Income Tax Counsel for Individuals

Individual income tax matters range from a mismatched information return to a residency audit with seven figures at stake. What they share is that the outcome usually depends on facts that can be established early — what the transcripts show, whether the assessed number is correct, and which deadlines are still open.

For Californians there is a second system running alongside the federal one, with a top rate of 13.3%, no preferential treatment for capital gains, and twenty years to collect against the IRS’s ten.

We represent individuals in Temecula, Murrieta, San Diego, Riverside, and San Bernardino, and nationally for former residents still under California scrutiny.

Where Individual Disputes Come From

Information return mismatches. The IRS matches W-2, 1099-NEC, 1099-K, 1099-DA, and K-1 data against the return automatically. Mismatches generate a CP2000 notice proposing additional tax — frequently overstated, because the notice reflects gross proceeds with no basis. A brokerage 1099-B reporting $400,000 of sales produces a proposed assessment on $400,000 unless basis is supplied.

Self-employment and Schedule C issues. Recurring losses, large deductions relative to receipts, vehicle and travel expenses, home office claims, and cash-intensive operations. Categories under Section 274 carry strict substantiation requirements where reasonable estimates are not permitted.

Rental real estate. Real estate professional status, material participation, short-term rental positions, and passive loss limitations.

Digital assets. Exchange reporting on Form 1099-DA surfaces unreported dispositions and basis gaps, particularly where assets moved between wallets and platforms.

Cancellation of debt income. Settled credit cards, foreclosures, and — new for 2026 — student loan forgiveness, now generally taxable again after the ARPA exclusion expired.

Filing status and dependency. Head of household claims and duplicate dependent claims after separation, resolved by the custodial parent rule and Form 8332 rather than by a family court order. See child tax credit.

When the Assessment Is Wrong

A significant share of individual matters involve a number that was never correct.

Substitute for return. When a return is not filed, the IRS may file one under IRC 6020(b) using third-party data — no basis, no deductions, no credits, and single filing status. These assessments are routinely multiples of the real liability, and filing an accurate return often reduces the balance by more than any settlement would. See unfiled returns.

Default audit assessments. Notices sent to a former address produce examination results decided without the taxpayer’s participation. Audit reconsideration can reopen them.

Liability belonging to a spouse. Innocent spouse relief under IRC 6015 can separate it.

Identity theft. A fraudulent return filed in your name produces assessments for income you never received, resolved through the IRS identity theft procedures rather than by ordinary dispute.

Reducing an inflated assessment is nearly always cheaper than settling one, which is why the first question in a collection matter should be whether the underlying number is right.

California Residency and Sourcing

This is where individual California matters become genuinely difficult, and where the stakes are highest.

California presumes continued residency until domicile is affirmatively changed, applying a closest-connections analysis across roughly nineteen factors under FTB Publication 1031 — home, family, vehicles, professional licenses, physicians, bank accounts, and social ties. A 546-day safe harbor applies to certain employment-related absences, and a rebuttable presumption applies to taxpayers present in California more than nine months of the year.

The state examines departures actively: residency audits of out-of-state filers rose 126% between 2019 and 2023.

Separately, California-source income is taxable regardless of residency — gain on California real property, income from a California business, and compensation for services performed here. A former resident can owe California tax on a transaction years after leaving.

Selling a business, exercising options, or recognizing a large gain in the year of a move is the most reliably audited fact pattern in California practice. See FTB matters and capital gains.

The Two Procedural Tracks

Federal. Examination, then a 30-day letter and the independent Office of Appeals — which can weigh hazards of litigation and settle on a percentage basis — then a statutory notice of deficiency with 90 days to petition the Tax Court. That petition preserves the right to contest before paying; miss it and the route becomes pay-and-claim-refund.

California. A Notice of Proposed Assessment with 60 days to protest, then a Notice of Action appealable to the Office of Tax Appeals, heard by panels of three Administrative Law Judges independent of the FTB.

The tracks connect through R&TC 18622: federal adjustments must be reported to the FTB within six months, and never reporting leaves California’s assessment window open indefinitely.

