California Begins Employee Business Expense Audits

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California is known for its aggressive audit programs and in August 2015, California Franchise Tax Board (FTB) began a new audit program for taxpayers who deducted unreimbursed employee business expenses on their tax return.

The audits will begin with the 2011 and 2012 tax years. FTB said it was taking this action because it has noticed a large number of taxpayers who have claimed on their Schedule A (Form 1040) what appear to be questionable employee business expenses.

Per the FTB, California generally permits the deduction of ordinary and necessary business expenses in accordance with federal rules. Valid employee business expenses are defined as paid or incurred during the tax year, required to carry on a trade or business, ordinary and necessary, not reimbursed by the taxpayer’s employer, and not eligible for reimbursement by the employer. The FTB will request taxpayers who claim employee business expenses to provide their employer’s reimbursement policy and other documentation to substantiate their claim.

If you believe that you have claimed employee business expenses in error, California FTB suggests you file an amended tax return as soon as possible to remove the business expenses that do not qualify for a deduction.

With four open tax years to audit, FTB should be busy for some time to come and California filers may want to begin collecting their documentation.

By Melinda Nelson, CPA