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Leaving California? Expect a California Franchise Tax Board Residency Audit
Oct 25, 2026 · @Steven Walker
You do not want to be involved in a California residency audit, if you can avoid it. In my experience, these cases, which are quite document and fact intensive, often end up in settlement before the Franchise Tax Board Settlement Bureau, unless you have a clear winner. The FTB does not let go easily, and both sides point to different factors in the Bragg analysis (discussed below) to support their position.
Importantly, the Franchise Tax Board has an audit group that focuses on residency audits. Every year, engineers, executives, and founders move to Nevada, Texas, Washington, or overseas expecting their California tax bill to stop at the border. Many are surprised when an FTB residency questionnaire arrives a year or two later.
The FTB looks at departing high earners, such as Silicon Valley taxpayers, because California does not want to lose an important tax base. Taxpayers leaving California often have equity compensation. RSUs, stock options, and pre-IPO shares can produce large income events after a move, and California often still claims a share of that income.
This article explains how California decides whether you have really left, why your equity can stay taxable after you go, and how to plan a move that holds up if the FTB asks questions.
How California decides whether you have left
Many years ago, I knew a technology executive who lived in Nevada and maintained an Excel worksheet tracking the time he spent working for a hardware company in Silicon Valley. So long as he kept his days under a certain threshold, he said that he was okay. Unfortunately, California does not use a simple day count.
The California income tax is imposed on the entire taxable income of residents of the state. (R&TC, § 17041.) The term “resident” is defined as: “(1) Every individual who is in the state for other than a temporary or transitory purpose. (2) Every individual domiciled in this state who is outside the state for a temporary or transitory purpose.” (R&TC, § 17014(a).)
Consequently, you are also a resident if you are domiciled in California and are away only for a temporary or transitory purpose. Indeed, during a residency audit, the Franchise Tax Board will ask for your bank statements and credit card statements, and do an analysis to determine just how many days you were actually in California, and each year stands on its own.
The nine-month presumption.
Every individual who spends in the aggregate more than nine months of the taxable year within California is presumed to be a resident. The presumption, however, may be overcome by satisfactory evidence that the individual is in California for a temporary or transitory purpose. (California Revenue and Taxation Code section 17016.)
An often misunderstood application of this rule is the notion that "I am not a resident if I spent less than nine months out of the year in California." There is a California regulation on point, which states, in part:
"It does not follow, however, that a person is not a resident simply because he does not spend nine months of a particular taxable year in this State. On the contrary, a person may be a resident even though not in the State during any portion of the year."
(Cal. Code Regs., tit. 18, § 17016.) So, if you actually were in California for less than nine months, the analysis falls back to whether you were just in the state for a temporary or transitory purpose, and the FTB will look to the documents for the answers. A taxpayer's self-serving and unsupported testimony often is not sufficient to win a case. It's just the icing on the cake. The "meat" is the documents.
Domicile
Another question clients often have is: what if I have houses in more than one state? You are a resident of California if you are domiciled in California and only outside for a temporary or transitory purpose. (R&TC, § 17014(a).) A person can have several houses but only one domicile. The term “domicile” refers to one's permanent home, the place to which he has, whenever absent, the intent of returning. (Whittell v. Franchise Tax Board (1964) 231 Cal.App.2d 278, 284.) An individual can have but one domicile at any one time. (Cal. Code Regs., tit. 18, § 17014(c).) To change a domicile, a taxpayer must move to a new residence and intend to remain there permanently or indefinitely. (Appeal of Bragg (2003-SBE-002) 2003 WL 21403264; Cal. Code Regs., tit. 18, § 17014(c).)
So, if you have a home in California and a second home in Nevada, in which state are you a resident? The answer turns on the application of the Bragg factors.
The Bragg Factors
To determine your residence, California weighs your connections to each state. Taxpayers must check off enough factors to qualify for nonresident status, and the analysis is surprisingly strict because California does not want to lose an important tax base. The state in which the taxpayer has the closest connections during the tax year is their state of residence. Below is a list of non-exclusive residency factors that the California Franchise Tax Board considers:
Where your spouse and children live and where the children attend school
Where you own or rent a home, and where your principal residence is
Where you work, and where your employer and your business activities are based
Your driver's license, vehicle registration, and voter registration
Where your bank accounts, doctors, dentists, and professional advisers are
Club and religious memberships, and where you spend your days
These factors come from a State Board of Equalization decision dating back to 2003, and the case is worth reviewing to better understand the law. (Appeal of Bragg (2003-SBE-002) 2003 WL 21403264, May 28, 2003.) Only by reading the court cases do you understand how the courts apply the factors to specific fact patterns.
