Anyone who has lived in California for any length of time knows that the state has extraordinarily high taxes, and the state’s Franchise Tax Board (FTB) is extraordinarily enthusiastic about collecting. One way the state ensures it is making top dollar is through residency audits by the FTB.
What is a residency audit?
The purpose of a residency audit is to determine residency. Most audits of this kind happen to people who have homes in more than one state, or who have recently moved out of state but still conduct some business in California.
A residency audit is extremely intrusive, time-consuming, and potentially costly if you cannot prove residency in another, lower-tax state.
Are you in the target demographic?
If you are a high-income individual who recently established a residency out of state, you are the target. You represent a significant tax potential for California, and it will use its resources to find anyone in your demographic who might be falsifying their residency status to avoid California’s high tax demands.
While anyone can be audited, high-income individuals claiming residency out of state but still conducting any business in California, especially those who have recently moved out of state, represent the highest potential yield.
How to survive your tax audit
There are three general things you can do to survive your tax audit:
- Do not try to game the system: If you are a California resident, do not try to pass yourself off as a non-resident. Not only is this tactic unlikely to succeed, you could get into some serious tax trouble if you try it.
- Keep good records: If you are not actually a resident, keep records of everything you do. From records of your children’s schooling to purchase receipts, business records and bills being sent to your out of state residence. All of these can prove that you are not, in fact, a California resident.
- Talk with an experienced tax lawyer before doing anything: Do not try to prepare for and handle your audit on your own. An experienced tax lawyer can help you get your records in order and will know how to respond to the FTB’s inquiries without jeopardizing your tax status. Also, even before you move or make any transactions involving your move, talk with our legal team. If you move out of state and then come back for one day to sell your business, for example, you could be taxed on that sale as a resident, as we saw in a case last year.
There is a lot at stake when it comes to residency tax audits. Make sure you claim proper residency, keep good records and call a tax attorney you can trust.