This true story is about a Nevada resident who never lived in California and never owned a business or real estate in California. And yet, somehow, California came after them, years after the statute of limitations had supposedly run.
Let’s start at the beginning.
In 2018, this couple received notice of a tax lien from California and an intent to levy their Nevada bank accounts.
They had no idea WHY the State of California would have a tax lien since they’d never lived in California and had no business interest there. (Also, no California rental real estate)
The process for all states and the IRS is that first there is a notice of an audit or a correction to a tax return with deadlines for compliance. If you ignore those notices, eventually the tax authority will assess a tax, interest and penalties. If you haven’t filed a tax return, the tax authority will create one for you. Then you get more notices. You have to pay or contact them by a certain date. They usually tell you that several times and then the last step would be a levy on your bank account (plus liens against your real estate).
So, the fact that they received this notice of levy meant that the process was very far down the line. The issue was related to something dated back in 2009. And now, 8 years later, the taxpayers heard about it for the first time. And not just that, it was down the process. What had happened?
If this happens to you, the first thing is to stop the levy. That could mean contacting your CPA or attorney, taking all your money out of your bank accounts or if you feel really lucky, calling the state yourself and hoping they follow through. (Both California FTB and the IRS are bad at doing what they say they will do on the phone.)
The statute of limitations for California is 4 years. This was 9 years later. How was it even possible that California could be chasing these taxpayers? Forget that they didn’t have taxable income in California, how could they do anything anyway?
After the levy was postponed, it was time to dig in to find out what happened.
Somehow California thought the taxpayers had California residency. That can happen if you have a vehicle with California plates, someone checks the wrong box on a 1099 or W-2 or you have a CA address for any reason (including a seasonal rental.) Based on that, California pulled the IRS return and just assumed that all of the income was subject to California income tax. They sent notices to a wrong California address (who knows where that came from), which was ignored or lost by the recipient or postal service.
A CA return was filed in absentia. That was all done within the 4 year statute of limitations for the 2009 income. Then, the clock started ticking on how long CA had to assess the judgement. This time, probably because they were looking for assets, they got an accurate NV address and that’s how the taxpayers happened to get the notice.
Now, 9 years later, the taxpayers had to prove they didn’t have California residency. But the problem is that usually you only need to keep records for 3 years after you file (for federal purposes). Your state may have a different statute of limitation, but since there is no Nevada tax return the only statute of limitations would be the federal one for this taxpayer.
Bottomline, no records.
In the end, it all worked out because they were able to reconstruct enough records to prove California had no right to tax the taxpayers’ income.
It wasn’t easy and it wasn’t fast. But the taxpayers won.
If you get an audit notice or tax assessment, no matter how wrong it is, don’t wait. Act quickly and strategically.
On Wednesday, April 17th at 5 pm Pacific, we’ll have our next coaching session “Surviving an IRS Audit Of Your Business.”
But I’ll talk more about IRS audits. The strategies also include states, which ones to watch, statute of limitations, what to tell them and when… audits can be terrifying experiences or they can be “no big deal.” It all depends on your strategy.
If you’re not yet a member of our coaching program, please join before next Wednesday by going to https://www.ustaxaid.com/coaching-program/.