Category: Tax Law

The FBAR for calendar year 2025 is due October 15, 2026, and nobody has to ask for that date. Congress set it in Pub. L. No. 114-41, § 2006(b)(11), at “April 15 with a maximum extension for a 6-month period ending on October 15,” and the IRS confirms the extension is automatic.

If you are a U.S. citizen or resident in California and your foreign accounts together topped $10,000 on any day in 2025, file. One report covers every account. If the interest was already on your Form 1040 and Form 540, a late report is paperwork. If it was not, you are picking a cleanup route.

Californians should read the penalty rules closely. The per-report rule for non-willful penalties was decided here first, in United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), two years before Bittner v. United States, 598 U.S. 85 (2023). It caps less than people assume.

Is the 2025 FBAR really due October 15, and what has to go on it?

Yes. 31 C.F.R. § 1010.306(c) still says reports go to FinCEN “on or before June 30 of each calendar year,” a sentence the 2015 statute overtook and nobody conformed. The trigger sits in 31 C.F.R. § 1010.350(a): a United States person with “a financial interest in, or signature or other authority over” a foreign account. The test is aggregate value above $10,000 at any moment, not at year end. Peak at $10,400 for one July afternoon and you report every account.

“Financial account” reaches past checking. Section 1010.350(c)(3) covers “insurance or annuity policies possessing cash value,” so an endowment policy from Manila counts, and the IRS FBAR Reference Guide adds Mexican Fondos para el Retiro and AFORE accounts. Form 8938 runs on different math, starting at $100,000 at year end or $150,000 at any time for a couple filing jointly here, per the IRS comparison. A Riverside couple can sit under 8938 and far over the FBAR line.

What did the Ninth Circuit decide in Boyd, and what did Bittner add?

Jane Boyd held fourteen United Kingdom accounts and filed one late but accurate FBAR listing all of them. The IRS called that thirteen violations and assessed $47,279. The circuit reversed in Boyd, holding that 31 U.S.C. § 5321(a)(5)(A) “authorizes the IRS to impose only one non-willful penalty when an untimely, but accurate, FBAR is filed, no matter the number of accounts.” On a later record multiplying $10,000 by 272 accounts, Bittner agreed that nonwillful penalties “accrue on a per-report, not a per-account, basis.”

The statute says $10,000, but nobody pays that. 31 C.F.R. § 1010.821 indexes it to $16,536 non-willful and $165,353 willful for penalties assessed on or after January 17, 2025. Those are this year’s numbers too, because OMB Memorandum M-26-11 cancelled the 2026 adjustment when October 2025 CPI data went unpublished.

What changes if I have five or six unfiled years instead of one?

This is where the rule stops helping. One report per year means one penalty per year, and the window in 31 U.S.C. § 5321(b)(1) runs six years from the transaction. Five open years at $16,536 is $82,680 before anyone says the word willful.

Two things push back. The penalty is discretionary. IRM 4.26.16 says the examiner “will either issue the FBAR warning letter, Letter 3800 … or determine a penalty,” and it caps non-willful penalties across all open years at 50 percent of the highest aggregate balance. Reasonable cause is narrow: § 5321(a)(5)(B)(ii) demands reasonable cause and that the balance “was properly reported,” which anyone who omitted the interest cannot show.

How do courts in this circuit decide whether a failure was willful?

The Ninth Circuit answered in United States v. Hughes, Nos. 23-15712, 23-15713 (9th Cir. Aug. 21, 2024). Judge Koh wrote that “[f]or purposes of civil penalties, willful violations of the FBAR statute include both knowing and reckless violations,” recklessness meaning a filer who clearly ought to have known there was a grave risk and could have found out easily. It still left two years non-willful, so this is decided year by year.

District courts got there earlier. In United States v. Bohanec (C.D. Cal. Nov. 1, 2016), Judge Pregerson applied a preponderance standard and treated Schedule B, Part III, question 7 as notice; the couple used paid preparers but never asked anyone about the Swiss account. A willful finding moves you to the greater of $165,353 or half the balance under § 5321(a)(5)(C) and (D), and reasonable cause is gone.

Who around Riverside, Chino, and Sacramento actually has this problem?

Not the people in the news stories. The typical file is a family with an account in Guadalajara supporting a parent, NRE and NRO accounts in India left open after a move to Temecula, or accounts in the Philippines, Vietnam, Korea, or China a spouse’s family opened. Coastal property adds a wrinkle: Rev. Rul. 2013-14 held a Mexican Land Trust is not a trust under Treas. Reg. § 301.7701-4(a) where the bank only holds legal title and transfers it at the owner’s direction, so the fideicomiso does not produce Forms 3520 and 3520-A. The peso account funding the predial is a reportable account.

Two groups get caught owning nothing. A business owner with signature authority over a subsidiary’s account in Tijuana or Shenzhen files on that authority alone. An executor who finds a passbook in a safe deposit box faces the decedent’s unfiled years and the estate’s own. The leading case on whether that liability outlives the taxpayer is out of circuit: United States v. Gill, No. H-18-4020 (S.D. Tex. June 30, 2021), holding the statute “is primarily remedial and the claim therefore survives.” No Ninth Circuit opinion settles it.

Does the FTB care, and is there a California version of this?

California has no FBAR, but it has Rev. & Tax. Code § 17041, taxing “the entire taxable income of every resident of this state,” and § 17014, which makes you a resident if you are here for other than a temporary or transitory purpose. That interest belongs on the Form 540 whether or not a 1099 exists.

The state finds out. Section 18622(a) requires reporting a federal change to the Franchise Tax Board “within six months after the date of each final federal determination,” and (b) requires an amended state return within six months of an amended federal one. The state disclosure door is closed: the FTB program under § 19191 runs to qualified entities and their owners, and § 19192 requires a nonresident on the signing date. A Corona resident with an account in Jalisco does not qualify, so the fix is amended returns and a penalty abatement request.

Which cleanup path fits, and what does it cost?

Take a Chino couple, both U.S. citizens, with three inherited accounts at a bank in Guadalajara. The aggregate peaked near $85,000 across 2021 through 2025, the accounts threw off about $2,000 a year in interest that never reached a return, and no FBAR was filed. These numbers are illustrative. On a non-willful examination, five open years at $16,536 is $82,680, cut by the IRM ceiling to half the $85,000 high balance, or $42,500.

Price the Streamlined Domestic Offshore Procedures. The Title 26 miscellaneous offshore penalty is “5 percent of the highest aggregate balance/value of the taxpayer’s foreign financial assets,” aggregating year-end balances for each covered year and taking the highest. So on a best year-end aggregate of $80,000 the penalty is $4,000. Add three amended returns picking up $2,000 of interest each, roughly $1,320 of federal tax, six years of late FBARs, Form 14654, and about $480 of California tax. Under $6,000 against a $42,500 exposure.

The other doors are narrower. If 2025 is the first year over the threshold and the income was reported, file by October 15. If the only defect is the missing report, file late FBARs through the BSA E-Filing System with a reason stated, though the IRS retired its Delinquent FBAR Submission Procedures page in 2026, leaving that to examiner discretion. If the conduct was willful, streamlined is out and the IRS Criminal Investigation Voluntary Disclosure Practice is the route, with Form 14457 preclearance, a six-year period, and no immunity guarantee, covered in an earlier post. A false certification is itself a crime.

Frequently Asked Questions

Is the FBAR due October 15 without requesting an extension?

Yes. Public Law 114-41 set the FBAR due date at April 15 with a maximum six-month extension ending October 15, granted automatically to every filer. There is no form to file. For calendar year 2025, the extended due date is October 15, 2026.

What if I have a foreign account but the balance never reached $10,000?

The test is the aggregate value of all your foreign accounts combined at the highest point during the year, not any single account and not the year-end balance. If the combined peak stayed at or below $10,000, no FBAR is required, but keep the records.