Several years ago, I had a case involving an executive who left California to move to another state. Prior to his move, he had gone to a return preparer (a person who prepares tax returns for a living), who handed the taxpayer the list of Bragg factors. He then went through the factors and made sure he checked off each factor before leaving California. The taxpayer kept meticulous records, so he had contemporaneous documents of his move, even down to the receipt for the moving company. Later, the FTB audited him, and ultimately agreed that he was no longer a resident. This is an example of how doing your homework actually works.
Finally, the FTB looks at the whole picture, and the taxpayer has the burden of proof in a civil examination (audit). The rationale is that the taxpayer has the books and records, not the FTB.
California sourcing rules
Another important point to keep in mind is the California sourcing rules, which are independent of residence. Even if you are not a resident, you can still be subject to income taxes on California source income. California taxes nonresidents on California-source income, and the FTB treats most equity compensation as wages for services. The FTB generally sources equity income by workdays:
RSUs. The income at vesting is allocated by the share of your workdays spent in California between the grant date and the vesting date.
Nonqualified stock options. The income at exercise is allocated by California workdays between the grant date and the exercise date.
Incentive stock options. A disqualifying disposition is generally treated like wages and allocated the same way. The treatment of a qualifying disposition depends on the facts.
There is a very helpful publication by the FTB on this, FTB Publication 1004 (Equity-Based Compensation Guidelines), which is worth reading and reviewing.
A simple example: you receive an RSU grant, work in San Jose for three years, move to Austin, and the final tranche vests a year later. California can claim roughly three-quarters of that tranche, even though you were a Texas resident on the vesting date.
Bad facts can lead to bad results in an audit
How the Franchise Tax Board will respond depends upon what you do, and when you do it. Here are some examples.
A large income event soon after the move. An IPO, acquisition, big vesting, or sale of a business within a year or two of leaving looks like tax-motivated timing.
Keeping the California home. Holding onto the house, especially while your family stays in it, undercuts a claim that you moved.
A family left behind. A spouse or children who remain in California are one of the strongest signs that your domicile did too.
Continuing to work here. Frequent trips to the Bay Area office, board meetings, or client work create California-source income and weaken the move.
Incomplete paperwork. A Nevada driver's license with a California voter registration, or California doctors and a California mailing address, tells a mixed story.
Stopping California returns entirely. If you owe California tax on equity or other sourced income and file nothing, the statute of limitations never starts to run.
How to plan a move that holds up: You must “get out of California”
Many years ago, a CPA told me that if you don't want to be a California resident, you have to "get out of California." While that may be a simplistic view of the law, it makes common sense. The more you are in the mud, the more you leave room for the FTB to argue that you are actually a resident, and then you are in for a dogfight.
Here are some common-sense tips:
Pick a clear move date and act on it. Sell or lease out the California home, move your family and belongings, and start living in the new state.
Change everything at once. Update your driver's license, vehicle registration, voter registration, banks, doctors, mailing address, and estate planning documents soon after you arrive.
Keep a day log. Track where you are each day, with calendars, travel records, and credit card statements to back it up. Track California workdays separately.
Map our equity before you move. List every unvested grant and unexercised option, and estimate how much California will claim. Timing a move around a vesting or liquidity event can change the result substantially.
File correctly in the year of the move. Report as a part-year resident, and report California-source equity income on nonresident returns in later years.
Keep the file. Save closing documents, leases, moving invoices, and school records. You may need them three or four years from now.
A case worth reading to better understand the law is the Appeal of Bracamonte (2021-OTA-156P, precedential), a decision by the Office of Tax Appeals. There, appellants were California residents on July 18, 2008, such that the proceeds from the sale of their company were subject to California income taxation. Appellants sold a company for $16 million on July 18, 2008. Appellants argued that they had moved to Nevada and therefore ceased being California residents at the time of the sale. The OTA said, in its opinion:
“We believe appellants’ testimony that they were in the process of moving from California to Nevada and establishing residency in Nevada. However, as of July 18, 2008, we find that appellants had not ‘relinquished . . . their residence in California.’” (Id. at 8.)
