Tax Guru – Ker$tetter Letter

In its latest Tax News newsletter, the California Franchise Tax Board stated the following.

We noticed a large number of taxpayers who claim unreimbursed employee business expenses (EBE) on Schedule A that appear questionable.

In August, we will increase the number of audits for taxpayers deducting EBE on personal income tax returns, starting with the 2011 and 2012 tax years.

There appears to be a bit of scare strategy at work here.  Normally, FTB doesn’t do many actual audits of items on income tax returns.  Instead, as with most other States, they just let IRS do the bulk of the examination work and then use the IRS results to make changes to the State tax returns.   They are explicitly encouraging people who don’t think they will survive an examination to file amended tax returns and do their job for them.

Your clients can file amended tax return(s) if their business expenses do not qualify.

Notice that they mention going back to 2011, highlighting the fact that the Statute of Limitations for California income tax returns has long been Four (4) years, compared to the long-standing Three (3) years with IRS.

Also, notice that the focus of this concern is just deductions on Schedule A of individual income tax returns.  It doesn’t mention any problems with expenses claimed on business forms (i.e. Schedule C) or corporate tax returns (hint hint).