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Red-flag compliance risks are mounting in 2025. The California Franchise Tax Board assessed more than $1.1 billion in penalties in 2023, and pressure has only increased. Tougher filing rules, tighter deadlines, and deeper data-matching mean your risk of an FTB audit or suspension is higher, even if your books are clean. Most penalties do not come from underpaid tax. They start with missed forms, wrong entity filings, or late payments. The FTB does not accept confusion as a defense, and one skipped schedule can invite both state and federal scrutiny.
The Short List: 2025’s Most Expensive FTB Audit Triggers
For the 2025 filing season, the main hot buttons include:
- Late or missing entity returns for LLCs and S Corps, such as Forms 568, 100, and 199
- Payroll and owner wage errors, even for one-owner companies or family employees
- Gaps in new climate reporting under SB 253 and SB 261 for qualifying businesses
- Unreported activity tied to California or out-of-state operations
More than 70% of recent penalty notices started with missing documentation, not unpaid tax. Penalties are steeper, with per-filing fines up to $2,000, plus the $800 minimum annual franchise tax that applies even when you have no profit.
Why the FTB Is Cracking Down, and Who Gets Flagged First
California now syncs IRS data, Secretary of State records, and third-party sources like processors and payroll systems. The most common targets:
- LLC and S Corp owners who miss the $800 franchise tax or pay late, with stacking fees that can begin at $250 per month
- Real estate investors who take cost segregation but fail to include required depreciation schedules, including California Form 3885 and federal Form 4562
- Contractors and service businesses that meet California’s doing-business test under Cal Rev & Tax Code 23101, including high California receipts or property thresholds, but skip required filings such as SB 253 and SB 261 reports where applicable
A recurring trigger is depreciation mismatches. If you take federal bonus depreciation on Form 4562 but do not file the California adjustment on Form 3885, the FTB often assumes underreporting. More than 11,000 notices in 2023 tied back to this single mistake. Align your federal and California schedules before you file.
A surprising trap is the zero-income return. Skipping a $0 return is the most common path to FTB suspension for small LLCs in 2025. The state can suspend rights, dissolve the entity, and apply penalties even if you had no sales. Quiet entities are viewed as higher risk for hidden cash flow. File Form 568 on time and pay the $800 minimum to stay off the suspension list and avoid instant data-sharing alerts.
Example: A Missed Filing That Snowballed Into $9,650
Consider a Realtor who opened an LLC in 2022, had no profit in 2023, and assumed no filing was needed for 2024. By late 2024, she received escalating penalty letters and a Secretary of State suspension. The triggers were a missing Form 568, skipped $800 payments, and no reply within 60 days. The fallout included:
- $2,400 in FTB penalties across two years
- Loss of legal standing to operate in California
- A federal cross-notice that increased audit risk and demanded proof of missing returns
With quick action and targeted abatement, penalties dropped to a fraction of the original amount. Many owners are not as fortunate and pay in full or lose the entity.
The Most Overlooked Filing Pitfalls in 2025
Do not assume your bookkeeper, payroll provider, or prior CPA is filing everything you need. The most common misses:
- FTB Form 3522, the $800 franchise tax payment due on the 15th day of the fourth month after year-end, not April 15. LLCs and S Corps owe this even with zero income.
- Late or missing Form 568 for LLCs, or Form 100 for S Corps. One missed year can escalate penalties and trigger suspension.
- Missing attachments and schedules. S Corps paying owners must retain payroll and reasonable salary support. Any entity with depreciation or rental activity should include California Form 3885 along with federal Form 4562, or expect a notice.
Always confirm filings inside the MyFTB portal. Emails or software confirmations do not prove state acceptance.
Do Not Assume IRS Compliance Protects You in California
IRS compliance does not shield you from the FTB. California often enforces faster, and the two agencies now share more data than ever. Key differences:
- A federal extension does not equal a California extension. File a state extension or face penalties even if the IRS granted more time.