Is the non-willful FBAR penalty per account or per year in California?

Per report, which means per year. The Ninth Circuit reached that result in United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), and the Supreme Court agreed in Bittner v. United States, 598 U.S. 85 (2023). The adjusted maximum is $16,536 per report, but because the IRS can reach six years under 31 U.S.C. § 5321(b)(1), those yearly amounts stack.

What is the difference between the FBAR and Form 8938?

The FBAR is a Title 31 report filed with FinCEN when foreign accounts exceed $10,000 in the aggregate at any time. Form 8938 is a Title 26 form attached to your return, starting at $100,000 at year end or $150,000 at any time for a couple filing jointly in the United States. Many people owe both.

Do I need to tell the Franchise Tax Board about a foreign account?

There is no California FBAR, but California taxes residents on worldwide income under Rev. & Tax. Code § 17041, so foreign interest and dividends belong on your Form 540. If you amend federal returns, § 18622 requires an amended California return within six months. The FTB disclosure program reaches only nonresidents and out-of-state entities.

What if my parents’ account in Mexico has my name on it?

If the bank will act on your instructions, you have signature or other authority and the account is reportable even if the money is not yours. If you are also a joint owner, you have a financial interest in it. Either way it counts toward your own $10,000 threshold.

How North Star Law Firm Can Help

North Star Law Firm helps Inland Empire and Sacramento-area clients fix foreign account reporting before it becomes an examination: rebuilding account histories, judging whether conduct was non-willful, preparing delinquent and amended returns, building penalty abatement positions, and handling IRS and FTB examinations. Phillip Zagotti is a California attorney and a CPA, admitted to the U.S. District Court for the Central District of California and the U.S. Tax Court, so the computation and the willfulness call come from one person.

If you are facing the October 15 deadline or years of missing reports, contact North Star Law Firm or schedule a consultation.

Every fall Inland Empire landlords get the same call from a broker: the Riverside fourplex or the Fontana industrial building is worth more than ever, and a buyer is ready. The like-kind exchange under 26 U.S.C. § 1031 is the usual way to defer the tax. What owners rarely hear about is the California piece that follows them out of the state: sell here, buy in Texas, and the Franchise Tax Board expects a return from you every year until the deferred gain is finally taxed.

How does a § 1031 exchange work under federal law?

Under 26 U.S.C. § 1031(a)(1), no gain or loss is recognized when real property held for investment or business use is exchanged solely for real property of like kind. Since 2018 only real property qualifies, and any domestic real estate is like kind to any other.

The sell-first, buy-later exchange traces to the Ninth Circuit. In Starker v. United States, 602 F.2d 1341 (9th Cir. 1979), the court approved an exchange for a promise to deliver like-kind property later. Congress then wrote the limits into § 1031(a)(3): identify replacement property within 45 days after the sale and receive it within 180 days. Treas. Reg. § 1.1031(k)-1 adds the identification rules and the qualified intermediary safe harbor that keeps you out of constructive receipt of the proceeds. Full deferral requires trading equal or up and replacing any debt paid off; cash or debt relief you keep is boot, taxed under § 1031(b). The old basis carries into the new property, so the gain is deferred, not erased.

Does California follow the federal rules?

Mostly. Revenue and Taxation Code § 18031 adopts the federal gain-and-loss provisions, including § 1031, “except as otherwise provided,” and for taxable years beginning on or after January 1, 2025, California limits exchanges to real property just as federal law does. The stakes are higher here because California has no preferential capital gains rate: gain is ordinary income taxed at rates reaching 12.3 percent, plus the 1 percent mental health services tax above $1 million. Add the federal rates and a top-bracket landlord faces a combined bite near 37 percent.

What is the Form 3840 clawback when you exchange out of California?

Revenue and Taxation Code § 18032 applies to exchanges in taxable years beginning on or after January 1, 2014. When gain on property “in this state” is deferred under § 1031 and the property acquired “is located outside of this state,” the taxpayer must file an information return “for the taxable year of the exchange and for each subsequent taxable year in which the gain or loss from that exchange has not been recognized.” That return is FTB Form 3840.

The logic is sourcing. Gain built up on California real estate stays California-source income no matter where the owner lives when it is recognized. Section 18032(b) supplies the teeth: if the taxpayer files neither the information return nor a California return, the FTB “may make an estimate of the net income, from any available information, including the amount of gain” and propose tax, interest, and penalties as in a nonfiler case under § 19087.

What happens to the 3.33 percent withholding at closing?

Under Revenue and Taxation Code § 18662(e), the buyer of California real property must withhold 3 1/3 percent of the sales price from an individual or trust seller unless an exemption applies. On Form 593 the seller can certify under penalty of perjury that the transfer is part of a § 1031 exchange, which excuses withholding to the extent gain is not recognized. Two traps follow. Boot above $1,500 must be withheld on by the qualified intermediary. And if the exchange fails within the 180-day window, the intermediary must notify the FTB within 10 days and withhold 3 1/3 percent of the sales price from the funds it still holds. On a $2.4 million sale that is $80,000.

What does the Riverside fourplex example look like from sale to year six?

A Riverside landlord bought a fourplex near the University neighborhood in 2009 and sells it on October 15, 2026 for $2.4 million. Adjusted basis is $600,000, so the gain is $1.8 million, $250,000 of it unrecaptured § 1250 depreciation. An outright sale in the top brackets would cost roughly $62,500 of federal tax on the recapture, about $310,000 on the remaining $1.55 million, around $68,400 of net investment income tax, and California tax approaching $220,000, about $660,000 in all.

Instead the owner hires a qualified intermediary, signs the Form 593 certification so nothing is withheld, identifies a $3 million apartment building in Fort Worth by November 29, 2026 (day 45), and closes by April 13, 2027 (day 180) with $600,000 of new financing. The Texas building takes a basis of roughly $1.2 million, and the 2026 California return includes Form 3840, refiled each year through 2031.

In 2032 the owner, now living in Fort Worth, sells for $3.6 million. Federally the gain is roughly $2.5 million after five years of depreciation on the carried basis. California gets a final Form 3840 and a nonresident return reporting $1.8 million of California-source gain at 2032 rates; the Texas appreciation is not California income. Had the owner stopped filing in 2029, the FTB could have assessed the $1.8 million then, with penalties and interest.

Does an exchange avoid Prop 13 reassessment, and what about Prop 19?

No. Proposition 13, article XIII A of the California Constitution, reassesses property on a change in ownership, and an exchange is one on both ends. An Ontario warehouse bought as replacement property gets a new base-year value equal to its price. Proposition 19, codified at Revenue and Taxation Code § 69.6, lets homeowners 55 or older, severely disabled, or displaced by disaster carry their base-year value to a replacement primary residence anywhere in California. It is a residence tool only; § 1031 never applies to a personal residence, so a retiree selling a Temecula home and a Corona rental runs two separate playbooks.

Can a retiring landlord exchange into a Delaware statutory trust or a vacation rental?

In Rev. Rul. 2004-86, the IRS treated a beneficial interest in a Delaware statutory trust holding rental real estate as an undivided interest in the property itself, so it works as replacement property. The price is a passive trustee: no renegotiating loans, no new leases outside narrow exceptions, no reinvesting proceeds. An out-of-state DST still triggers Form 3840.

Is a Palm Springs house the family uses a few weeks a year held for investment? Rev. Proc. 2008-16 offers a safe harbor. The IRS will not challenge a dwelling’s investment character if, in each of the two 12-month periods before the exchange (or after it, for replacement property), the owner rents it at fair rental for at least 14 days and personal use stays within the greater of 14 days or 10 percent of rental days.

How does swap till you drop work with the 2026 estate exemption?

