State Tax Audits Decrease but Revenue From Reviews Rises

State tax officials conducted fewer audits last year but collected more money from California taxpayers as a result of those reviews, according to figures released Friday by the Franchise Tax Board.

A steep decline in referrals from the Internal Revenue Service helped lead to a 7% drop in total FTB audits of individual taxpayers in the fiscal year ended June30, said Denise Azimi, FTB spokeswoman. A total of 434,490 taxpayers faced state scrutiny last year, compared with 467,307 in the year-earlier period.

But the federal tax cases that were referred to the state for follow-up tended to involve larger tax bills, which helped lead to a 16% rise in additional tax assessments to $330.2 million, Azimi said.

Overall, IRS referrals accounted for 39% of FTB audits but 67% of additional taxes assessed.

The IRS typically notifies the state when a federal audit is conducted, so the FTB can follow up with its own tax assessment. These IRS leads in the past have made up more than half of the audits the FTB conducts, and they often are a lower-cost way of collecting money than audits initiated by the state.

IRS audits, however, have dropped in the last four years because of staff cuts and a massive reorganization effort at the federal agency. Last year, in-person audits conducted by IRS agents in a taxpayer’s home or office or at an IRS field office fell 36%.

The FTB has responded to the decline in IRS leads by increasing the number of audits it initiates by 10% to 307,991. The state agency also significantly expanded its automatic math-checking program, FTB figures show. The program reviewed 16.3 million returns and assessed an additional $123.4million in net taxes last year, a 47% increase from a year earlier.