What to Expect From a California FTB Audit

California doesn't conform to every federal tax provision, and where it doesn't conform, a position that's perfectly correct federally can still be wrong for California purposes. Apportionment methodology, certain federal deductions, and specific credits are common areas where the state and federal treatment diverge. Don't assume a federal audit result, clean or otherwise, tells you anything definitive about your California exposure; the two systems are asking related but genuinely different questions.

A few patterns draw more FTB attention than others: a company with California-based remote employees but no formal California registration or apportionment filed, a sharp apportionment change year over year with no clear business explanation, or a company claiming California tax credits without airtight documentation. Remote work has made the first pattern far more common than it used to be, since a single California-based remote employee can be enough to establish nexus even without any office or other physical footprint.

A mismatch between what your federal return shows and what your California return shows, without a clean reconciliation explaining the difference, is another pattern that tends to draw a closer look, since it signals either an error or an undocumented position, so reconcile the two returns explicitly rather than filing them independently.

Expect an initial information request covering your apportionment workpapers showing how you calculated California's share of your income, documentation of your nexus determination including when you first had California-connected activity, and support for any California-specific credits claimed. The FTB is generally methodical about testing the apportionment calculation itself first, since that's where the dollar impact usually concentrates, before moving into more granular transaction-level questions.

Expect the first information request to cover these items:

• Apportionment workpapers showing how you calculated California's share of your income.
• Documentation of your nexus determination, including when you first had California-connected activity.
• Support for any California-specific credits you claimed on the return.
• A reconciliation between your federal return and your California return, explaining any differences.

If you have even one employee working from California, confirm whether that alone establishes nexus requiring you to register, apportion income to California, and potentially collect California payroll withholding, well before an audit forces the question. Many companies that hired remote broadly during expansion never revisited their state tax footprint against their actual current employee locations, and a single overlooked California-based hire from years ago can be the fact pattern an FTB audit eventually surfaces.

Respond to information requests completely but don't volunteer analysis beyond what's asked; a request for apportionment workpapers is a request for the workpapers, not an invitation to explain your entire multi-state tax philosophy. Bring in a California state tax specialist early, ideally at the first notice rather than after an initial proposed assessment, since the FTB's positions on remote employee nexus and apportionment methodology continue to evolve and a specialist current on recent guidance can meaningfully change the outcome of a dispute.

If the FTB proposes an assessment you believe is wrong, you generally have a formal path to protest it before it becomes final, and that protest process is where a clear, well-organized apportionment file actually pays off, since you're now arguing your position with evidence rather than reconstructing it under time pressure. Companies that treat the initial information request as the whole fight, and then don't protest a bad outcome, often leave real money on the table simply by not pursuing the process the state itself provides for disputing a result.

For example, suppose the FTB proposes an assessment based on a different apportionment result than the one on your return. If your workpapers show how each factor was calculated and where the underlying records came from, you can protest with evidence rather than opinion. A common mistake is treating the first information response as the end of the process and letting the protest path go unused. The fix is to calendar the response date the day a proposed assessment arrives and ask your specialist to review the file immediately. As a decision rule, don't accept a proposed assessment until you have tested it against your own apportionment support.