Selecting the correct filing status on one's state or federal tax return is important. Certain statuses, such as married or head of household, provide benefits not available to those who file singly. Of course, taxpayers must meet certain criteria in order to qualify for these statuses. But each year, either deliberately or by mistake, tens of thousands of California residents wrongly choose their status.
That's when the Franchise Tax Board can become involved. When the FTB believes that a person has checked the wrong box when it comes to filing status, it will issue an audit letter, requesting that the recipients verify that their status is correct. Just last week, the FTB announced that it was sending out in excess of 120,000 letters to people whose selection of head of household status on their 2011 returns was in question.
If the FTB determines that a taxpayer chose that status in error, it will recalculate a person's tax bill, which will almost always increase the amount the taxpayer owes. When the FTB performed this task last year, it found that 28,000 returns had incorrectly listed a taxpayer's status as head of household. A subsequent recalculation of those taxpayers' returns resulted in an assessment of an additional $30 million in taxes.
The head of household status confers a lower tax rate and a higher standard deduction when compared with the single status. To select this status in a given tax year, people must provide over 50 percent of the cost of keeping their home, must care for a qualifying person for over six months of the year and must be unmarried.
Source: California Franchise Tax Board, "Franchise Tax Board Auditing 'Head of Household'," Aug. 8, 2012.
• While it is important to respond to the FTB in a timely manner, it is equally important to know the law the FTB is relying on to challenge a return. If you would like more information on my firm, please visit my Orange County tax controversy page.