Is Your California Virtual Address Triggering FTB Notices?
Recently, I’ve received numerous requests for representation from non residents of California who are being asked by the California Franchise Tax Board (FTB) to file state tax returns even though they don’t conduct business activities in California or receive California-source income. These requests have come from both U.S. residents and foreign persons including foreign entities.
Why would the FTB be doing this? In most cases, it’s because you’re using a California address while doing business on:
- Some other major selling platform and payment processors
These platforms share a lot of information with California and other states. And if the FTB learns that someone with a California address is making income online, they’ll generally assume that the business is liable to file taxes in that state. However, in most cases, that’s not true.
FTB can be very aggressive when collecting taxes and enforcing tax laws, so even non residents of California end up paying in order to avoid an audit or lengthy tax litigation.
That’s why it’s so important that you know your rights and what taxes you are or aren’t liable for if you receive a notice from FTB. Here’s the rundown.
What should I do if I receive a notice from the FTB?
When the California FTB comes knocking, you will either receive a Request for Tax Return (FTB 4600), or a Notice of Proposed Assessment (NPA). FTB sends these notices to either verify your California tax filing requirement or, more commonly, to request a missing tax return for a specific year.
Don’t just throw the notice in the trash. It’s important that you take this seriously and act quickly to avoid any tax liabilities that could be imposed or assessed—as well as any related penalties and interest.
FTB generally provides at least a 30-day window for you to either respond or provide the missing return. In some cases, a simple phone call will resolve the issue.
How do I know if I am required to file a California tax return as a nonresident?
First off, yes, California does tax non residents on “California-source income.” So in order to know whether or not you’re required to file a California tax return, you need to know if you have a California-source income.
Here are five categories of income that would generally qualify as California-source.
Gains from a Sale or Rental Income from a Property Located in California
For example, let’s say Matt lives in Arizona. In 2018, he purchased a condo apartment in California. He renovated it, then rented it out. Matt received $1,000 in rental income from this condo apartment, then sold the condo in 2019 and made a gain of $20,000.
In this case, Matt’s rental income and his gains from the sale would both be California-sourced income. The rental income $1,000 received in 2018, and the 2019 $20,000 gain from the Condo sales will all be California-source income.
Income from Doing Business in California
Let’s say Angie lives in Nevada. In 2019, she hired an employee in California. She also travels to California frequently for contract work with a company based in Beverly Hills and earned $10,000 while working on site for them.
Because Angie has an employee in California and travels to the state frequently for business purposes, she is considered doing business in California.
That Beverly Hills company may issue her Form 1099, then send a copy to both the IRS and the FTB. That means that the FTB is going to send her a notice if she failed to file a California tax return for 2019.
Wages Received While Working in California
Jack lives in Idaho. His employer sent him to California to work on a client’s project, and he earned $13,000 while working on site for the client.
Even though Jack is being paid by an employer located in Idaho, Jack has earned California-source income because he physically completed the work in California.
Payment or Income Received While Residing in California
From January–April 2019, Alice was a resident of California. She then moved to Colorado, where she stayed permanently for the rest of the year. During the four months ( January–April 2019) she spent in California, she earned:
- $100 in interest income
- $200 in dividend income
- $500 from royalties
- $1,000 as a W-2 employee for a California company.
All of this income are California-source income, because Alice earned it while living there.
Payment for Services That Benefited a Business or Individual in California
Andrew lives in Indiana. In 2018, he provided IT coaching and consulting services to a business based in California, earning $20,000.He performed all of his work remotely from his home office in Indiana.
Since Andrew provided a service that benefited a California business, that $20,000 is California-source income. It doesn’t matter that he was in another state when he performed the work.
These are just some of the most common scenarios in which a non resident of California would have California-source income, the list is not exhaustive as there could be other scenarios not discussed here. It is advisable to consult with your CPA , EA or Tax Attorney whenever you are in doubt about your source of income.
Do I always have to file as a California non resident if I’ve earned California-source income?
No, not always. You’re only liable for California state taxes if your California-source income—gross or adjusted—reaches a certain threshold. This threshold will depend on whether you’re filing as single, married, or head of household, as well as the number of dependents you claim on your return.
This chart will help you determine your filing requirement for 2019.
If I don’t have any California-source income, how do I stop the FTB from sending me notices?
If you or your business does not have any meaningful connection to California, you might need to give up your California address, whether virtual, physical or that of a relative or friend. This will be especially helpful if you do business on online selling platforms or payment processors, which will often trigger FTB notices.
And if you lived in California in the past but moved, you’ll need to stop using your old California address when filing your federal tax returns. The IRS passes a lot of information on to the FTB, and if you still have a California address, the FTB will probably try to send notices as discussed above.
And here’s a tip: if you’re going to choose a new virtual address to replace a California address, you might want to pick a state with no income tax. That includes:
- New Hampshire
- South Dakota
You won’t be getting pesky tax notices from any of those states.
Can you help me resolve a notice I already received?
We’ll get your problem sorted in a jiffy.
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***Disclaimer: This communication is not intended as tax advice, and no tax accountant -client relationship results**