California’s economic hardships have caused the state to be creative in its quest for tax revenue. One tactic the Franchise Tax Board (FTB) has turned to is residency audits.
California residents pay state tax on their worldwide income, no matter its source or how far-flung, while part-year residents only pay taxes on income received while a resident. With personal income tax representing 61 percent of the state’s total general fund revenue sources, the FTB in the last few years has become even more aggressive in its enforcement and interpretation of California residency law.
The FTB conducts a residency audit to determine whether an individual is a California resident, nonresident or part-year resident. The legal standard for residency is defined as an individual who is in the state for other than a temporary or transitory purpose or domiciled in California but physically outside the state for a temporary or transitory purpose.
Although this might read as a clear-cut definition, the law is actually broadly written and leaves room for interpretation. If the FTB determines an individual to be a state resident, the burden then lies with the taxpayer to prove the determination to be erroneous.
The FTB has a list of factors to determine residency status:
- The amount of time the taxpayer spent in California versus the amount of time spent outside of the state.
- The location of the taxpayer’s spouse and children.
- The state where the taxpayer’s principal residence is located.
- The state that issued the taxpayer’s driver’s license.
- The state the taxpayer’s vehicles are registered in.
- The state the taxpayer’s professional licenses are maintained in.
- The state the taxpayer is registered to vote in.
- The location of the taxpayer’s bank accounts.
- The origination point of the taxpayer’s financial transactions.
- The location of a taxpayer’s medical professionals, as well as accountants and attorneys.
- The location of the taxpayer’s social ties such as worship, country clubs and professional associations.
- The location of the taxpayer’s real estate property and investments.
- The permanence of the taxpayer’s work assignments in California.
“Snowbirds” or those who visit California for an extended period of time have in recent years been frequent targets of FTB residency audits.
There is a statutory presumption that if a person spends nine months or more in the state then he or she is a California resident.
The second presumption is that an individual whose presence in the state does not exceed six months within a taxable year and maintains a permanent home outside the state is not considered a California resident provided the taxpayer does not engage in any activity or conduct within the state other than as a seasonal visitor, tourist or guest. If you fail to meet these requirements, then the FTB factors listed above will be used to determine your residency.
The FTB is aggressive in pursuing individuals who might be residents but do not file state tax returns. It is not unusual for individuals who have spent some time visiting in California to return to their permanent state of residence, only to receive a letter stating they have failed to file a state tax return or have unreported income. These FTB notices are usually the result of the individual earning a small amount of interest from a California bank account or deducting mortgage interest on California property from a federal tax return.
If the notice is ignored or handled improperly, the individual can face a costly audit and a monstrous tax liability.
Even though you have left the Golden State to make a permanent home in another state, you might still be held liable for California income taxes.
Your intent to leave and make another place your permanent home is not enough for the FTB. Instead, the agency looks at physical facts that demonstrate you have relinquished your California residency. Also, if you are present in or have connections-such as property interests or family/social ties-in California but consider yourself a resident of another state, you might still have to convince the FTB that you are not a California resident.
To avoid potential tax issues, individuals leaving California are encouraged to completely sever their connections with the state and establish significant connections in the new state.
The California Franchise Tax Board may also conduct its own tax audit to look for tax problems that are unique to California income tax law. For example, if you have moved from or to California the FTB may argue that you are a resident of California for some period of time before or after you actually became a California resident in order to tax you on a large bonus you received. Our California tax litigators can review your records to determine whether the FTB is correct, and provide tax representation throughout the entire process.
Facing a residency audit or receiving an unexpected FTB notice of taxes due can throw you a curve ball and you might not know where to turn. The knowledgeable and experienced tax attorneys of Brown, PC can help guide you through your options and help establish your true residency with the FTB. We represent clients in Los Angeles and throughout California. Please contact the firm online or by calling 424-252-1100 to speak with one of our state tax attorneys.