California Residency Tax Planning
With Tax Day having come and gone, the Franchise Tax Board, California’s tax authority, is now busy sending out its annual 4600 Notices, also known as “Request for Tax Return” letters. Almost all 4600 Notices are sent to nonresidents, mostly those who own a vacation home or have a business interest in California, and have made one of several common mistakes. For a full discussion of what a 4600 Notice is, see “They’re Back: FTB 4600 Notices Coming Soon to You.”
If you receive a 4600 Notice, the first order of business is to timely and effectively respond. Whether that means filing a nonresident tax return (a Form 540NR) or providing a proper legal explanation for why you don’t have to, depends on the circumstances. Second, assuming the notice gets resolved favorably, the next task is preventing the same problem from recurring in future years.
Automatic vs “Reviewed” Triggers
4600 Notices don’t just happen. They are triggered. The trigger is usually one of several common, avoidable mistakes by nonresidents.
In my practice, the typical 4600 Notice involves a nonresident who owns a vacation home in California with a mortgage. Out of convenience or just as an oversight, the nonresident tells the mortgage lender to send the Form 1098 Mortgage Interest Statement to the vacation home. Form 1098 is the “information return” mortgage lenders generate to report loan interest. They send one copy to the FTB and another to the borrower. If the “Payer/Borrower” address on the 1098 is in California, and the borrower doesn’t file a state tax return, the FTB will automatically send a 4600 Notice. Continue reading