The Franchise Tax Board (FTB) is the California tax agency that collects and enforces state income tax assessment and collection. In many situations, the FTB operates similarly to the Internal Revenue Service (IRS). There are many similarities between issues that arise with federal income taxes and those that arise for California state income tax purposes. Additionally, California conforms to many of federal tax laws; however, there are some major differences.
The federal government taxes income based on citizenship and residency using specifically defined criteria. Determining whether or not your income is taxable in California is a very different story. Ties to the state of California, such as a vacation home or a business license, can sometimes result in taxation by the State of California on people who do not have their primary residence there. This is where one of the major differences between California and federal income tax arises. For federal purposes, the IRS will only assess and enforce income taxes based on information reported by third parties on documents such as 1099s, W-2s, or other tax documents. On the other hand, California will use estimates and comparisons to determine what they believe taxable income would likely be, and then assesses taxes based on this determination. This can lead to many issues including “residency audits.” Taxpayers that reside outside of California are not immune to these potential assessments because California has the ability to levy payments and bank accounts outside of the state if they determine there is a tax liability due.
Another major difference is that California does not conform to all federal tax laws or U.S. tax treaties. Therefore, it is very important to make sure international tax planning includes separate consideration for California tax implications. Additionally, FTB collection enforcement is less regulated and more aggressive than the IRS. Failing to respond to notices or balances due is not advisable in any context; however, with the FTB this often leads to much quicker and more severe collection activities and consequences. As a result, it is imperative you or your advisor work promptly with the FTB to resolve any tax balances due.
Overall, many people consider state income taxes as of secondary importance to federal tax laws. However, in California, due to high tax rates, complex tax laws and aggressive taxing authorities you should take the FTB very seriously and act accordingly. At Hone Maxwell LLP, we have experience handling all types of California income tax and FTB administrative matters.