The Risk of California FTB Audits is Increasing

Allen Barron, Inc.
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Did you know that the number of California FTB audits is increasing when compared to the trend of IRS audits in 2025? The California Franchise Tax Board, or FTB, has recently invested in advanced data processing systems and AI applications. This, combined with streamlined information sharing with the IRS, Employment Development Department (EDD), other federal and state agencies, as well as international tax agencies and Foreign Financial Institutions (FFIs), exposes businesses and individuals who reside in or conduct business within California to a higher risk of audit than they might face with the IRS.

Key Takeaways Regarding an Increase in the Number of FTB Audits:

  • The number of FTB audits has increased significantly over the past two years when compared with the IRS.
  • The California FTB's EDR2 program identifies "noncompliant" individual and business tax filing and reporting, and intervenes directly, driven by advanced data processing systems and AI.
  • It is never in the taxpayer's best interests to communicate directly with the FTB or IRS. If a taxpayer receives a letter or notice in the mail, it is often a precursor to an audit. Prompt response and supporting documentation are the keys to avoiding a more extensive review or audit.

California recently implemented the Enterprise Data to Revenue Project or EDR2 with the goal of proactively using advanced technology and AI applications to evaluate extensive streams of data from employment records, onshore and offshore banking and financial institutions, the California Secretary of State as well the IRS regarding individual and business taxpayers to more easily and efficiently identify "noncompliant" taxpayers, even those who may have simply made a mistake on a form or tax return. EDR2 usually begins contact with a request for the taxpayer to address the issue. Ignoring this inquiry usually advances the case to an audit. This is one of the primary reasons the number of California FTB audits and taxpayer inquiries is increasing.

According to the FTB: "The implementation of new systems simply allows the FTB to collect more information and relate it to specific unique taxpayer identification numbers or social security numbers." This is how an agency can single you out of the roughly 17 million business and individual tax returns filed in California each year. EDR2 allows the FTB to set up individual electronic "folders" for each taxpayer used internally by the FTB to aggregate information for each taxpayer gleaned from what used to be stored in separate systems across multiple agencies around the state, nationally (through the IRS), and internationally (through sovereign tax agencies and FFIs). Some data the system is collecting has never been available electronically before, and this provides "exciting new opportunities to identify trends and audit targets" at the FTB.

An executive with the California FTB recently said the new systems provide a "360-degree view of the taxpayer. These advanced systems have "found errors in people's filings (the FTB) hadn't found in years." The integration with other government agencies allows the FTB to access more information about unique taxpayers and pursue tax collections from those they could not reach in the past.

California FTB audits are increasing the risk for both individual taxpayers and businesses. If you receive any form of communication or request for information from the California FTB or the IRS, it is important to seek the guidance of an experienced California and international tax attorney. A tax attorney can evaluate the extent of the request, assess the potential exposure faced by an individual or business taxpayer, and provide recommendations and solutions to mitigate or eliminate risk, thereby resolving the matter at hand.

It is never in a taxpayer's interest to communicate directly with an agency like the IRS or California FTB. Your tax attorney can handle all interactions with a state, federal, or foreign tax agency, provide sound insight and counsel, while reducing the stress and risks associated with taxpayer interactions with tax collection agencies.

California FTB audits are increasing, and requests for information leading to an audit typically begin with a letter from the agency. If you are contacted about a recent request for information, a notice regarding missing or incorrect information on a tax form, or IRS or California FTB audits (field, desk, or office), you need the advice and counsel of an experienced, proven tax attorney.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Attorney Advertising.

© Allen Barron, Inc.

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