A landlord who exchanges repeatedly and never sells is playing for the step-up. At death, 26 U.S.C. § 1014 resets the basis of the last replacement property to fair market value, and the accumulated deferred gain, Form 3840 balance included, disappears for income tax purposes. For 2026, 26 U.S.C. § 2010(c)(3) as amended by the 2025 reconciliation act sets the federal exclusion at $15 million per person, indexed after 2026, and California has no estate tax, so a married couple with $20 million of exchanged real estate and a well-drafted trust can pass it estate-tax free with a fresh basis for the children.

Frequently Asked Questions

Do I have to file California Form 3840 if I moved to Texas after my exchange?

Yes. Revenue and Taxation Code § 18032 requires the return every year until the California-source deferred gain is recognized, regardless of where you live. Stop filing and the FTB may estimate the deferred gain and issue a Notice of Proposed Assessment with penalties and interest.

Does California tax the gain when I finally sell my out-of-state replacement property?

It taxes the California-source portion, meaning the gain deferred when you sold the California property, at the rates in effect in the year of recognition. Appreciation on the replacement property in another state is not California income for a nonresident.

How do I avoid the 3.33 percent withholding when I sell California property in a 1031 exchange?

Complete Form 593 and certify under penalty of perjury that the transfer is part of a § 1031 exchange, and escrow will not withhold on the exchanged amount. If you receive boot over $1,500 or the exchange fails, the qualified intermediary must withhold 3 1/3 percent, which you recover as a credit on your California return.

Can I use a 1031 exchange on my primary residence in California?

No. Section 1031 covers only property held for investment or used in a business. A residence has its own tools, the federal § 121 exclusion of up to $250,000 of gain ($500,000 for a married couple) and the Prop 19 base-year transfer for homeowners 55 and older.

Will a 1031 exchange keep my Prop 13 property tax base on the new California property?

No. The replacement property is reassessed to its purchase price on the change in ownership, and the assessed value of the property you gave up does not carry over.

Is a Delaware statutory trust a good replacement property for a California landlord who wants to retire?

It can be. Rev. Rul. 2004-86 treats a DST interest as an undivided interest in the underlying real estate, so it qualifies as replacement property. The trade-offs are frozen trustee powers, illiquidity, and sponsor fees.

How North Star Law Firm Can Help

North Star Law Firm advises Inland Empire and Sacramento-area property owners on real estate tax strategy for § 1031 exchanges, Form 3840 compliance after an exchange out of state, Form 593 withholding, and FTB audit and assessment defense when a deferred gain is challenged. Phillip Zagotti is a California attorney and a CPA, which matters here because the exchange, the nonresident return, and the estate plan all have to line up. The firm coordinates exchange planning with revocable living trust design, and owners weighing a move should read the firm’s post on FTB residency audits after moving to Texas or Nevada.

If you are planning a sale this year or are unsure whether your Form 3840 filings are current, contact North Star Law Firm or schedule a consultation.

The IRS says it is weeks away from replacing its Voluntary Disclosure Practice with a faster and cheaper version. For an Ontario restaurant owner with years of unreported cash, or a Rancho Cucamonga engineer with an unreported account in Hyderabad, that sounds like the moment to act. But the federal program is only half the problem in California. The other half is the Franchise Tax Board, the CDTFA, and the EDD, which IRS Criminal Investigation cannot bind.

What is the IRS changing in its Voluntary Disclosure Practice?

The Voluntary Disclosure Practice is IRS Criminal Investigation’s bargain: come forward before the government finds you, file corrected returns, pay, and CI will not recommend prosecution. The process runs through Form 14457: Part I is a preclearance request, and Part II, due within 45 days of the preclearance letter, tells the full story.

The civil price has been steep: six years of returns, a 75 percent civil fraud penalty under 26 U.S.C. § 6663 on the worst year, and, for foreign accounts, a willful FBAR penalty under 31 U.S.C. § 5321(a)(5) of 50 percent of the highest aggregate balance. The National Taxpayer Advocate counted only 161 closed cases in six years.

On December 22, 2025, in IR-2025-124, the IRS proposed a redesign that keeps the six-year lookback but replaces the fraud penalty with a 20 percent accuracy-related penalty on each amended year, charges only failure-to-file penalties on delinquent returns, caps international information return penalties at $10,000 per return per year, and computes FBAR penalties per year. Approved taxpayers would have three months to file, pay, and sign.

Has the new program been released, and should a Californian wait for it?

Not as of September 12, 2026. CI Chief Jarod Koopman said in late August that the revised program would be public within roughly 60 days, with a 120-day resolution target, upfront screening instead of full examinations, and digital assets folded in. Practitioners at the same conference reported the willful FBAR penalty dropping into the 20 to 30 percent range. Treat that as a preview; nothing is final yet.

A disclosure is timely only if it arrives before the IRS opens an examination, receives a third-party tip, or obtains the taxpayer’s information from an enforcement action. A foreign bank’s FATCA report can close that window any day. The practical move is to file Part I now, which preserves eligibility, and time Part II so the case closes under the better framework.

Does California have its own voluntary disclosure program?

The FTB does, but it is narrower than most people assume. Under Rev. & Tax. Code § 19191, the Franchise Tax Board may sign a voluntary disclosure agreement with a “qualified entity” and its nonresident owners and trust beneficiaries. The definitions in § 19192 exclude any entity organized in California, registered with the Secretary of State, or staffing a permanent facility here, and require that the applicant has never filed or been contacted by the FTB. It fits a Nevada corporation that has sold into Sacramento for years without filing, not a Corona sole proprietor who left cash off every return.

Where it applies, the terms are a six-year lookback, waiver of anything older, and waiver of late-filing, late-payment, and estimated tax penalties, applied for anonymously on Form FTB 4925, with the FTB required by § 19191(b)(5) to act within 120 days.

What happens to a California resident who amends six years of returns?

A resident individual has no state disclosure program, so the state side is amended Forms 540, full payment, and a penalty fight over what the FTB asserts. The accuracy-related penalty under Rev. & Tax. Code § 19164 conforms to federal § 6662 at 20 percent, and subdivision (d) conforms to the 75 percent fraud penalty. Sections 19131 and 19132 add up to 25 percent each for late filing and late payment.

Under § 19058 the FTB has six years, not four, when more than 25 percent of gross income was omitted, and under § 19087 there is no limit if no return or a fraudulent return was filed. The FTB has its own Criminal Investigation Bureau, § 19706 makes a willful false return punishable by jail or prison, and a federal closing agreement does not bind that bureau.

If the receipts were taxable sales, the CDTFA is owed sales tax on the same dollars, and its disclosure provisions in Rev. & Tax. Code §§ 6487.05 and 6487.06 (a three-year lookback for unregistered out-of-state retailers and use tax purchasers) do nothing for a permitted retailer that underreported deliberately. That retailer amends and faces a 10 percent negligence or 25 percent fraud penalty. The EDD has no statutory disclosure program at all; an employer that paid cash wages registers, files the missing DE 9 and DE 9C returns, pays, and asks for good-cause relief from penalties such as the 15 percent late-payment penalty in Unemp. Ins. Code § 1112.

How does a federal closing agreement trigger a California reporting duty?

Rev. & Tax. Code § 18622 requires a taxpayer whose federal return is “changed or corrected by the Commissioner of Internal Revenue” to report the change to the FTB within six months of the final federal determination, and subdivision (b) imposes the same six-month duty on anyone who files an amended federal return that increases California tax. Each amended Form 1040 starts its own clock, so file the state returns alongside them.

California also departs from federal rules for licensed cannabis operators: Rev. & Tax. Code § 17209 switches off 26 U.S.C. § 280E for state purposes through 2029, so the state amended returns can claim deductions the federal returns cannot. Because the federal program excludes illegal-source income, a cannabis disclosure also raises a threshold question counsel must resolve before any preclearance request goes out.

What would a Chino restaurant owner with $1.1 million unreported actually owe?

