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Head of household FTB audits will begin in August

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The FTB recently revealed that it will initiate approximately 90,000 audits for tax year 2013 beginning in mid-August. The audits will target taxpayers whose 2013 filing status on their California income tax return was head of household.

California taxpayers may generally claim head of household status on their tax returns if they are:

1) Unmarried,
2) Not a registered domestic partner,
3) Paid more than one-half of the costs to keep up their home, and
4) Had a qualifying person live with them.

It is the fourth element, the qualifying person requirement, where most taxpayers are vulnerable to an audit attack by the FTB. However, all the elements must be satisfied to endure an audit review.

The head of household audit is usually fruitful for the government because the determination is generally factual, not legal. Additionally, taxpayers claiming head of household status are taxed at a lower tax rate and enjoy a higher standard deduction than a taxpayer filing either single or married/registered domestic partner filing separately. Therefore, if the taxpayer cannot substantiate the factual basis for the head of household status claimed on their tax return, their tax rate will increase. Additionally, if the targeted taxpayer claimed a standard deduction, then their deductions will decrease and they will likely owe the government money. Lastly, because the adjustments were caused by the audit, the government will also benefit from the right to assess and collect monetary penalties and interest.

While the word “audit” is technically correct, in reality, this August the FTB is simply sending questionnaires to approximately 90,000 “lucky” California taxpayers who filed as head of household on their tax returns. Taxpayers who failed to submit a head of household questionnaire with their 2013 tax return, or whose questionnaire was deemed incomplete or provided conflicting information will likely receive one of the 90,000 audit notices.

Like all tax notices, it is important to respond to this notice if you receive one. Taxpayers who fail to respond to the questionnaire or whose responses indicate they should not meet the criteria to file as head of household, can expect to then receive a formal notice of proposed tax assessment. This is the notice that formally notifies the taxpayer that the government intends to change the taxpayer’s tax return as filed, adjust their taxes owed, and imposes penalties and interest.

Now that you are aware that you may be receiving a love letter from the FTB in mid-August you can prepare your fight or wallet book accordingly.

This article is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

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