Identify Areas of Recurrent Taxpayer Noncompliance Taxpayers’ Bill of Rights Annual Report to the Legislature

Sample Data from the Audit Process

We compiled and analyzed data from FTB’s audit process to identify areas of recurrent taxpayer noncompliance. The data, some of which is derived from statistical samples, includes:

  • The statute or regulation violated by the taxpayer.
  • The amount of tax involved.
  • The industry or business engaged in by the taxpayer (sample data).
  • The number of years covered in the audit period.
  • Whether the taxpayer used professional tax preparation assistance (sample data).
  • Whether the taxpayer filed an individual or corporate tax return.

We collected assessment information from the personal income tax Notice of Proposed Assessment display file for assessments that became final in FY 2023/2024. When we used sample data, the volumes and dollar amounts represent the sample study numbers projected to the total universe of assessments. Refer to tables in Appendix 1 for details.

We collected data for the distribution of Notices of Proposed Assessment by issue and tax assessed. If a single notice included multiple issues, we categorized the notice under the issue that provided the majority of the tax change. We categorized the assessment as “other” when there was no distinct primary issue.

For corporation taxes, the largest dollar amount in proposed assessments resulted from one primary issue–allocation and apportionment audits–which involves corporations doing business within and outside California.

Allocation is the assignment of nonbusiness income to a particular state. Apportionment is the division of business income among states by the use of an apportionment formula. Within the apportionment formula, the sales factor is the most frequent audit issue for corporations. The higher rate of noncompliance associated with allocation and apportionment may be attributed to the complexity of the issues involved. In addition, noncompliance may occur due to diverse interpretations of the tax laws.

Based on the primary business activity in California, the industry group assessed with the largest dollar amount was the manufacturing industry.

For personal income taxes, the largest dollar amount in proposed assessments resulted from filing enforcement assessments, which refers to taxpayers who have not filed their state income tax return after we notified them of their filing requirements. Most of the proposed assessments were issued to personal income taxpayers for failure to file a state income tax return.

We issue a separate Notice of Proposed Assessment to the taxpayer for each tax year included in an audit adjustment. Individuals typically have audit changes for just one tax year. Ninety-five percent of the individuals who received Notices of Proposed Assessment during FY 2023/2024 had audit changes for a single tax year.

Virtually all corporation tax returns are prepared by accounting firms, law firms, or the entity’s in-house accounting department. The data indicates that tax professionals file 65 percent of all personal income tax returns. We consider all corporation tax returns as professionally prepared. In the absence of a paid tax professional’s signature, we consider that taxpayer’s personal income tax return as self-prepared.

Taxpayer Filing Errors

FTB identifies the most common errors taxpayers make when they file their tax returns, and we evaluate how those errors may be avoided or corrected.

We compiled Personal Income Tax (PIT) and Business Entity (BE) taxpayer error information on nearly 22.5 million tax returns (20.2 million of PIT returns and 2.3 million of BE returns) processed between July 1, 2023, and June 30, 2024. During this period, 94 percent of all tax returns were electronically filed while the remaining 6 percent were paper filed. During the same period, FTB sent approximately 1,882,0001 return notices (1,590,000 PIT— Notices of Tax Return Change and 292,000 BE— Return Information Notices) to taxpayers who filed tax returns with errors that resulted in a change. This figure equates to 8.4 percent of tax returns. We explain the errors in the notices and inform customers how they can resolve any discrepancies.

The two most common PIT taxpayer errors are related to calculating total tax liability and payment/credit discrepancies. Together, these two errors account for 29 percent of all PIT taxpayer errors identified during the processing of tax returns.

Of all PIT change notices sent, 15 percent contained a total tax liability adjustment, meaning taxpayers made a math error calculating their total credits or tax liability. To understand the change, taxpayers can review their filed tax return and their calculations. Often, no additional action is needed to resolve this issue.

The other most common PIT taxpayer error identified during tax return processing is claiming the incorrect payment/credit amount. This error accounted for another 14 percent of FTB notices sent to PIT taxpayers that resulted in an adjustment. This error is also one of the most common reasons PIT and BE taxpayers, or their authorized representatives, call during our peak pre-filing season. FTB continues to use marketing campaigns to promote the use of MyFTB for both PIT and BE taxpayers and their authorized representatives. Taxpayers with a MyFTB account can review their withholding and estimated payment information in order to help them file accurately.

The two most common BE taxpayer errors are related to computing payments and tax due. Together, these two errors account for 92 percent of all BE taxpayer errors identified during the processing of tax returns.

Of all BE change notices sent, 61 percent contained a revision to the payment amount due to a computation error. This sometimes occurs when taxpayers fail to apply payments and/or credits properly. To verify total payments made before filing, taxpayers and their representatives are encouraged to review their payment history in their MyFTB account.

The other most common BE taxpayer error identified during tax return processing is the total tax due, either to correct a computation error or to reflect adjustments made to the preceding lines. This error accounted for another 31 percent of FTB notices sent to BE taxpayers that resulted in an adjustment. Often, no additional action is needed to resolve this issue.

The tables in Appendix 2 display the number of adjustments for PIT returns by tax return type and filing method, and they include a description of what typically caused each adjustment.

Footnote

  1. Compliance notices are issued after the tax return due dates, so the volume reported includes notices resulting from both the extended 10/16/2023 and standard 04/15/2024 due dates, as of 06/30/2024. ↵