Responding to an FTB Request/Demand for a Tax Return (Form 4600)

No one who claims to be a nonresident of California wants to receive a letter from the Franchise Tax Board (“FTB”).  In most cases, up to that point, you probably thought you were completely off their “radar.”

Then comes that day when you receive a form letter (i.e., FTB Form 4600) requesting/demanding that you file a tax return and inquiring about your California residence status.  For many of my nonresident clients, such an event is beyond their imagination.

“How did this happen??,” they always ask.  The answer is usually simple.  These days, a request (demand) for a tax return is usually the result of an electronic disclosure made to the FTB from any of several sources, including the IRS, other state tax authorities, payors of various types of income (think Form 1099), certain business or investment entities in which you may be invested that are doing business in California and financial institutions to which you are making mortgage payments, among others.  Other taxpayers make themselves targets for a Form 4600 inquiry letter by filing their federal tax return using a California address.  After such disclosures are compared to the FTB database of filed tax returns with no match, the residence status inquiry letter, a questionnaire and a request for a tax return are generated automatically.

Many clients who receive such an inquiry, believing in their own nonresident status, make the mistake of assuming that the FTB will see it their way if they just explain it to them in a letter.  Filling out the FTB questionnaire (which I don’t recommend) and providing an amateur response to their letter which does not address the salient facts and legal issues in which the FTB is interested, often just digs the taxpayer in deeper.  In this regard, the well-known Miranda warning that “anything you say may be held against you” applies equally to disclosures made in an amateur response to the FTB.  Indeed, an amateur response to such an inquiry often results in a request for further information that could begin a residence tax audit (for more information about California residency tax audits, click here).  Such an audit can be extremely intrusive and costly.

To obtain a better result (i.e., a Confirmation Letter on Form FTB 4054 ENS, confirming that the FTB are closing their inquiry), we recommend commissioning a professionally drafted response to a Form 4600 request for a tax return.   We draft that letter only after analyzing the multitude of factors possibly bearing on the question of your residency status and developing a clear vision of your factual vulnerabilities, from which we steer clear in our response.  At the same time, we fully apprise the FTB of the applicable law and each fact that supports the position that you are a nonresident who is not required to file a tax return

If a nonresident tax return is due for the tax year in question (e.g., because you earned even a dollar of gross rental income from a leased California vacation home or time share), we will consult with you about the preparation of that return (and may recommend a “quiet” filing of earlier years tax returns that may be due for the same reason).

We have a strong track record of dissuading the FTB from pursuing Form 4600 inquiry letters into full-scope residency tax audits. If you or someone you know has received a Form 4600 inquiry letter, questionnaire and/or a request for a tax return, contact us as quickly as possible.

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Lance Cross-Border Law and Tax is the premier cross-border tax law firm in California advising clients concerning residency tax problems.  In addition to residency tax planning, we also assist our clients to resolve residency tax audits and appeals of residency tax assessments.  Learn more about our complete range of services concerning cross-border residency tax issues by visiting: www.lancecrossborder.com