What Triggers a California FTB Audit? (Orange County Guide)
The California FTB Is Always Watching
Wondering what triggers a California FTB audit? Whether you’re a business owner or individual taxpayer, the Franchise Tax Board uses both automated systems and red flag criteria to select returns for audit.
These audits can be triggered by mismatched 1099s, income discrepancies, aggressive deductions, or referral from another agency like the IRS.
In this guide, we’ll explain the most common FTB audit triggers, how to avoid unnecessary risk, and what to do if you've already been contacted. We help taxpayers across Orange County prepare for — and survive — California FTB audits with confidence.
What Is a California FTB Audit?
An FTB audit is an in-depth review of your California state tax return(s), income, and financial activity to verify the accuracy of what you’ve reported — or what the FTB believes you failed to report.
You may be audited as an:
- Individual taxpayer (especially high earners or non-filers)
- Business owner (including S corps and LLCs)
- Independent contractor or gig worker
- Self-employed professional
- Out-of-state taxpayer with California-source income
Top 10 Triggers for a California FTB Audit
1. Unfiled Tax Returns (Delinquency)
One of the most common FTB triggers is failure to file. The FTB cross-references data from:
- Employers (W-2s)
- Contractors (1099s)
- Financial institutions
- IRS records
If they see income reported but no return filed, you’ll likely be flagged. The FTB may even file a Substitute Return for you — often overstating your income and resulting in exaggerated tax liabilities. In some cases, the FTB will create a Substitute Return on your behalf — often inflating your income and resulting in a higher tax bill.
2. Mismatched Income Reporting
If your California tax return doesn't match your federal return, or if it leaves out 1099 income, capital gains, or stock sales, the FTB will notice.
Even minor mismatches can lead to receiving an FTB notice in the mail — and if ignored, may escalate into full audits.
3. Self-Employment Income Without Documentation
Sole proprietors and 1099 contractors in cities like Santa Ana, Anaheim, and Irvine are often audited if:
- Reported income seems low compared to industry standards
- They deduct business expenses without proper backup
- They fail to pay estimated taxes
The FTB uses data analytics to compare your return to others in your ZIP code and industry.
4. High Deduction-to-Income Ratio
If you claim excessive deductions relative to your income — especially Schedule A or C — you may be flagged for “audit potential.”
Watch out for red flags like:
- Home office deductions that don’t match business activity
- Travel or meal expenses not tied to business
- Charitable contributions that seem inflated
5. Unreported Out-of-State Income
California taxes worldwide income for residents — and California-source income for non-residents. If you live in Orange County but claim to work remotely from Nevada, but your records show otherwise, that can raise an FTB red flag.
6. Residency Issues and Part-Year Filers
Claiming non-residency while maintaining ties to California (e.g., address, employment, voter registration, driver’s license) often triggers an audit. The FTB is aggressive about tracking people who leave the state but still have California-sourced income.
7. Prior Audit History
If you’ve been audited by the IRS or FTB before, you’re more likely to be audited again — especially if:
- You owed substantial tax
- You failed to respond to the audit
- You didn’t comply with a resolution
8. Filing Late — Repeatedly
Filing past the deadline year after year may not trigger an audit by itself, but it can raise your risk score within the FTB’s internal system.
9. Business Owner with 1099 Contractors
Misclassifying employees as independent contractors can spark FTB, EDD, or even CDTFA action. In some cases, this overlaps with defending against CDTFA sales tax audits for business owners.
- FTB audit
- EDD (Employment Development Department) audit
- Penalties and reclassification
10. Data Sharing from the IRS
If the IRS audits you and finds discrepancies, the FTB is notified. You may find yourself responding after an IRS audit assessment at both the federal and state level.
Don’t go it alone. We help taxpayers across Orange County respond strategically and protect themselves. Schedule a confidential audit defense call today.
How FTB Audits Work (Step-by-Step)
If your case escalates, here’s what to expect during an FTB field audit step by step:
- Initial Notice Sent
You’ll receive a letter requesting clarification or documentation. - Audit Initiation
If not resolved, the FTB launches a formal audit. They’ll request: - Bank statements
- Receipts
- Contracts
- Business records
- Travel logs, donation proof, etc.