Where California Departs from Federal Law

California’s conformity date is January 1, 2025 under Senate Bill 711 — before the One Big Beautiful Bill Act. For individuals the gaps that reach the most returns:

• No preferential capital gains rate — gains taxed as ordinary income up to 13.3%, with holding period irrelevant
• No Section 199A QBI deduction
• No QSBS exclusion
• Tips and overtime deductions — federal only; fully taxable by California
• 529 K-12 withdrawals — tax-free federally, taxable in California with a 2.5% penalty on earnings

Each produces a Schedule CA adjustment, and mismatches between the two returns are visible to the FTB.

Penalties and How They Come Off

On an older individual liability, penalties and the interest running on them frequently make up a third or more of the balance — which means penalty abatement is often the largest single reduction available, and it is regularly overlooked.

The penalties that appear most often are failure to file at 5% per month to a 25% cap, failure to pay at 0.5% per month reduced to 0.25% while an installment agreement is in effect, the estimated tax penalty, and the accuracy-related penalty at 20% for negligence or substantial understatement.

First-time abatement is administrative relief available to a taxpayer with a clean compliance history for the three preceding years. It requires no showing of reasonable cause and is frequently granted on request, yet many taxpayers never ask.

Reasonable cause relief requires facts and documentation — serious illness, death in the immediate family, destruction of records, or reliance on a professional where that reliance was objectively reasonable. Assertion alone does not carry it. Reliance arguments in particular turn on whether the taxpayer supplied complete information and whether the advice concerned a matter within the adviser’s competence.

Interest is generally not abatable except where it results from IRS error or delay, so the practical target is the penalty base — which, because interest accrues on penalties, also reduces the interest that has built on top of them.

Frequently Asked Questions

I received a CP2000. Does it mean I owe that amount?

Not necessarily. CP2000 notices reflect third-party data without basis or offsetting items — securities sales in particular. Supplying basis and documentation frequently reduces or eliminates the proposed amount.

How long does the IRS have to audit me?

Three years from filing, six where more than 25% of gross income was omitted, and without limit for a fraudulent return or an unfiled year.

Can California tax me after I moved away?

Yes, on California-source income regardless of residency, and on all income if residency did not actually change before recognition. The FTB examines departure-year transactions closely.

What is the deadline to petition the Tax Court?

90 days from the statutory notice of deficiency, and it cannot be extended. Filing preserves the right to contest without paying first.

Is my student loan forgiveness taxable?

Federally, generally yes for income-driven repayment forgiveness in 2026 and later. PSLF and certain other discharges remain tax-free, and the insolvency exclusion often applies.

What if the IRS filed a return for me?

A substitute for return includes no deductions, basis, or credits and overstates the liability. Filing an accurate return generally reduces the assessment substantially.

My spouse caused the liability. Am I stuck with it?

Not necessarily. Innocent spouse relief, separation of liability, and equitable relief under IRC 6015 are requested on Form 8857, generally within two years of the first collection activity.

Can I deduct my home office if I am an employee?

No. The employee home office deduction was eliminated along with miscellaneous itemized deductions and remains unavailable. The deduction is available to the self-employed reporting on Schedule C, and to partners in limited circumstances under a partnership agreement requiring the expense.

What records should I keep, and for how long?

Returns and supporting records for at least three years from filing, six where a substantial omission of income is possible, and indefinitely for any year in which no return was filed — because the assessment period never begins. Basis records for property and securities should be kept until the asset is sold and that year’s period closes.

How is cryptocurrency taxed?

As property. Each disposition — selling, exchanging one asset for another, or spending it — is a taxable event producing gain or loss measured against basis. Exchange reporting on Form 1099-DA now surfaces these transactions, and basis gaps from assets moved between wallets and platforms are a common source of proposed assessments.

Establish the Facts Early

Most individual tax matters look worse at the notice stage than they turn out to be, because the notice reflects what the government knows rather than what actually happened. Transcripts, basis records, and the deadline calendar usually reframe the problem within days.

Pietro Canestrelli holds an LL.M. in Taxation and represents individuals before the IRS, the FTB, the Office of Tax Appeals, and the United States Tax Court. Schedule a consultation, or review our IRS representation and tax relief services.