Take a Chino couple who own a sit-down restaurant and skimmed $1.1 million of cash across the 2020 through 2025 tax years, roughly $183,000 a year, with the largest year at $250,000. Assume a 32 percent federal rate and a 9.3 percent California rate.

Federal tax on the omitted income is about $352,000. Under the existing framework the fraud penalty hits only the worst year: 75 percent of that year’s $80,000 tax, or $60,000. Under the proposal it is 20 percent of each year’s understatement, about $70,400. California adds roughly $102,000 of tax, plus about $20,500 at the 20 percent rate or about $76,700 if the FTB asserts fraud. Sales tax on those meals at Chino’s 7.75 percent combined rate adds about $85,000 before penalty, and if skimmed cash paid kitchen staff off the books, the EDD assessment follows. Interest runs on each layer.

The numbers flip if the same $1.1 million sat in a foreign account. There, the current 50 percent willful FBAR penalty alone is $550,000, and the August preview alone could cut that by hundreds of thousands of dollars. Roseville tech workers with accounts abroad and Chinese-American and Indian-American families in the Inland Empire collecting rent on property overseas have the strongest reason to preserve eligibility now and close under the new rules. Where the failure was careless rather than deliberate, Bittner v. United States, 598 U.S. 85 (2023), which capped the non-willful FBAR penalty at $10,000 per report, points toward the streamlined procedures instead.

Frequently Asked Questions

Can a California resident use the FTB Voluntary Disclosure Program?

Generally no. Rev. & Tax. Code § 19192 limits it to entities not organized, registered, or staffed in California that have never filed or been contacted by the FTB, plus their nonresident owners. A resident individual files amended Forms 540 and pays tax, interest, and any penalty the FTB asserts.

Does an IRS voluntary disclosure protect me from the Franchise Tax Board?

No. IRS Criminal Investigation’s promise not to recommend prosecution binds only the federal government. The FTB, CDTFA, and EDD each decide separately whether to assess penalties or refer a case, so state filings belong alongside the federal disclosure.

How long do I have to tell California about amended federal returns?

Six months. Rev. & Tax. Code § 18622 requires anyone who files an amended federal return that increases California tax, or whose return the IRS adjusts, to report the change to the FTB within six months. Missing it keeps the FTB’s assessment period open on those items.

Should I file my IRS preclearance request now or wait for the new program?

For most taxpayers, file Part I of Form 14457 now. Eligibility ends the moment the IRS opens an exam, gets a tip, or receives third-party data about you, and the redesign will not revive it. Preclearance holds your place while counsel times Part II.

Will the new IRS program lower penalties for a cash business with no foreign accounts?

Not necessarily. The proposal swaps a 75 percent fraud penalty on the single worst year for a 20 percent penalty on every year in the six-year window, which for steady domestic omissions can add up to more. The savings are largest for FBAR and international information return cases.

Does a licensed California cannabis business face the same tax on unreported income as a restaurant?

Federally it is worse, because 26 U.S.C. § 280E denies most deductions. Rev. & Tax. Code § 17209 turns off § 280E for California licensees through 2029, so state amended returns can claim ordinary expenses. The federal program’s exclusion of illegal-source income must also be analyzed before a cannabis operator applies.

How North Star Law Firm Can Help

North Star Law Firm represents Inland Empire, Sacramento, and other California individuals and businesses who need to correct unfiled returns, unreported income, or undisclosed foreign accounts before the government finds them first. Phillip Zagotti is a California attorney and a CPA, which matters here because the choice between the criminal Voluntary Disclosure Practice, the streamlined procedures, and a plain amended return turns on both the legal exposure and the numbers. The firm prepares the federal and California submissions together and handles the follow-on tax defense, penalty abatement, and unfiled return work with the FTB, CDTFA, and EDD.

If you are deciding whether to come forward now or wait for the redesigned program, the eligibility clock comes first. Contact North Star Law Firm or schedule a consultation to review your exposure under both frameworks.

On August 19, 2026, the Connecticut Attorney General took $275,000 from TaxAct to resolve claims that tracking code on the company’s website sent customer data to Meta and Google from January 2018 through December 2022. The data covered adjusted gross income and refund or balance-due figures (both rounded), number of dependents, and flags for charitable gifts, investment income, mortgage interest, and student loan interest. Advertising code sent them automatically while people filled in their returns.

That is a Connecticut case, but the law that matters most is federal, and California layers its own privacy statutes and an aggressive wiretap law on top.

What did Connecticut find TaxAct was doing with taxpayer data?

According to the state, TaxAct’s contract with Meta placed no limit on what Meta could do with the data, despite a privacy notice promising to bar third parties from sharing it. TaxAct must create a review committee for tracking technology, inventory every data point each tag collects, scan the live site for unapproved tags, and submit to two independent audits.

TaxAct had already paid once. A nationwide class action, Smith-Washington v. TaxAct, Inc., No. 3:23-cv-00830 (N.D. Cal.), received final settlement approval on December 30, 2024, with a larger share for a California subclass. And in September 2023 the Federal Trade Commission warned five tax preparation companies that pixel-based sharing of tax data for advertising without express consent could draw civil penalties of up to $50,120 per violation.

Does federal law already forbid a preparer from sharing your return data?

Yes. 26 U.S.C. § 7216 makes it a misdemeanor for anyone who prepares returns, or provides services connected to preparing them, to knowingly or recklessly disclose return information or use it for any purpose other than preparing the return. The penalty is a fine of up to $1,000 ($100,000 where identity theft is involved) and up to one year in prison. The civil companion, 26 U.S.C. § 6713, imposes $250 per improper disclosure, capped at $10,000 per calendar year, and requires no intent.

The regulations reach software companies. Treas. Reg. § 301.7216-1 defines a tax return preparer to include “a person who develops software that is used to prepare or file a tax return,” and tax return information as anything furnished in connection with a return. Treas. Reg. § 301.7216-2 lists the disclosures that need no consent: to the IRS, under a court order, within the same U.S. firm, to a processing vendor, and for software maintenance. Advertising partners are not on the list.

What does a valid § 7216 consent look like, and how is it different from Form 8879?

Form 8879 is the e-file signature authorization and says nothing about marketing. A § 7216 consent is a separate document, and Treas. Reg. § 301.7216-3 requires it to be knowing and voluntary, signed before any disclosure, and never a condition of getting your return prepared. If silent on duration, it lasts one year. For Form 1040 filers, Rev. Proc. 2013-14 adds mandatory formatting: 12-point type, a statement that federal law requires the form, a statement that you need not sign it to receive services, and contact information for the Treasury Inspector General for Tax Administration. An electronic consent requires a typed name or PIN, not a clicked box.

How does California’s own law reach tax preparers and their websites?

Under Bus. & Prof. Code § 22250 et seq., a paid preparer who is not a California CPA, an active State Bar member, or an enrolled agent (the § 22258 exemptions) must register with the California Tax Education Council and post a bond, and § 22253 requires preparers to return client records on demand.

The California Consumer Privacy Act, Civ. Code § 1798.100 et seq., applies only to a business with annual gross revenue above $26,625,000 (the 2025 adjusted figure), personal information of 100,000 or more consumers, or half its revenue from selling or sharing data. TaxAct clears that bar; a Rancho Cucamonga CPA firm does not. For covered businesses, § 1798.140 treats Social Security numbers and financial account credentials as “sensitive personal information,” and § 1798.121 lets consumers limit its use to what the service requires. Watch § 1798.145(e), which exempts information handled subject to the Gramm-Leach-Bliley Act. It covers the data, not the company, so website analytics stay in play.

Enforcement is active: on July 1, 2025, the Attorney General collected $1.55 million from Healthline for sharing data with advertising partners after users opted out.

Why should an Inland Empire business with a Meta Pixel care about CIPA?

