Getting a letter from the IRS or California Franchise Tax Board (FTB) can feel like a panic attack in an envelope. Thats why today we will focus on california tax notice audit defense
But not all notices are bad—and most aren’t full audits. Still, failing to respond correctly (or at all) can turn a small issue into a major problem.
This guide breaks down:
- Why you might have received a notice
- How to decode IRS and FTB letters
- What actions to take (and avoid)
- How to handle audits, payment demands, and document requests
- When to escalate, negotiate, or bring in a tax professional
Whether you’re self-employed, a business owner, or just got blindsided by a tax letter—this guide gives you a calm, clear defense plan.
Quick Answer: What to Do If You Get a Tax Notice in California
- Don’t ignore it. Every notice has a deadline—and ignoring it can lead to penalties, liens, or worse.
- Read it carefully. Determine which agency sent it (IRS vs. FTB), the year involved, and what’s being requested.
- Don’t pay until you understand. Many notices are incorrect or based on missing forms.
- Respond on time. Most IRS and FTB notices allow 30 days to reply. Send your response via certified mail.
- Get help if it’s complex. Audits, CP2000s, or wage garnishment threats should be reviewed by a strategist or enrolled agent.
- Fix the root cause. Many notices are triggered by bookkeeping gaps, missing forms, or tax prep mistakes that can be prevented going forward.
Section 1: Understanding California Tax Notices (IRS vs. FTB)
Before you panic, start by identifying who actually sent the notice. California taxpayers can receive letters from either the Internal Revenue Service (IRS) or the Franchise Tax Board (FTB)—and each operates under different rules, timelines, and enforcement powers. Thats why this is very timely for us to focus on california tax notice audit defense
IRS vs. FTB: Key Differences
| Feature | IRS (Federal) | FTB (California State) |
| Jurisdiction | Federal taxes | California personal and business income tax |
| Common Notices | CP2000, CP14, audit letters, levy | Demand for tax return, underpayment, audit |
| Response Window | Typically 30 days | Often 30–60 days, varies by notice |
| Collection Tools | Bank levies, liens, garnishment | Same, but through CA systems |
| Contact Info | 800-829-1040 (slow) | 800-852-5711 (faster, often more helpful) |
Most Common IRS Notices in California
- CP2000 – Underreported Income:
IRS thinks you missed income (usually from 1099s or W-2s). Not a formal audit, but very common. - CP14 – Balance Due:
Standard “you owe money” notice. Includes penalties and interest. - Letter 525 – Audit Notification:
You’re being audited. Usually comes with Form 4549 (proposed changes). - Notice LT11 – Final Notice of Intent to Levy:
Urgent. The IRS plans to seize assets if you don’t respond or resolve.
Most Common FTB Notices
- Demand for Tax Return:
The FTB doesn’t see a return on file—even if you filed it with the IRS. - Notice of Proposed Assessment (NPA):
They’ve adjusted your return—often due to missing info or a federal change. - Underpayment or Estimate Penalty Notice:
You didn’t pay enough estimated taxes throughout the year. - Request for Supporting Documents:
FTB wants backup for deductions (often for S Corps, sole props, or rentals). - Franchise Tax Nonpayment Notice:
You owe the $800 minimum or haven’t filed Form 100/100S.
Step 1: Identify These 5 Things Immediately
- Which agency sent it – IRS or FTB?
- What tax year is involved?
- What are they asking for? (payment, documents, correction, return?)
- What’s the due date to respond?
- Do you agree with it? (Don’t guess—check your return or call your preparer)
Bottom line:
Tax notices are manageable when you act early. In the next section, we’ll walk through the exact steps to respond—whether you owe money, disagree with the claim, or are being audited.
Section 2: How to Respond to a Tax Notice (Step-by-Step)
Getting a tax notice doesn’t mean you did something wrong—but how you respond determines whether it becomes a small correction… or a major crisis. This is key when it comes to california tax notice audit defense
Here’s the exact step-by-step protocol we use at KDA when helping clients respond to IRS and FTB letters.
Step 1: Don’t Ignore It
Every notice has a due date. Ignoring it leads to:
- Automatic penalties
- Loss of appeal rights
- Asset seizure (in worst-case scenarios)
Even if you can’t pay or don’t understand it, respond.
Step 2: Understand the Notice
Before you reply, know:
- Who sent it (IRS or FTB)
- What it’s about (balance due, missing form, document request)
- Whether you agree or disagree with it
- The deadline to reply
Tip: Look at the top right corner for the notice number (e.g., CP2000, NPA, Letter 525).
Step 3: Gather Your Documents
You’ll need:
- The full notice (every page)
- Your filed return for the year in question
- W-2s, 1099s, K-1s, or other income docs
- Bank statements, receipts, or logs (if deduction is challenged)
- Proof of filing (if the notice says “not received”)
Step 4: Craft a Professional Response Letter
Whether you agree or disagree, send a written response.
Include:
- Your name and SSN or EIN
- The notice number and tax year
- A short, clear summary of your position
- Supporting documentation (with labels or cover page)
- Your contact info and signature
Always keep your tone respectful—even if they’re wrong.
Step 5: Send It by Certified Mail
For both IRS and FTB:
- Use certified mail with return receipt
- Keep copies of what you sent
- Track the delivery and keep proof of mailing in your records
This protects your rights if they lose the file or respond late.
Step 6: Wait for a Response (But Monitor Deadlines)
IRS and FTB typically respond within 4–8 weeks. If you don’t hear back:
- Call to confirm receipt (especially with the IRS)
- Don’t assume silence = resolved
- If your reply deadline is close, escalate or resend
What If You Agree But Can’t Pay?
