State Tax Audits on Rise Despite Drop-Off by IRS

The steep decline in Internal Revenue Service audits has had little effect on the state Franchise Tax Board, which audited more Californians last year than in 1998.

Better technology, more aggressive matching programs and increased initiatives to root out non-filers boosted state audits by 3% for fiscal year 1999, which ended June 30.

The number of audits on individual taxpayers--668,086 for fiscal 1999--is well below a 1997 peak of 942,364, FTB spokeswoman Denise Azimi said. But the 1997 number included hundreds of thousands of audits backlogged from prior years, as the agency made a push to catch up on old files.

Although some FTB exams are simple follow-ups on audits initiated by the IRS, more than 80% of the individual taxpayer audits last year were initiated by the state. The number of IRS referrals has remained relatively stable at about 117,000 a year since 1997, despite a dramatic drop in overall federal audit levels in the last two years.

Many of the IRS audit referrals to the state come from semi-automated service center audits, which have been on the rise even as face-to-face IRS audits have dropped.

The state, meanwhile, expanded its matching programs that checked taxpayer returns against data such as employer-provided W-2s and 1099s from financial institutions and mortgage lenders. The state was particularly interested in people who owned property in the state but who did not file as residents.

In fact, California’s is one of the most aggressive among state tax agencies about ferreting out people it thinks are pretending to be nonresidents to avoid state income taxes, tax attorneys say.