Because the California Invasion of Privacy Act is privately enforced. Penal Code § 631 penalizes reading a communication in transit without all-party consent, and § 637.2 allows $5,000 per violation without proof of actual damages. The Ninth Circuit held in Javier v. Assurance IQ, LLC, No. 21-16351 (9th Cir. May 31, 2022) (unpublished), that § 631 requires consent before recording starts, so a banner that appears after the pixel fires does not cure the problem.

A second theory used § 638.51, the pen register statute. SB 690, passed by the Legislature on August 28, 2026 and awaiting the Governor’s action by September 30, would end private § 638.51 suits over website tracking, retroactive to actions filed on or after January 1, 2025. Section 631 claims are untouched.

What happened to the Sacramento dental practice whose bookkeeper’s portal used a pixel?

Consider a two-dentist practice in Sacramento’s Pocket neighborhood with $1.9 million in annual collections. Its outside bookkeeper hosts a portal, live since February 2024, where the practice uploads its Form 1120-S workpapers and the bookkeeper posts a projected balance due each March. In August 2026 the office manager noticed that every portal page fired a Meta Pixel whose transmitted URLs included the form type and a rounded balance-due figure.

The bookkeeper serves 320 business clients on the same portal. Under § 6713 the penalty is $250 per disclosure but capped at $10,000 per year, so three filing seasons produce a $30,000 ceiling. Criminal exposure under § 7216 turns on whether installing the pixel blind was reckless. The bigger number is CIPA: 320 clients at $5,000 each is $1.6 million, and the practice is a potential plaintiff, not a defendant. The CCPA is irrelevant at the bookkeeper’s revenue. The practice should demand its records, stop uploading until the tag is gone, and check its own website.

What can a California taxpayer do if a preparer or software company leaked their data?

Preserve the evidence first: the privacy notice as it read, any consent you signed, and the browser report showing the tag. Then file Form 14157, the IRS return preparer complaint, now routed through the IRS online tip portal, and report the disclosure to TIGTA. If the company is a CCPA business, complain to the Attorney General or the Privacy Protection Agency and exercise your deletion and limit rights in writing. Then ask counsel whether a CIPA claim fits your facts. On prevention, read the consent screens in tax software, decline sharing with partners, and ask your preparer in writing whether any pixel runs on the portal where your documents live.

Frequently Asked Questions

Is it illegal for a tax preparer to share my tax return information with advertisers?

Not without a valid written consent. 26 U.S.C. § 7216 makes knowing or reckless disclosure of return information a federal misdemeanor, and § 6713 adds a $250 civil penalty per disclosure. Both rules reach companies that develop tax software.

Does signing Form 8879 give my preparer permission to use my data for marketing?

No. Form 8879 only authorizes electronic filing. Any other use or disclosure of your information requires a separate consent under Treas. Reg. § 301.7216-3, signed before the disclosure happens, and a preparer cannot make it a condition of doing your return.

Does the CCPA protect my tax data in California?

Only partly. The CCPA applies to businesses with more than about $26.6 million in annual revenue or data on 100,000 or more consumers, so large software companies are covered but most local preparers are not. It also exempts information handled under the Gramm-Leach-Bliley Act, though website analytics usually fall outside that exemption.

Can my business be sued for having a Meta Pixel on its website in California?

It can. Plaintiffs have filed thousands of suits under Penal Code § 631 alleging that a pixel intercepts visitor communications without prior consent, and § 637.2 allows $5,000 per violation without proof of harm. SB 690, passed in August 2026, would end private pen register suits but leaves § 631 claims in place.

How do I report a tax preparer who disclosed my information without consent?

File Form 14157, the return preparer complaint, through the IRS online tip portal, and report the disclosure to the Treasury Inspector General for Tax Administration. A registered preparer can also be reported to CTEC, and a large software company to the California Attorney General or the Privacy Protection Agency.

Do CPAs and attorneys in California have to register with CTEC?

No. Bus. & Prof. Code § 22258 exempts CPAs licensed by the California Board of Accountancy, active State Bar members, IRS enrolled agents, and certain regulated financial institutions. Everyone else who prepares returns for a fee must register with CTEC, post a bond, and complete annual education.

How North Star Law Firm Can Help

North Star Law Firm advises California taxpayers and business owners on who may see their tax information, including § 7216 consent reviews, disputes with preparers and software vendors over unauthorized disclosures, and the exposure a company website or client portal creates under the CCPA and the California Invasion of Privacy Act. Phillip Zagotti is a California attorney and a CPA, and he sees these questions from both sides: what a preparer must do and what a client may demand. The firm’s tax law and tax defense practices cover IRS and FTB matters, and its contract drafting and review work handles vendor agreements with bookkeepers and marketing agencies that touch client data.

If you have found tracking code on a preparer’s portal, received a consent form you do not understand, or want your own website checked before a demand letter arrives, contact North Star Law Firm or schedule a consultation.

For decades, California taxed software only when it came in a box. A program on a disk was taxable, while software that was downloaded or run in a browser generally escaped the tax. That ends on January 1, 2027. SB 122, a tax budget trailer bill signed on June 29, 2026 as Chapter 23 of the Statutes of 2026, adds “digital products” to the definition of tangible personal property, which pulls software as a service, downloaded software, and most remotely accessed prewritten software into the sales and use tax. Colorado reportedly passed a similar law weeks earlier with the same effective date. For software sellers in Sacramento and for every Inland Empire business that pays monthly subscriptions, the next four months are the planning window.

What does SB 122 make taxable?

The bill amends Revenue and Taxation Code § 6016 so tangible personal property includes a digital product, and new § 6016.1 defines a digital product as prewritten computer software transferred on tangible storage media, transferred electronically, or accessed remotely. Software first developed for one customer becomes “prewritten” once it’s held for general sale. The definition then carves out several categories: digital assets, audio and audiovisual works, books, video games, visual works, and “digital infrastructure,” meaning cloud services that let a customer create, deploy, scale, or run its own software. That last exclusion is how the bill treats most infrastructure-as-a-service and platform-as-a-service offerings.

Local and district taxes follow the state tax. The bill amends the Bradley-Burns and district tax statutes so remote sales of digital products are sourced to the purchaser’s address, which means the rate depends on where the customer is, not where the seller is. You can read the full text on the Legislature’s bill page for SB 122.

What stays exempt?

Software built to one customer’s order is still treated as exempt custom software. New § 6372 exempts products bought only for use in other states or in interstate or foreign commerce; the seller carries the burden of proof unless it takes an exemption certificate from the buyer. A buyer with users both inside and outside the state can issue a certificate and self-report use tax on the California portion, though the statute doesn’t say how to split it.

The most debated provision is new § 6372.1, the “human effort” exemption. It covers a digital product that represents a service delivered electronically, where the service primarily involves human effort by the provider and that effort begins after the customer asks for it. The same section says the exemption doesn’t apply to the right to use or access the provider’s software running on cloud infrastructure, whether through a web browser or a program interface. At its July 21, 2026 workshop, the California Department of Tax and Fee Administration reportedly framed the question as one of the “true object” of the transaction and acknowledged it hadn’t yet defined how much human effort is enough. A medical billing firm whose coders work claims and report through a portal has a plausible argument. A practice-management platform the client logs into and runs itself doesn’t.

Who has to collect the tax, and when does a buyer pay it directly?

An out-of-state seller must register and collect once its California sales exceed $500,000 in the current or preceding year under § 6203(c)(4). A California-based seller needs a seller’s permit regardless. Whether 2026 subscription revenue, which isn’t taxable yet, counts toward the 2027 threshold is one of many questions CDTFA hasn’t answered.

SB 122 also flips collection responsibility for very large buyers. Under new §§ 6052 and 6201.55, once a single customer’s annual digital product purchases from a single vendor top $5 million, the customer rather than the vendor self-assesses and pays the tax directly to CDTFA. Starting in 2028, the prior year’s purchases also count. That rule will mostly affect large employers and hospital systems, but mid-market buyers of enterprise software should track it.

