A person’s “residence” under California law is the key to understanding their state income tax liability. For this reason, the California Franchise Tax Board (FTB) conducts residency audits that will determine a person’s residency called a California Residency Audit.
Outcomes of a California Residency Audit
Generally, three outcomes are possible; a taxpayer may be found to be a resident of California, in which case they are taxed on income from all sources, including income from sources outside of California. A taxpayer may be found to be a nonresident of California, in which case they are taxed only on income from California sources. Finally, a taxpayer may be found to be a part-year resident, and taxed on all income received while a resident and only from California sources while a nonresident. See Franchise Tax Board, Residency Tax Audit Frequently Asked Questions, available at https://www.ftb.ca.gov/forms/misc/1015R.pdf.
California residency law defines the class of persons that are expected to contribute tax revenue to the state. California’s Revenue and Tax Code (R&TC) § 17014 includes every person in the state of California except for those in California for “a temporary or transitory purpose.” Cal. Rev. & Tax. Code § 17014 (West). It is important to note that this definition of residency is very broad, and includes everyone currently in the state except for those remaining in the state for a temporary or transitory purpose. It also includes those people domiciled in the state of California but currently outside the state for a temporary or transitory purpose.
Much of the residency determination depends upon the definition of “a temporary or transitory purpose.” California Code of Regulations (CCR) § 17014(b) defines in great detail what “temporary or transitory purpose” means. It states that visitors in the state for a short period of time for both business and pleasure are in the state for “a temporary or transitory purpose,” and as such are to be taxed as California residents. On the other hand, those domiciled outside the state, but staying within the state for business, medical or retirement purposes that are long-term and indefinite in time will not be considered in the state for “a temporary or transitory purpose,” and will be subject to the state tax.
For situations other than those mentioned, one has to rely on the various guidance provided by administrative bodies. For example, the Board of Equalization has set forth a list of non-exhaustive factors. See generally Appeal of Stephen D. Bragg 2003-SBE-002, 2003 WL 21403264 (Cal.St.Bd.Eq.) (May 28, 2003).
The residence calculation for a California Residency Audit can be detail-oriented and confusing, and one should consult an experienced attorney that can help in tackling tax issues such as these.
Civil and Criminal Consequences of Not Filing a Tax Return
Failure to file a tax return has a number of important implications that should not be overlooked. These implications extend from civil penalties and late fees to criminal prosecution. Such issues can be avoided by ensuring that the proper paperwork is filed, regardless of whether you are able to pay your taxes at the time the return is due.
One major misconception is that not filing is the same as not paying; this is not the case. Failure to pay your taxes will result in civil penalties, fees and ultimately an IRS collection proceeding. However, failure to file your return is both a civil and a criminal matter, and may result in criminal prosecution as a misdemeanor under Internal Revenue Code (IRC) 7203, or as a felony for more serious cases of willful neglect to file under IRC 7201. The latter can include a prison term of up to five years, and while only the most egregious offenders will serve lengthy prison terms, it is important to understand that filing your tax return will allow you to avoid criminal prosecution even where you are unable to actually pay your taxes.
There are also a number of financial reasons to file your return on time, whether or not you are able to pay your tax bill. First, failure to file a timely return will prompt the IRS to file a Substitute for Return (SFR), which computes your tax liability in the best interests of the government, i.e. with the fewest credits and deductions in your favor. 26 U.S.C.A. § 6020. In other words, the IRS will calculate your taxes as if you did everything your accountant told you not to do when filing your taxes! By filing on time you can avoid this. You can also avoid a late filing penalty by filing on time, which is a monthly penalty capped at approximately 25% of the overall amount due. 26 U.S.C.A. § 6621. Finally, you can risk losing a tax refund for failing to file your taxes on time.
The problems you will face for failure to promptly file a tax return are numerous, some of which are not included in this discussion, e.g. limitations on carrying forward losses, inability to file revised return, and can even extend to criminal prosecution. The bottom line is that you have a strong incentive to file your tax return on time, even if you cannot pay your taxes, and you should consult an experienced attorney who can help you navigate these and other important tax law issues.
Please keep in mind the information and advice presented in this blog is not intended to be used as formal legal advice. Contact a tax professional for personalized tax advice pertaining to your specific situation. While we try and answer all parts of the question when we write our blogs, sometimes there may be some left unanswered. If you have any questions about your problems with the IRS, SBOE, FTB, or BOE, or tax law in general, call RJS Law at (619) 595-1655.