IRS vs. FTB: Key Differences for California Taxpayers
Understand the parallel tax systems governing Californians. This guide clarifies the separate and overlapping responsibilities of the federal IRS and state FTB.
Taxpayers in California face a dual system of taxation with obligations at both the federal and state levels. These systems are overseen by two distinct government agencies, each with its own set of rules and enforcement mechanisms. Understanding the differences between the federal Internal Revenue Service (IRS) and California’s Franchise Tax Board (FTB) is necessary for ensuring full compliance and managing one’s financial obligations.
Jurisdictional Roles and Responsibilities
The Internal Revenue Service (IRS) is the federal tax collection agency for the United States, operating as a bureau of the U.S. Department of the Treasury. Its authority is national and derived from federal tax laws enacted by Congress, applying to every U.S. citizen, resident, and business. The agency is responsible for enforcing the Internal Revenue Code.
In contrast, the Franchise Tax Board (FTB) is California’s state-level tax authority. Its jurisdiction is confined to California, and it administers tax laws from the California Revenue and Taxation Code. The FTB’s authority extends to all California residents, non-residents earning income from California sources, and businesses operating in the state. This means compliance with the IRS does not remove the separate obligations to the FTB.
Taxes Administered by Each Agency
The IRS collects a wide array of federal taxes that fund national programs. The most prominent taxes include:
- Federal individual and corporate income taxes
- Payroll taxes for Social Security and Medicare (FICA)
- Federal unemployment taxes (FUTA)
- Estate taxes on the transfer of property from deceased persons
- Gift taxes on large transfers of wealth between individuals
- Various federal excise taxes on goods like fuel and tobacco
The Franchise Tax Board’s focus is narrower, centered on revenue for California. Its main responsibility is collecting the state’s personal income tax, which applies to individuals, partnerships, and estates. The other major tax it handles is the corporate income and franchise tax, levied on corporations for doing business in California. Other state and local taxes, such as sales and property taxes, are managed by different agencies like the California Department of Tax and Fee Administration (CDTFA) and county tax assessor offices.
Key Differences in Enforcement and Collection
While both the IRS and FTB have tools to ensure tax compliance, their enforcement approaches and timelines differ. The IRS generally has a three-year statute of limitations to audit a tax return after it is filed. The FTB, however, has a longer window of four years from the filing date to initiate an examination of a state tax return.
When a tax debt remains unpaid, both agencies can use similar collection tools, including filing tax liens, issuing levies to seize funds from bank accounts, and garnishing wages. The FTB can also take other aggressive actions, like intercepting state refunds or suspending driver’s and professional licenses for delinquencies over $100,000. The statute of limitations for collecting a debt also varies significantly; the IRS generally has 10 years to collect an unpaid tax, whereas the FTB has a 20-year period.
FTB auditors have more latitude in defining an audit’s scope, as the state’s collections manual is less detailed than the Internal Revenue Manual, granting agents greater discretion. For disputes, taxpayers can appeal an FTB decision to the Office of Tax Appeals (OTA), while federal disputes are handled within the IRS’s own Appeals Office before potentially moving to U.S. Tax Court.
How the IRS and FTB Interact
The IRS and the FTB have formal information-sharing agreements that prevent them from operating in isolation. Under these agreements, data from federal tax returns, including income, deductions, and audit adjustments, is regularly shared with the FTB, and state tax information is available to the IRS. This data sharing creates a direct trigger effect between the two agencies.
An action taken by one agency will almost certainly lead to a corresponding inquiry from the other. For example, if the IRS conducts an audit and determines a taxpayer has understated their income, that change is reported to the FTB. The taxpayer is legally required to notify the FTB of this change within six months by filing an amended state return. Failure to do so can result in the statute of limitations for the FTB to assess additional tax remaining open indefinitely.
If the FTB initiates an audit first and makes an adjustment, the shared information can still flag a taxpayer’s account for IRS review. This interconnectedness means taxpayers must consider the implications for both their federal and state liabilities simultaneously.