The more common exposure is use tax on vendors that never register. Under § 6202, a California purchaser owes use tax when the seller doesn’t collect it. And through 2028, § 6225 requires a business that isn’t otherwise registered with CDTFA to register as a qualified purchaser and file by April 15 once it has more than $10,000 of purchases subject to use tax. Many small professional firms in Riverside and San Bernardino counties have never registered, because they’ve never bought much taxable equipment from out of state. A few software subscriptions from small vendors could change that.

What will this cost a Temecula business or a Sacramento software company?

Start with a Temecula medical billing company that spends $180,000 a year on SaaS. Temecula’s combined rate is 8.75%, according to CDTFA’s April 2026 rate schedule, so if every vendor collects, the company pays $15,750 a year in new tax. If a fifth of its seats are used by remote billers in Arizona and it gives vendors an out-of-state use certificate while self-reporting the California share, the tax on the remaining $144,000 is $12,600, though that split is exactly the kind of allocation CDTFA hasn’t blessed yet. If $60,000 of its software comes from small out-of-state vendors that don’t register, it owes $5,250 of use tax itself, and because those untaxed purchases exceed $10,000, it has to register and file a qualified purchaser return. The tax is a deductible business expense for income tax purposes, which softens the cost but doesn’t eliminate it.

Now take a Sacramento startup selling $2 million of subscriptions a year, 40% to California customers. At an 8.75% rate across its California customers, that’s $70,000 of tax, and the actual figure depends on each customer’s address. Who bears it depends on the contract. Civil Code § 1656.1 makes a seller’s right to add sales tax reimbursement depend on the terms of the sale. If the company’s master agreements state tax-included prices, about $64,400 of the $800,000 is tax that comes out of revenue. If they say nothing about tax, the company owes tax on the full $800,000 and may be unable to pass the $70,000 through. On the income tax side, the same California customers already drive its Franchise Tax Board sales factor under market-based sourcing, so the company will now report the same revenue to two state agencies.

What happens to contracts that run past January 1, 2027?

SB 122 contains no transition rule for existing contracts and no rule for bundled software and services. At the July workshop, CDTFA reportedly said a taxable sale requires a right to use the software and consideration after the effective date, and it didn’t commit to whether the contract date or the payment date controls a multiyear deal. That makes year-end prepayments risky. An annual subscription invoiced and paid in December 2026 for calendar 2027 service may still be taxed, and a company that prepays three years to “beat the tax” could find it bought nothing but an audit issue. CDTFA has reportedly circulated draft emergency regulations for discussion and expects to adopt rules before the effective date, so businesses should watch its special notices page.

Until the regulations arrive, there’s still plenty to do. Sellers should update contract templates to state that prices exclude tax and that the customer reimburses applicable tax, separate human-effort services and infrastructure from software access on invoices, and start collecting reliable billing and service addresses for every customer now. Buyers should list every software vendor, flag which ones are likely to collect, and budget the tax at their local rate. Businesses with teams outside California should decide how they’ll document out-of-state use before signing their 2027 renewals.

How did California treat software before, and why does it matter now?

Under Cal. Code Regs., tit. 18, Regulation 1502(f), prewritten software delivered by remote telecommunication without any tangible property changing hands wasn’t taxable. Sellers also relied on the technology transfer agreement rules; in Nortel Networks Inc. v. State Board of Equalization (2011) 191 Cal.App.4th 1259, the Court of Appeal held that the value of copyright and patent interests transferred in certain software licenses wasn’t subject to sales tax. SB 122’s amended definition expressly includes “any copyright or patent interests associated” with a digital product, which reads like a response to that line of argument. Anyone with an open refund claim or audit involving pre-2027 software transactions should keep those older rules in view, because the new law is prospective.

Frequently Asked Questions

Is SaaS taxable in California?

Starting January 1, 2027, yes. SB 122 treats prewritten software accessed remotely as a taxable digital product, subject to state and local sales or use tax at the customer’s location.

Is cloud hosting or infrastructure taxable under SB 122?

Services that let a customer create, deploy, scale, or run its own software are excluded as “digital infrastructure,” which generally covers IaaS and PaaS. Bundled offerings may need allocation.

What is the human effort exemption?

It exempts services delivered electronically that primarily involve the provider’s human effort, performed after the customer’s request. It doesn’t cover access to the provider’s software, and CDTFA hasn’t yet defined how much human effort is required.

Do I owe use tax if my software vendor doesn’t charge California tax?

Yes. The purchaser owes use tax when the seller doesn’t collect it, and through 2028 a business with more than $10,000 of such purchases must register with CDTFA as a qualified purchaser.

Will prepaying a 2027 subscription in 2026 avoid the tax?

Not reliably. SB 122 has no transition rule, CDTFA has reportedly tied taxability to use rights and consideration after January 1, 2027, and it hasn’t said whether the contract date or the payment date controls.

Which rate applies to a SaaS subscription?

The combined state and local rate at the purchaser’s address in the seller’s records. For example, CDTFA lists 8.75% for Riverside, Temecula, Ontario, and Sacramento as of April 2026.

How North Star Law Firm Can Help

North Star Law Firm helps California businesses and software companies prepare for SB 122, including taxability reviews, contract tax clauses, qualified purchaser registration, and CDTFA audits and appeals. Phillip Zagotti is a California attorney and a CPA, so a sales tax review can cover the contract language, the invoice structure, and the income tax sourcing together. Learn more about the firm’s sales and payroll tax practice, its tax defense work, and its contract drafting and review, or schedule a consultation to plan for your 2027 renewals.

California has the most generous overtime law in the country, and that’s exactly why the federal “no tax on overtime” deduction confuses so many California workers and payroll departments. A warehouse lead in Fontana who works ten-hour days earns California daily overtime from the ninth hour on. The federal deduction doesn’t care about daily overtime. It follows the Fair Labor Standards Act, which counts only hours over 40 in a workweek, and only the half-time premium on those hours. The IRS confirmed that approach in August 2026 when it replaced its January guidance with Fact Sheet FS-2026-13, and starting with 2026 wages, the number on the employee’s Form W-2 largely controls the deduction.

What does the federal overtime deduction allow?

The One Big Beautiful Bill Act added 26 U.S.C. § 225. For 2025 through 2028, it allows a deduction of as much as $12,500 of qualified overtime compensation, with a $25,000 ceiling for married couples filing jointly. Once modified adjusted gross income passes $150,000 ($300,000 joint), the ceiling shrinks by $100 per $1,000 of excess income. Claiming it requires a work-authorized Social Security number and, for married taxpayers, a joint return, but non-itemizers can take it.

“Qualified overtime compensation” is narrow by design. The statute limits it to overtime required under section 7 of the FLSA that exceeds the regular rate. FAQ 12 of the fact sheet turns that into a formula: FLSA hours over 40 in the workweek, times one-half, times the FLSA regular rate. On a time-and-a-half hour, only the extra half counts.

Why doesn’t California daily overtime count?

Labor Code § 510 requires time and a half after eight hours in a day, after 40 hours in a week, and for the first eight hours on the seventh consecutive workday, plus double time after 12 hours in a day and after eight hours on the seventh day. The FLSA requires none of the daily pieces. FAQ 16 of the IRS fact sheet addresses this directly: overtime an employer pays under state law, a union contract, or its own policy qualifies only to the extent it’s needed to satisfy the federal requirement, and the IRS specifically calls out premiums for hours beyond eight in a workday. In the fact sheet’s own example, a $20-an-hour worker puts in 50 hours and receives $400 of double-time pay for the 10 extra hours, and only $100 of it qualifies.

