1. The Tax Account and Entity Classification Define the Dispute
A company may have multiple tax accounts. First, match the notice to the taxpayer and return at issue.
An Llc'S Tax Election Changes Its California Filing
A single-member LLC is generally disregarded for federal income tax, while a multi-member LLC defaults to partnership treatment. California follows federal classification. A disregarded or partnership-taxed LLC doing business in California generally files Form 568 and pays an $800 annual tax, plus an LLC fee if California income reaches $250,000. An LLC taxed as a corporation instead files Form 100 or 100S.
The election and tax year matter. See the business tax overview for entity planning.
Sales, Payroll, and City Taxes Follow Different Rules
The CDTFA administers sales and use tax, the EDD handles state payroll taxes, and the IRS handles federal employment taxes.
San Jose's business tax is separate from sales tax. Most businesses pay based on employee count, potentially including owners and other workers. Certain rental businesses follow other measures. Registration for a Business Tax Certificate is generally required within 90 days of starting operations, including for out-of-town businesses with limited activity.
The city's 2026 amnesty program runs through December 31, 2026, and may waive penalties and interest on qualifying unpaid city business taxes, not state or federal debts.
2. Source Records Show Whether the Assessment Is Accurate
A shortfall may reflect missing receipts, misclassification, or timing differences. Start with the filed return.
Compare Filed Returns with Original Transactions
Compare the return with the ledger, invoices, bank statements, processor reports, and payroll records. A deposit might be revenue, a loan, an owner contribution, or an internal transfer.
For sales tax, distinguish taxable transactions from documented exemptions. For income tax, match revenue and deductions to their records. Federal IRS audit record reconciliation follows its own document requests. Keep a copy of each agency submission.
Check Worker Status and Operating Locations
A contractor agreement alone cannot establish worker status. Examine actual duties, control, and payment arrangements under the relevant tax rules.
For city business tax, verify the start date, worksite addresses, activity days, and covered workers. A company operating from outside San Jose may be taxed differently from one with a permanent local location. A California seller's permit does not establish the city tax owed.
3. Owner Liability Depends on Authority and Willfulness
An LLC's unpaid tax is not automatically its owner's debt. Federal withholding and California sales tax follow different tests.
Federal Trust Fund Recovery Penalty under Irc Section 6672
Under 26 U.S.C. § 6672, a person responsible for trust fund taxes may face a penalty for willfully failing to collect or pay them over. It generally covers withheld federal income tax and employees' Social Security and Medicare taxes, not the employer's separate share.
Control over payroll and creditor payments can matter more than a title. Paying other creditors despite known withholding debts may show willfulness. Multiple people may qualify.
California Responsible-Person Liability under Section 6829
California Revenue and Taxation Code § 6829 may impose personal liability for unpaid sales or use tax when a business terminates, dissolves, or is abandoned. The CDTFA must establish responsibility, willful nonpayment, and statutory conditions involving tax reimbursement or use tax.
Liability covers tax due during the person's period of responsibility, plus related interest and penalties. Bank authority, filings, and closure records help establish control.
4. The Notice Determines the Forum and Filing Deadline
An information request and a formal assessment have different consequences. Check the notice type and service date.
Common Tax Notices and Response Periods
| Notice | Usual Deadline and Procedure |
|---|---|
| IRS statutory Notice of Deficiency | Tax Court petition within 90 days of the notice date, or 150 days if the overseas rule applies |
| FTB Notice of Proposed Assessment | Protest to FTB within 60 days of the notice date |
| CDTFA sales or use tax determination | Petition for redetermination within 30 days after service |
| EDD Notice of Assessment | Petition for reassessment to CUIAB, generally within 30 days. Jeopardy cases have shorter periods |
| San Jose business tax assessment | Written hearing request to the Finance Director within 10 days after service |
The deadlines apply to the listed notices. Missing one can make an assessment final.
An Administrative Protest Is Not Always a Court Case
An adverse FTB Notice of Action is generally appealable to the Office of Tax Appeals within 30 days. CDTFA and CUIAB disputes follow separate administrative routes. An eligible IRS deficiency can reach U.S. Tax Court before payment, while other federal tax disputes may use collection or refund procedures.
Keep the notice, delivery evidence, and submissions. A broader audit dispute may concern underlying findings, but the specific notice controls the response route.
12 Nov, 2026
