,
					 provided the audit of the taxable year has not been closed.
(C) The guidelines identified in this
					 regulation do not supersede or have any bearing on the statute of limitations
					 for issuing deficiencies or refunds as provided by the Revenue & Taxation
					 Code. Failure to adhere to the guidelines of the regulation will have no effect
					 on the validity of a notice of proposed assessment, offset, notice of proposed
					 overpayment, or no change letter issued within the applicable statute of
					 limitations period, or on any rights of the taxpayer.
(7) Materiality. Audit issues are based on
					 the materiality of the potential adjustment and balanced with the statutory
					 requirement to determine the correct amount of tax. If potential for an audit
					 adjustment is likely, the issue should be pursued if the materiality of the
					 potential adjustment warrants the audit resources necessary to audit the issue.
					 Auditors will use judgment as to what constitutes materiality for purposes of
					 this subsection as materiality is a facts and circumstances test. The auditor
					 will discuss materiality at any time during the audit if so
					 requested.
(8) This regulation
					 shall be applicable for initial audit contacts made on or after the effective
					 date of this regulation within the meaning of Government Code Section
					 11343.4.