- IRS penalty relief does not apply to the FTB. Each agency requires separate requests and documentation.
- Federal deductions are not always allowed in California. Cost segregation timing and bonus depreciation rules can differ. File both federal and California versions of your schedules.
Contractor reporting trips up many owners. You must file federal Form 1099-NEC and California Form DE 542. The state compares contractor payments against payroll data, and mismatches lead to quick notices.
How Audit Algorithms Are Changing in 2025, and What To Do Now
The FTB now matches:
- 1099-K data from Stripe, PayPal, and other processors against state entity filings. Unreported California receipts above $600 can trigger a review.
- Climate reporting under SB 253 and SB 261 for larger companies with global revenue over $1 billion. Thresholds could shift, so monitor both worldwide revenue and California factors.
- Secretary of State status before allowing entity changes, ownership updates, or closures. Any open FTB balance can trigger a suspension hold.
This sweep covers new LLCs, pass-through entities for real estate professionals, and even smaller S Corps. A single out-of-state deposit that belongs on your California return can start a notice chain. If any FTB letter arrives, respond within 30 days. Upload proof inside MyFTB or send tracked mail. Non-response now triggers fast escalation.
Example: Protecting a Multi-Entity Real Estate Portfolio
A high net worth investor with several California S Corps and LLCs missed two cost segregation schedules and filed one Form 100 late. Within months, penalties across both agencies compounded. Bank access for payroll and closings was frozen, and audit risk spread to each property until all filings were corrected. With immediate schedule filings, payroll support that aligned with IRS guidance, and coordinated abatement, suspensions were lifted and total penalties fell to a fraction of the original assessment.
Already Out of Compliance? You Can Still Recover
Move quickly if you have a 2025 FTB notice:
- Check MyFTB for balances, missing returns, and open items
- File any overdue returns, such as Form 568 for LLCs and Form 100 for S Corps
- Pay the $800 minimum with Form 3522, even if you are inactive or lost money
- Prepare a clear reasonable cause statement with a timeline and proof
- Work with a Business Tax specialist who can shore up payroll, depreciation schedules, and entity filings
Speed and documentation drive successful outcomes. Waiting for automated relief rarely helps in 2025.
Fast Tax Fact: Real-Time Data Sharing Is Now Standard
By late 2025, the FTB and IRS exchange entity, payroll, penalty, bank, and depreciation information electronically, including large cost segregation adjustments. Cross-agency audits are rising. Request transcripts from both sides, compare line items, and correct mismatches before a notice lands.
FAQ: Common 2025 Compliance Questions
What happens if my LLC or S Corp gets suspended?
You lose the right to operate, sign contracts, receive processor payments, or defend against lawsuits. Reinstatement requires clearing all balances and filings, then requesting status restoration from the Secretary of State. Processing can take weeks or months even after payment.
Will filing late with the IRS cause California penalties?
Not automatically, but late federal filings can invite FTB demands for backup. The reverse is also true. California issues can prompt IRS inquiries on compensation, owner draws, and depreciation.
Can I get penalties reduced if this is my first issue?
Often, yes. First-time abatement and reasonable cause relief are available when supported with fast, credible documentation. California tends to be stricter for repeat issues and higher income entities.
How long do I have to respond to a notice?
Most letters require action within 30 days. Some items, such as cost segregation support or climate reporting, can require immediate response. Check the deadline in MyFTB or on the letter.
Book a Compliance Strategy Session
If you want to reduce audit risk, clear unknown penalties, or stabilize your entity before year-end, schedule a focused session with Herbert Financial Group Tax Strategy. You will get a clear action plan that covers required filings, payroll support, depreciation schedules, and cash impact. If you prefer local expertise, you can also consult with a tax accountant in Los Angeles, a tax advisor in Los Angeles, or a tax consultant in Los Angeles. Herbert Financial Group works with clients across the West, including those seeking a tax accountant in San Diego. Connect with a team that treats Business Tax like a year-round priority and helps you protect profits while staying compliant.