California’s state income tax doesn’t follow any of this. The Franchise Tax Board’s summary of federal tax changes lists California as not conforming to the overtime deduction, though it does conform to the related information reporting rules. California’s conformity date is January 1, 2025, which predates the federal law. Two 2026 bills that would have created a state version, AB 1550 and AB 2336, stalled in committee in April 2026. For now, California taxes every dollar of overtime.

Which California workers get state overtime but no federal deduction?

More of them than most payroll teams realize. The four-day, ten-hour schedule is the simplest case. A worker on four tens without a valid alternative workweek election under Labor Code § 511 earns eight hours of California daily overtime each week, but works exactly 40 FLSA hours, so the federally qualified amount is zero.

Logistics workers present a subtler gap. The FLSA motor carrier exemption in 29 U.S.C. § 213(b)(1) reaches drivers, driver’s helpers, loaders, and mechanics whose work affects the safety of interstate vehicles, according to the Labor Department’s Fact Sheet 19. California’s Wage Order 9 removes overtime only for employees whose own hours are regulated by federal or CHP hours-of-service rules, which usually means drivers. So a dock loader or yard mechanic at an Ontario carrier can be owed full California overtime while qualifying for nothing federally. Central Valley farmworkers are another example: California agricultural overtime reached the full eight-hour and 40-hour standard in 2022 for employers with more than 25 workers and in 2025 for smaller ones, but the FLSA exempts most agricultural labor.

Salaried employees can fall into the gap too. A Sacramento operations manager earning $112,000 may satisfy the federal highly compensated employee test while spending most of the day on nonexempt work, which makes the manager nonexempt under California’s “primarily engaged” rule. That manager is owed California overtime with a Code TT amount of zero. And the IRS’s 20% owner rule in FAQ 5 treats an employee with a bona fide 20% equity stake who actively manages the business as an exempt executive, which matters for family businesses that put owners on hourly payroll.

What does the Code TT number look like for a Fontana warehouse worker?

Take a single worker at $24 an hour with no alternative workweek. For 36 weeks of the year she works five ten-hour days. For 12 weeks she works four ten-hour days plus one 13-hour day. In a 50-hour week, California pays ten hours at $36, and the FLSA-required premium is also ten hours at $12, or $120, so the two laws line up. In the 53-hour week they split. California pays 12 hours at time and a half and one hour at double time, a $168 premium, while the FLSA requires only 13 hours at the $12 half-time rate, or $156.

Across the year, her gross pay is $64,800, her California overtime premiums total $6,336, and her Box 12, Code TT amount should be $6,192. Using the 2026 single standard deduction of $16,100, her federal taxable income drops from $48,700 to $42,508, which is still inside the 12% bracket, so the deduction saves $743.04. California taxes the full $64,800. Compare a coworker who loads trucks for the company’s interstate carrier at $26 an hour and works 50-hour weeks for 48 weeks. If the motor carrier exemption applies to him, he collects $6,240 of California overtime premium and has a Code TT figure of zero.

What if the W-2 amount is wrong?

For 2026 and later, the worker is stuck with the lesser of what was actually paid and what’s reported in Box 12, Code TT, under FAQs 20 through 23. If the employer overstates it, the deduction is still limited to the real amount. When the employer reports too little, the worker has to get a Form W-2c, because FAQ 23 rules out filing Form 4852 as a substitute. FAQ 11 requires employers who find an error to issue the W-2c, and information return penalties under 26 U.S.C. §§ 6721 and 6722 apply to uncorrected forms.

California employers have one extra complication. Alvarado v. Dart Container Corp. of California (2018) 4 Cal.5th 542 requires flat-sum bonuses to be folded into the overtime rate using only nonovertime hours as the divisor, which produces a higher number than the federal method. In a 50-hour week at $24 with a $50 attendance bonus, California requires about $13.75 more than the FLSA does, and that $13.75 isn’t qualified. Payroll systems built around California rules will overstate Code TT unless they run a separate federal calculation.

What should employers and employees do now?

Employers should confirm that payroll can calculate FLSA overtime by workweek, separate from California daily overtime and double time, and should review which workers fall under the motor carrier, agricultural, and executive exemptions federally even when California overtime is paid. Expect questions when the wage statement shows 1.5x and 2x hours but the W-2 shows a smaller Code TT figure. Employees shouldn’t reduce withholding automatically: FAQs 8 and 9 say employers keep withholding unless a new Form W-4 is filed, and anyone who lowers federal withholding for the deduction shouldn’t carry that change onto the California DE 4, since the state won’t allow it. If your company also has repayment or correction issues pending, our post on California’s stay-or-pay law walks through the W-2c mechanics.

Frequently Asked Questions

Does California allow the no tax on overtime deduction?

No. California doesn’t conform to the federal overtime deduction, so overtime remains fully taxable on the California return. Bills to create a state version stalled in committee in April 2026.

Does California daily overtime qualify for the federal deduction?

Only the portion the FLSA would require. Daily overtime after eight hours and double-time premiums qualify only to the extent of the half-time premium on hours over 40 in the workweek.

What is Box 12, Code TT on my W-2?

It reports qualified overtime compensation, the FLSA half-time premium on hours over 40. Starting with 2026, your deduction is limited to the lesser of that amount and what you were actually paid.

Can I use my own time records if my employer’s Code TT figure is too low?

No. Ask your employer to issue a Form W-2c. According to the IRS, Form 4852 can’t be used to increase the reported amount for this deduction.

Do truck drivers get the federal overtime deduction?

Usually not. Drivers, loaders, and mechanics covered by the FLSA motor carrier exemption have no FLSA overtime, so none of their overtime qualifies, even if California or the employer pays overtime.

How much can I deduct?

The cap is $12,500 per year for single filers and $25,000 for joint returns through 2028. It phases down as modified AGI rises above $150,000, or $300,000 for couples.

How North Star Law Firm Can Help

North Star Law Firm helps California employers sort out payroll tax reporting, worker classification, and information return corrections, and it represents businesses when EDD or IRS payroll issues turn into assessments. Phillip Zagotti is a California attorney and a CPA, so the wage-and-hour question and the W-2 reporting question get answered together. Learn more about the firm’s sales and payroll tax practice, its penalty abatement work, and the wider Tax Law practice, or schedule a consultation to review your payroll setup before year-end W-2s.

Moving to Austin or Henderson doesn’t end a California tax problem. It usually starts one. The Franchise Tax Board finds most of its residency cases the simplest way possible: someone files a part-year or nonresident return, Form 540NR, the year they leave, and the year of a big sale or bonus is almost always the same year. For a business owner in Riverside or San Bernardino County who sells a company after relocating, the difference between winning and losing that audit can run well into six or seven figures, and Texas and Nevada won’t give a credit for any of it because neither state taxes individual income.

The good news is that residency cases are won or lost on facts the taxpayer controls, most of them before the move is even finished. The bad news is that the FTB auditor will reconstruct those facts from bank records and credit card swipes whether the taxpayer kept a diary or not.

Who counts as a California resident?

Under Revenue and Taxation Code § 17014, a resident is anyone in California for other than a temporary or transitory purpose, and anyone domiciled here who is away only for a temporary or transitory purpose. Those two tests do different work. Domicile is the one true, fixed, permanent home a person intends to return to, and a person can have only one. Residence turns on presence. The Court of Appeal made that distinction concrete in Whittell v. Franchise Tax Board (1964) 231 Cal.App.2d 278, holding a Nevada-domiciled couple taxable as California residents because they spent most of each year at their Lake Tahoe estate.

The regulation behind the statute, Cal. Code Regs., tit. 18, § 17014, tells auditors to find the state with which the person had the closest connection during the year. Two statutory rules sit on top of that. Section 17016 presumes anyone who spends more than nine months of the year here is a resident. Section 17014(d) offers a safe harbor for a domiciliary who leaves under an employment-related contract for at least 546 consecutive days, but it’s narrow: it disappears if intangible income tops $200,000 in any year of the contract or if the main purpose of the absence is avoiding tax, and it does nothing for an owner who simply decides to relocate.