If the FTB contacts you
A residency audit usually starts with a detailed questionnaire and a request for documents. How you answer it often shapes the rest of the case, so treat it as the first step in a legal dispute, not a form to fill out.
Audit. The auditor reviews your contacts with each state and may ask for calendars, credit card statements, phone records, and travel records.
Notice of Proposed Assessment. If the FTB concludes you owe tax, it issues a proposed assessment. You generally have 60 days to file a written protest.
Protest. The protest is an administrative review within the FTB, and the record built here matters on appeal.
Appeal. If the protest fails, you can appeal to the Office of Tax Appeals, an independent agency that has heard these cases since 2018.
How long does California have to audit a return?
Clients often ask, “How long does the FTB have to audit my state income tax return?” The answer is that if you file an honest return, the general rule is four years. A notice of a proposed deficiency assessment shall be mailed to the taxpayer within four years after the return was filed. (R&TC, § 19057(a).) Importantly, the filing of a return starts the clock on the assessment statute expiration date (ASED).
If there is no return, there is no assessment and no running of the statute of limitations. Consequently, if you never file a return for a year in which you owe California income taxes, the statute remains open indefinitely. (Ordlock v. Franchise Tax Bd., 38 Cal. 4th 897, 135 P.3d 628 (2006) (FTB timely issued a notice of proposed assessment for taxes underpaid more than 14 years earlier because taxpayers failed to report federal changes).)
There is a strong incentive built into the system to file a return, because it starts the ASED, the time the FTB has to audit a return. Tax controversy lawyers are always watching the clock, and you want the hands moving.
IRS discloses information to the California Franchise Tax Board
A sometimes overlooked issue is that the IRS shares information with the Franchise Tax Board, and so if you get audited, the IRS will transmit the results of the audit to the FTB. Hiding out in the woods after an IRS audit generally does not work because the FTB is right around the corner, waiting to send you a notice.
The IRS discloses federal “tax return and return information” to state tax agencies for state tax administration purposes. (26 U.S.C. § 6103(d)(2); IRS Announcement 77-37, I.R.B. 1977-12, 24, January 1, 1977 (IRS announced agreement with California Franchise Tax Board and other state tax agencies)).
The California Franchise Tax Board piggybacks off the federal determination, meaning that after an IRS examination or audit, the Franchise Tax Board may issue the taxpayers a notice of proposed adjustment before assessing the taxes. (R&TC, § 19041.)
Thus, if you are undergoing a civil examination (audit) with the Internal Revenue Service, expect to receive a notice from the California Franchise Tax Board once the audit is over. And, the FTB's determination, which is based upon the federal adjustment, is presumed to be correct. (Todd v. McColgan (1949) 89 Cal. App.2d 509, 514.) That means you have the burden of proving that the FTB's determination is incorrect. So, if you lose at the IRS audit, the FTB will follow that result, and you may have an uphill battle with the FTB unless you can come up with new evidence, information not presented to the IRS.
In addition, you are required to notify the Franchise Tax Board within six months of each final federal determination. Many people ask, “Why would I notify the FTB after an audit?” The answer is that it impacts the statute of limitations (the time period) that the FTB has to audit your return. If you or the IRS notify the FTB more than six months after the date of the final federal determination, the FTB has four years from the date the FTB receives “sufficiently-detailed” information to apply the federal changes to your California return. “Sufficiently-detailed” information is defined as enough information to allow the FTB to compute the resulting California tax change.
If you or the IRS do not provide timely notification, the statute of limitations for assessment remains open. See FTB Publication 1008 (Revised: 05/2020). Normally, after an IRS audit, an amended return is filed with the California Franchise Tax Board, following the procedures set forth in FTB Publication 1008.
Remember, you want to keep the clock ticking on the statute of limitations.
Talk to us before you move, or as soon as the FTB writes
Steven L. Walker worked at the Franchise Tax Board and at the IRS Office of Chief Counsel, and he has represented taxpayers in California residency disputes for years. Whether you are planning a move or have already received an FTB questionnaire, the law firm can help you understand your exposure and build a record that holds up.
Contact the Law Office of Steven L. Walker, A Professional Law Corporation in San Jose to schedule a consultation.
This article provides general information, not legal advice. Residency and sourcing rules depend on your specific facts. Consult a qualified tax attorney about your situation.
