The California Franchise Tax Board (“FTB”) administers personal and business income taxes. The FTB is known for their aggressive collection, compliance, and enforcement efforts.
On January 10, 2022, the FTB sent self-correct letters to taxpayers who reported large Schedule C expenses on their 2019 tax returns and will continue to send more letters throughout the year. Schedule C is the form filed to report a sole proprietorship business or a single member LLC. According to the FTB, the purpose of the self-correct letters is to encourage taxpayers to review their 2019 tax return, and current tax years, for any discrepancies or necessary corrections. The tax returns remain subject to an audit until the expiration of the statute of limitations.
Even though, the FTB claims that these self-correct letters do not constitute an audit, it is a good indicator that an audit is likely if changes are not made. If you receive this letter, we highly suggest that you consult with a tax professional because filing an amendment could raise red flags and it could also affect your federal tax return. Also, filing an amendment to your 2019 tax return could subject prior or subsequent tax years to scrutiny as well. However, not filing an amendment could mean an audit from the FTB. Nevertheless, if the Schedule C is correct, changes should not be made but preparations should be made to defend a possible audit.
As you prepare to file your 2021 tax returns, remember to maintain documentation to substantiate your deductions and that these deductions are in line with your business activities, and if you get one of these notices contact your CPA or a tax professional.