- Auditor Review
An auditor reviews your file and schedules a phone call or meeting. - Proposed Assessment
If they disagree with your return, they’ll issue a Notice of Proposed Assessment (NPA) — giving you time to protest or amend. - Final Assessment & Collections
If unresolved, the balance becomes due — with penalties, interest, and enforcement actions like liens or levies. If your audit results in additional taxes, here’s how penalties and interest work in California.
What Happens If You Ignore an FTB Audit?
Ignoring audit notices can lead to:
- Automatic tax assessments
- Suspension of licenses (professional, contractor, driver’s license)
- Bank levies or wage garnishments
- Tax liens reported on your credit
- Potential criminal referral for large-scale fraud (rare, but possible)
How to Respond to an FTB Audit
- Read the notice carefully
- Do not respond emotionally or defensively
- Gather all relevant documentation
- Do not call the FTB without professional guidance
- Hire a tax resolution CPA or representative
- Respond before deadlines to protect your rights
If penalties result, we also help clients pursue California FTB penalty relief options to reduce or eliminate extra costs.
How Boulanger CPA Helps with FTB Audits
At Boulanger CPA and Consulting PC, we help Orange County taxpayers through every stage of the audit process. We:
- Review and interpret your audit notice
- Respond directly to FTB auditors on your behalf
- Protect your rights and minimize risk
- Build a proactive strategy to resolve any tax balance
- Help avoid future audits and penalties
- Challenge IRS findings by challenging IRS penalties or protesting proposed assessments
Don’t Go Through an FTB Audit Alone
If you’ve received a letter or notice from the Franchise Tax Board — or if you suspect your return may be flagged — get professional help before it escalates. Explore your full California tax relief options — including settlements and payment plans — before collections begin.
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Call Boulanger CPA at
657-218-5700
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Schedule a consultation
atorangecounty.cpa
Work with experts who know how to handle audits — and learn more in Defend What’s Yours.
Frequently Asked Questions
What are the most common FTB audit triggers?
Frequent triggers include mismatches between your federal and state returns, large or unusual deductions, unreported income, and cash-heavy businesses.
Does receiving an FTB notice always mean I did something wrong?
No. Many audits are triggered by automated systems comparing returns or by random selection, not necessarily by wrongdoing.
Are certain industries more likely to face FTB audits?
Yes. Restaurants, construction, cannabis, and other cash-based businesses are frequent audit targets due to higher risk of underreporting.
How far back can the FTB audit my returns?
The FTB typically audits the past four years, but can extend further if fraud or significant underreporting is suspected.
Can an IRS audit trigger an FTB audit?
Yes. The IRS and FTB share information. An IRS adjustment often triggers a parallel state audit for the same tax years.
What happens if the FTB finds I owe more tax?
You’ll receive a Notice of Proposed Assessment. If you disagree, you can file a protest or appeal through the Office of Tax Appeals (OTA).
Can penalties and interest be reduced?
Possibly. You may qualify for penalty abatement if you show reasonable cause, but interest usually cannot be waived unless due to FTB delay.
Should I get professional help for an FTB audit?
Yes. Professional guidance helps you respond properly, avoid unnecessary disclosures, and protect your rights during the audit process.
📣 About the Author
Marc Boulanger, CPA is the founder of Boulanger CPA and Consulting PC, a boutique tax resolution firm based in Orange County, California and trusted by high-income individuals and business owners across Southern California.
He is the author of Defend What’s Yours: A California Taxpayer’s Guide to Beating the IRS and FTB at Their Own Game, available now on Amazon. The book offers a step-by-step plan for resolving IRS and FTB tax debt without losing your business, your home, or your peace of mind.
With over a decade of experience resolving high-stakes IRS and State tax matters, Marc brings strategic insight to complex cases involving wage garnishments, bank levies, unfiled returns, and six-figure tax debts. He is known for helping clients reduce or eliminate tax liabilities through expertly negotiated settlements and compliance plans.
Marc is a Certified Public Accountant licensed in California and Oklahoma and holds the designation of Certified Tax Representation Consultant. He is a member of the American Society of Tax Problem Solvers (ASTPS) — the national organization founded by the educators and practitioners who have trained thousands of CPAs, EAs, and tax attorneys in IRS representation strategy.
Every case is handled with discretion, proven methodology, and direct CPA-led representation — not call center scripts.
📍 Learn more at www.orangecounty.cpa or call (657) 218-5700.
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