FTB Audits: Considerations for Handling Requests for Statute Extensions by FTB Auditors.

• Author: Coffill, Eric J.

A Common issue arising in FTB audits--personal and corporate--is whether to grant a waiver of the statute of limitations at the request of a field auditor. The general rule is that the FTB has four years from the original due date or the date the return was filed to audit that return and issue any Notice of Proposed Assessment (NPA) (RTC sections 19057, 19066).

However, keep in mind the FTB statute of limitations independendy remains open for six months after the expiration of a federal IRS statute waiver signed by the taxpayer (RTC 19065).

FTB's Manual of Audit Procedures (MAP) makes clear to auditors that "waivers are not an acceptable substitute for prompt, timely audits" (MAP Section 4.1; MAP 4 SOL & WAIVERS; ftb.ca.gov/tax-pros/procedurcs/manual-of-audit-procedures/chapter-4.pdf).

Further, FTB's Audit Procedure regulation states that a taxpayer should have the "expectation" that a "resolution of the audit will be achieved within a two-year period" commencing with the date of the auditor's initial contact (FTB Regulation 19032 (a)(2)). Further pressure results from FTB field auditors being instructed to complete cases and submit them for review by the Technical Resources Section at least six months before the statute of limitations expires (MAP Section 4.1).

Even with these clear directives regarding the timing and completion of audits, in the author's experience, it is a rare FTB audit these days in which an auditor does not request at least one, and often multiple, wavers of the typical four-year statute. What are the considerations in deciding whether to grant or deny an auditor's request for a statute waiver in a pending audit? The central question is: Is it in the client's interest, or against the client's interest, to sign the statute waiver requested by the auditor?

Here are some considerations for making that decision.

What are the likely consequences of not signing the requested waiver?

Absent the waiver, the statute of limitations for FTB to issue any NPA will lapse for that tax year. Does this mean the auditor will essentially "throw together" and issue a timely XPA simply to protect potential revenue, even when not justified based on the current status of the audit? Does this mean the auditor will conclude that based upon the current status of the audit, they do not have reasonable grounds to issue an NPA and will close the audit without assessing? Will the audit continue anyway for other years where there is still open...