How does the FTB actually run a residency audit?

The FTB’s Residency and Sourcing Technical Manual is public, and it reads like a playbook. The audit opens with a contact letter and a series of Information Document Requests, each with a 30-day response date. Auditors then build a physical presence calendar from credit card statements, bank records, airline tickets, and the locations where checks were processed. When records are slow to arrive, the manual describes getting them from the bank with a signed authorization.

The factors come from the Board of Equalization’s 2003 decision in Appeal of Bragg: where the family lives and the kids go to school, the size and value of homes in each state, whether a homeowner’s exemption is still claimed, where the doctors and dentists are, club memberships, vehicle registration, driver’s license, voter registration, business interests, and professional licenses. The Office of Tax Appeals now groups them into three buckets, following Appeal of Mazer, 2020-OTA-263P: physical presence and property, personal and professional associations, and registrations and filings. That third bucket carries the least weight. A Texas driver’s license obtained in week one is expected; it proves very little if the family still sleeps in Corona most weekends.

Why do people with Texas licenses and Nevada addresses still lose?

Because the move was a paperwork move. Appeal of Bracamonte, 2021-OTA-156P, is the case every Inland Empire seller should read. The owners of an aviation services company rented a Henderson apartment, registered to vote in Nevada, got Nevada licenses, and opened Nevada bank accounts in early 2008. They also kept their large California home with its furnishings and spent far more days in California than Nevada before their company sale closed that July. OTA sustained a 2008 assessment of $1,592,648 and repeated the rule that makes these cases hard: the FTB’s residency determination is presumed correct, and when domicile is in doubt, it’s found not to have changed.

In Noble v. Franchise Tax Board (2004) 118 Cal.App.4th 560, a couple claimed Colorado residency from March 1 but sold securities later that month while still living here, and they lost. Appeal of Beckwith, 2022-OTA-332P, shows the reverse trap: a man who had really moved to Tennessee bought a California home years later, spent about 170 days here, and was a resident again when his shares were exchanged.

What income can California still tax after a genuine move?

Winning on residency isn’t the end of the analysis, because nonresidents still owe California tax on California-source income, and the sourcing rules are where business owners get surprised. Section 17952 sources gain on stock and other intangibles to the seller’s state of residence, so a true Texas resident who sells S corporation stock generally owes California nothing on that gain. Change the deal structure and the answer flips. Under Regulation 17951-4, a nonresident shareholder’s share of income from a business run entirely in California is California-source, and the FTB’s manual applies that to goodwill gain that flows through when the company sells its assets or the buyer insists on a deemed asset sale election. For a Fontana trucking company or a Temecula medical practice, that can put the whole gain back on a California return.

Timing matters too. Regulation 17952(d) fixes the source of an installment sale when the sale happens, so a note signed while the seller was a Californian keeps producing California-source gain on every payment after the move, though the interest isn’t California-source. Retirement income runs the other way: 4 U.S.C. § 114 bars states from taxing nonresidents on qualified plan, IRA, and similar distributions, while nonqualified deferred compensation is protected only if it’s paid in substantially equal periodic payments over at least ten years or life, or under certain excess benefit plans.

What does the math look like for an Inland Empire business owner?

Take a married couple who own all of a California S corporation in Corona that operates only in California. They move to Austin on July 1, 2025, buy a house, enroll their children in Texas schools, and switch licenses and voter registration. They keep the Corona house furnished, and the husband flies back roughly eight days a month to manage the transition. On March 15, 2026, they sell their stock for $8.5 million with a $1 million basis, a $7.5 million gain.

If the Texas domicile holds up, California taxes none of that gain, though they still file a 540NR for the company’s California income from January 1 through the closing. If the FTB proves they were still residents on March 15, the gain is fully taxable. Using the 2025 joint rate schedule as a stand-in, since the 2026 schedule isn’t out, the regular tax on $7.5 million of taxable income is about $884,000, and the 1% surcharge on income above $1 million under § 17043 adds $65,000, for roughly $949,000 before interest. If the buyer had required a § 338(h)(10) election, winning on residency might not help much: the goodwill gain from a California-only business would generally be California-source, the company itself would owe California’s 1.5% S corporation tax on the deemed sale, and the gain would be measured from the company’s asset basis rather than the owners’ $1 million stock basis. The furnished house and the monthly trips are exactly what cost taxpayers in Bracamonte.

How long can the FTB come back, and what happens if you don’t file?

The general assessment period is four years from filing under § 19057, extended to six years when more than 25% of gross income is omitted. Someone who files nothing gets no clock at all. Section 19087 lets the FTB estimate income and assess at any time, and a late-filing penalty of up to 25% can follow under § 19131. That’s why skipping the part-year return to avoid attention is almost always the wrong call. A filed 540NR that discloses the move and reports California-source income starts the statute running. If an audit does produce a Notice of Proposed Assessment, the protest deadline is 60 days under § 19041, and an appeal to the Office of Tax Appeals must follow within 30 days of the Notice of Action. At OTA, the taxpayer carries the burden of proof by a preponderance of the evidence.

What should a Californian do before and after moving?

Sign the sale documents after the move is real, and don’t let the closing land while the family still lives in the old house. Sell or lease the California home to an unrelated tenant if the numbers work; if you keep it, cancel the homeowner’s exemption. Move what you actually care about, from the doctors to the dog. Keep a day log from the first week along with the receipts behind it, because the auditor’s calendar will come from the same card statements. The FTB’s Publication 1031 is a useful checklist.

One more date to watch this year: Proposition 40 on the November 3, 2026 ballot would impose a one-time tax on billionaires who were California residents on January 1, 2026, according to the Legislative Analyst’s Office. If it’s approved, that measure would lean on the same § 17014 residency rules discussed here, and it would make the January 1 date the most scrutinized day of the year for a small group of taxpayers.

Frequently Asked Questions

Does spending fewer than 183 days in California make me a nonresident?

No. California has no 183-day safe harbor. Section 17016 presumes residency after nine months, but people present far fewer days have been held residents when their closest connections stayed in California.

Is getting a Texas or Nevada driver’s license enough to change my residency?

No. Licenses, voter registration, and addresses are the weakest category of evidence. The FTB and OTA look first at where you live, where your family is, and where your property and business ties are.

If I move before selling my company, will California tax the gain?

It depends on the deal. A stock sale after a genuine move is generally sourced to your new state. Flow-through gain from an asset sale or deemed asset sale of a business operating in California is generally still California-source.

Can California tax my 401(k) or pension after I leave?

No. Federal law, 4 U.S.C. § 114, prohibits states from taxing nonresidents on qualified retirement income. Nonqualified deferred compensation is protected only in limited circumstances.

How far back can the FTB audit my residency?

Usually four years from when you filed, or six years if you left out more than 25% of gross income. If you didn’t file a California return for the year in question, there’s no time limit.

What is the deadline to protest an FTB Notice of Proposed Assessment?

You have 60 days from the date of the notice to file a written protest. After the FTB issues a Notice of Action, you have 30 days to appeal to the Office of Tax Appeals.

How North Star Law Firm Can Help

North Star Law Firm represents Californians and former Californians in FTB residency audits, protests, and Office of Tax Appeals cases, and it helps owners plan a move and a business sale in the right order before the FTB gets involved. Phillip Zagotti is a California attorney and a CPA, so the presence calendars, sourcing schedules, and 540NR reporting that decide these cases are handled by the same person making the legal arguments. Learn more about the firm’s California tax defense practice, its work on structuring a business sale, and its Office of Tax Appeals representation. If a residency letter has already arrived, the firm can help you schedule a consultation and prepare the response.