You still need to reply. Include:
- Your signed agreement
- A payment plan request (IRS Form 9465)
- Proof of financial hardship (if needed)
Important: Paying something—even $50—shows good faith and can reduce penalties.
Bottom line:
Timely, professional responses are your best defense. Never send originals, always document what you send, and don’t go it alone if the issue is complex.
Audit Risk in California — What Triggers It, and How to Avoid It
An audit doesn’t happen randomly. Both the IRS and FTB use risk-scoring systems to flag tax returns with red flags, inconsistencies, or unusual activity—especially for business owners and real estate investors. This is key to know when it comes to california tax notice audit defense
If you’re in California, your risk is even higher due to:
- High income levels
- Complex deductions
- Dual-agency oversight (IRS + FTB)
Here’s what gets flagged—and how to prevent it.
1. High Deductions Relative to Income
Claiming $90K in deductions on $120K of income? That might be legit—but if it’s not well-documented, it’s a trigger.
Especially risky:
- Marketing or travel deductions that look excessive
- Home office write-offs that aren’t exclusive
- Personal expenses reclassified as “business”
Prevention: Keep digital receipts, written logs, and clear documentation for high-dollar categories.
2. S Corp Owners With No Payroll
If you’ve elected S Corp status and don’t pay yourself a salary:
- IRS assumes you’re avoiding self-employment tax
- They may reclassify distributions and assess back payroll taxes + penalties
Prevention: Run W-2 payroll with a reasonable wage based on your role. File 941s, W-2s, and maintain a clean paper trail.
3. Unfiled or Late Franchise Tax Board Returns
The FTB audits aggressively when:
- You miss filing a CA return
- You skip the $800 minimum tax
- You file as an S Corp federally but don’t file Form 100S in CA
Prevention: File all CA forms—even in low-income years. Don’t assume your CPA filed at the state level just because the federal return went out.
4. Misclassified Workers
If you treat a long-term assistant or contractor like an employee—but pay them via 1099:
- You risk back payroll tax
- California will often assess penalties retroactively
- You’ll lose access to the deduction for those payments
Prevention: Review every contractor annually. Classify based on control, schedule, and deliverables. When in doubt, consult an employment tax expert.
5. Large Charitable Contributions or Losses
Big donation? Passive loss carryforward? The IRS notices if these spike compared to your income.
Prevention: Keep receipts for all donations, especially over $250. For real estate or investments, attach supporting schedules and depreciation records.
6. Inconsistent Reporting Across Forms
The IRS cross-references:
- 1099s (income)
- K-1s (partnerships)
- W-2s
- Bank account activity
- Asset sales (via Form 1099-S or 1099-B)
If something was reported to the IRS and you didn’t match it, your return is flagged—even if it was a genuine mistake.
Prevention: Always reconcile what’s on file with what was reported to the IRS. Use transcript pull tools or work with a strategist who does.
Bottom line:
Audit risk is a byproduct of sloppy or aggressive filings—not success. With proper systems, you can scale confidently and stay out of audit crosshairs.
KDA Case Study — From IRS CP2000 to Cleared Audit in 3 Weeks
Client Profile:
- Name: Anthony (name changed)
- Location: Pasadena, CA
- Role: Marketing agency owner
- Income: $330,000 (S Corp)
- Issue: Received a CP2000 notice alleging $41,000 in unreported income from a 1099-K
The Problem
Anthony called us in a panic. He’d received a CP2000 letter from the IRS alleging he underreported income by $41,000 for the previous tax year. The notice included:
- Proposed changes to his return
- An additional tax due of $13,282
- A 30-day window to respond or accept the change
Anthony swore he reported everything—but couldn’t figure out where the number came from.
Upon review, we found:
- Stripe had issued him a 1099-K for gross revenue
- His return correctly reported net revenue (after refunds + fees)
- The IRS was double-counting revenue due to how Stripe reports
The KDA Fix
We took immediate action:
- Requested Stripe transaction summaries for the full year
- Reconciled gross reported vs. actual revenue using QuickBooks
- Created a clean summary of refunds, chargebacks, and fees
- Wrote a formal IRS response letter outlining the issue
- Included:
- Stripe documentation
- Reconciliation sheet
- Copy of Anthony’s original tax return
- Cover letter signed by our enrolled agent
- Stripe documentation
We mailed the packet via certified mail and called the IRS to note that a response was on the way.
The Outcome
- IRS acknowledged our response within 14 days
- After 3 weeks, we received a closure letter stating no change to Anthony’s return
- No penalties, no taxes owed, no audit
What Anthony Said:
“I thought I was screwed. If I hadn’t worked with KDA, I probably would’ve paid the $13K just to avoid the hassle. They handled it fast, and it didn’t even go to full audit.”
Lesson:
CP2000s often look scarier than they are. When backed by clean records and a sharp response, they can be cleared without issue.
Book Your Tax Notice Review
If you’ve received a tax notice—whether from the IRS or the California FTB—the worst thing you can do is wait.
Most notices are fixable, but only if you respond on time, with the right documentation, and with a clear explanation. And if you’re unsure what the notice means, guessing can cost you thousands.
At KDA, we specialize in helping California taxpayers:
- Decode IRS and FTB letters
- Prepare clear and complete response packets
- Resolve CP2000s, proposed assessments, and audit requests
- Avoid or minimize penalties
- Clean up prior-year mistakes so they don’t trigger future notices
What You’ll Get:
- A notice review by a licensed tax strategist
- Clear explanation of what’s being requested (and why)
- A recommended response strategy or dispute letter
- Audit defense tips tailored to your situation
- Advice on what to do next year to avoid repeat notices
- Peace of mind—backed by a real plan
You’re not alone. Tax notices are stressful, but solvable.
