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Audit Branch Procedure Statement: 99-3

Subject:Raising New Issues at ProtestDate: June 11, 1999
From:Dale Isaac, Director, MSA Program 
 Winston Mah, Director, GTA Program 
ISSUEExisting authority permits the FTB to raise new issues on appeal after the statute of limitations has expired for issuing a deficiency assessment where the FTB can meet the burden of proof. The purpose of this procedure statement is to address raising new issues at protest.
CURRENT AUDIT PROCEDURECurrent audit procedure is to raise new issues at protest to sustain a deficiency assessment after the statute of limitations has expired for issuing a deficiency assessment only if the new issues are transactionally related to the original deficiency assessment.
NEW PROCEDURE New issues may be raised at protest to sustain a deficiency assessment in accordance with the following guidelines.

I. New issues directly related to the NPA adjustment.

These are issues that are identified based on new information obtained at protest to further develop the original issue or to make an alternative legal argument to support, supplement, or supplant the original legal argument.

II. New issues attributable to the NPA adjustment.

These are issues that are caused by the NPA adjustment due to other statutes or mathematical calculations. Examples: AMT computations, revised AGI limitations on deductions or credits , interest offset.

III. Statutory adjustments.

New issues include any discovered statutory adjustment that was not previously made and not related to the NPA adjustment.

IV. New matters.

These are issues that do not fall into categories I through III. These issues are unrelated to any of the issues included in the NPA and require development and presentation of different evidence. For example, a provisional assessment is issued to protect the statute of limitations and the case is returned to the field for further factual development upon the filing of a protest by the taxpayer. Upon further review of the return, the auditor identifies an issue that was not previously considered, or previously considered but scoped as having limited tax potential, but which now has material tax potential.

New issues identified as new matters should be pursued only in rare and unusual circumstances and only with the approval of the respective unit supervisor/manager. The workpaper file must contain the facts and circumstances which are relied upon to justify raising the new matter and evidence of the supervisor's/manager's approval.

NPA TAX LIMITATIONNew issues may never increase the deficiency assessment in excess of the additional tax shown on the NPA.
BURDEN OF PROOFThe burden of proof will be on the FTB. A prima facie case will shift the burden back to the taxpayer.
RELATION TO OTHER AUDIT PROCEDURESIt is emphasized that raising a category IV new issue would be done only in an extremely rare and unusual situation. This is intended to be consistent with FTB's procedure concerning the reopening of audited years.
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