Common personal income tax audit issues January 2019 Tax News

One question we consistently get from tax professionals has to do with what the more common audit issues are for personal income taxpayers (PIT). It goes without saying that a large portion of our audit adjustments originate from IRS audits of California taxpayers, and, these of course, cover a wide range of issues. But, in terms of what our auditors focus on when we initiate an audit, include some of the more common areas:

  • Sales of personal or real property, including like-kind exchanges
  • Shareholder/partner/owner's Basis in a Pass-Through Entity
  • California residency and sourcing of income
  • Head of household (HOH) filing status
  • Employee business expenses

It’s worth noting that some audits of like-kind exchanges result from incomplete, missing, or improperly completed California Like-Kind Exchanges (FTB 3840) forms.  We have a related article this month, Request for, California Like-Kind Exchanges, letters going out (FTB 3840).

Finally, if your client is audited by the IRS and changes are made, we have an informational publication Federal Tax Adjustments and Your Notification Responsibilities to California (FTB 1008), which explains the responsibility for notifying us in this event and the different methods for doing so.