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 the 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 individual or corporate tax returns.

For personal income taxpayers, we relied on Notice of Proposed Assessment information for assessments that became final in Fiscal Year 2024/2025. 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 comprising finance, insurance, real estate, and holding companies was assessed the largest dollar amount.

For personal income taxes, the largest number and dollar amount in proposed assessments resulted from filing enforcement assessments, which apply to taxpayers who have not filed their state income tax return after we notified them of their filing requirements. The second largest dollar amount for personal income tax proposed assessments continues to be from CP2000 notices, which are received through the data sharing agreement with the Internal Revenue Service (IRS) on the Revenue Agent Reports. These notices result when California conforms to federal law, and a change to a taxpayer’s federal tax return applies to the taxpayer’s California tax return.

We issue a separate Notice of Proposed Assessment to the taxpayer for each taxable year included in an audit adjustment. Individuals typically have audit changes for just one taxable year. Ninety-six percent of the individuals who received Notices of Proposed Assessment during Fiscal Year 2024/2025 had audit changes for a single taxable year.

An in-house accounting department or an accounting or legal firm prepares virtually all corporation tax returns. The data indicates that tax professionals file 63 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 assume taxpayers self-prepared their personal income tax returns.

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 21.3 million tax returns (19.1 million PIT returns and 2.2 million BE returns) processed between July 1, 2024, and June 30, 2025. 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 1,920,000¹ return notices (1,590,000 PIT— Notices of Tax Return Change and 330,000 BE— Return Information Notices) to taxpayers who filed tax returns with errors that resulted in a change. This figure equates to 9 percent of tax returns. We explain the errors in change notices and inform customers how they can resolve any discrepancies.

The two most common PIT taxpayer errors are related to verification of total credits and special credits, along with withholding discrepancies. Together, these two errors account for 38 percent of all PIT taxpayer errors identified during the processing of tax returns.

Additionally, of all PIT change notices sent, 17 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.

PIT taxpayer errors related to withholding discrepancies accounted for another 15 percent of PIT notices 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 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 94 percent of all BE taxpayer errors identified during tax return processing.

Of all BE change notices sent, 56 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 next 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 38 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 10/16/2024 and standard 04/15/2025 due dates, as of 06/30/2025. ↵