California Residency Audit
California Residency Audit: How to Reduce Tax Risks
California is very strict about determining residency, and if handled improperly, it can result in significant taxes and penalties. A Residency Audit often arises when taxpayers claim nonresident status after moving, especially for high-income or high-net-worth individuals.
Why Does the FTB Start a Residency Audit?
The California Franchise Tax Board (FTB) may initiate an audit in the following situations:
Filing a part-year return and reporting large income after the move
Excluding California-source income shown on a W-2
Large income reported in the media (e.g., Hyatt case)
Tips or complaints from ex-spouses, employees, or others
During an audit, the FTB’s primary focus is comparing days spent in California vs. days spent in the new state. Importantly, time in other states or abroad is ignored—only CA vs. the new home state matters.
Residency Standards Under FTB Pub. 1031
According to FTB Publication 1031 (2024), a California resident is anyone who:
Is present in California for more than a temporary or transitory purpose; or
Has California as their domicile but is outside the state for only a temporary or transitory purpose.
A nonresident is anyone who does not meet those criteria. When determining residency, the FTB examines closes connections, such as:
Location of spouse and children
Ownership and use of a primary home
Driver’s license and vehicle registration state
Location of bank accounts and financial activity
Medical, legal, and professional service providers
Social and community ties (church, clubs, associations)
In short, residency is not about where you say you live—it’s about where your life is truly centered.
Practical Defense Strategies Against Residency Audits
To effectively defend nonresident status, consider the following:
❌ Do not keep vehicles registered in California
❌ Do not continue owning or using a California home
✅ Purchase and move into a new home in the new state
✅ File state tax returns consistently in the new state
✅ Keep bank, credit card, and utility records as proof
One of the most decisive factors is retaining a California home. Even if leased, if family members use it or if you return, the FTB may conclude you remain a California resident. Selling the CA property often provides the cleanest break.
FAQ
Q1. Does simply changing my address make me a nonresident?
No. You must shift daily life factors—driver’s license, banking, social ties—to the new state.
Q2. Is frequent travel back to California a problem?
Yes. Spending too many days in California increases the likelihood of being considered a resident.
Q3. Can I keep my California home and just rent it out?
Risky. Retaining the home can be interpreted as intent to return, weakening your nonresident claim.
Conclusion
Residency audits focus on substance over form. To successfully defend nonresident status, taxpayers must make a clear and visible break from California. Otherwise, the costs of defending an audit may outweigh the intended tax savings.