What If Your FTB Audit Does Not End Well

by Bruce Givner on October 11, 2011

Assume your accountant has handled your FTB audit, which has now dragged on for over a year, and the agent in charge of your FTB audit has proposed to disallow a $1,000,000 item. You know that the disallowance means an additional $90,000 of tax, plus interest and possibly penalties. The tax may be deductible for Federal purposes, meaning the after-tax cost may be more like $50,000. Should you pay the tax? Your accountant’s fees for the FTB audit have been $15,000, and your accountant has told you that the next step in the Franchise Tax Board procedure – a Protest – will cost at least that much.

The answer in most cases is that you should pay the tax and give up the fight. Even if the Franchise Tax Board is wrong, it will cost too much to continue at the Franchise Tax Board Protest level. The Protest itself will take one to two years, during which time non-deductible interest will continue to accrue. And the costs to handle the Protest are likely to be double the costs of an FTB audit.

You cannot give up the fight if the IRS statute of limitations has not yet run. Normally by the time an FTB audit is over, since it has a 4 year statute of limitations, the IRS 3 year statute has run. However, in some situations the IRS has a 6 year statute. So, you will have no choice but to continue to the Franchise Tax Board Protest Division, and to protest your FTB audit. You must carefully check this with your accountant.

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