California FTB Notice California Audit Position Letter – AIPS Summary (AUD 1527)

The AUD 1527 is the FTB’s formal summary of its audit findings after reviewing your return. AIPS stands for Audit Issue Processing System — California’s internal tracking platform for open audit issues. When the FTB sends you an AUD 1527, it’s documenting every adjustment it proposes to make to your return, the dollar amount of each change, and the reasoning behind it. This is not the final bill. It’s the proposed position before you get a chance to respond.

What most people don’t realize: the AUD 1527 is one of the last stops before the FTB issues a formal Notice of Proposed Assessment (NPA). You typically have 30 days to respond to the AIPS summary position letter. If you don’t, the NPA follows automatically and your right to dispute at the audit level is gone — you’d have to appeal to the Office of Tax Appeals, which is a longer and more expensive process. The 30-day window is not automatically extendable, though the FTB will sometimes grant extensions for cause.

We treat every AUD 1527 as urgent. When this letter arrives, we pull the complete audit file, cross-reference each proposed adjustment against the original documentation, and identify which items we can support and which we can challenge. Getting a well-documented response in before the deadline is almost always better than letting it escalate to the NPA stage.

You dispute the AUD 1527 by submitting a written protest within the response window — usually 30 days from the date on the letter. Your protest must address each proposed adjustment specifically: you can’t just say you disagree. For each item, you need to provide documentation (bank statements, contracts, receipts, 1099s, K-1s, depreciation schedules) and a written explanation of why the FTB’s position is incorrect or why the documentation supports your original filing position.

The FTB is most likely to reverse adjustments when you provide contemporaneous records — documents created at the time of the transaction, not reconstructed later. For business expense adjustments, the FTB follows the Cohan rule from federal law, which allows reasonable estimates when exact records are unavailable, but California auditors apply it more narrowly than IRS agents do. If the proposed adjustment involves California residency or part-year allocation, you’ll need to document physical presence, domicile intent, and where income was earned — that evidence is very specific and often requires professional preparation.

At The Reed Corporation, we draft every audit response ourselves. We organize the protest to address the highest-dollar adjustments first, lead with your strongest documentation, and explicitly counter the FTB’s legal reasoning where it’s wrong. Auditors respond better to organized, professional submissions than to informal letters.

If you agree with all or part of the AUD 1527 findings, you can sign and return the agreement portion of the letter. The FTB will then issue a formal assessment for the agreed amount, which becomes due within 30 days of the final Notice of Assessment. Interest under R&TC Section 19101 will have been running since the original due date of the return — that’s added automatically. If the audit found unreported income over 25% of your gross income, a 20% substantial understatement penalty under R&TC Section 19164 may also apply.

Partial agreement is also an option. You can agree to certain items in the AIPS summary while continuing to dispute others. That stops interest from running on the agreed items if you pay them promptly, while preserving your right to fight the disputed adjustments. This approach is often worth it when some items are clearly correct but others have real merit. The FTB is generally willing to settle on that basis.

One thing to check before you agree: whether a federal audit is also open or whether the IRS has already made adjustments to the same year. California automatically conforms to federal changes under R&TC Section 18622, and if there’s a discrepancy between what you told the IRS and what you told the FTB, agreeing to the FTB’s position can create a new problem at the federal level. We always check both returns side-by-side before a client signs anything.

The AIPS summary typically lists proposed changes to tax owed, interest accrued to date, and any applicable penalties. California’s income tax rates top out at 13.3% for income over $1 million (12.3% for ordinary income over about $625,000 for single filers), so even modest audit adjustments can generate meaningful tax bills. Add accrued interest — currently running around 7% annually under R&TC Section 19101 — and the balance grows fast if the audit covers multiple years.

Penalties in FTB audit position letters commonly include the 25% failure-to-pay penalty under R&TC Section 19133, a 25% delinquency penalty for returns not filed on time (R&TC Section 19131), and the 20% accuracy-related penalty for substantial understatements (R&TC Section 19164). In cases involving undisclosed offshore accounts or abusive tax shelters, California’s penalty can reach 75% of the understatement under R&TC Section 19164.5. The good news: California has a reasonable cause exception for most penalties, and a well-documented request for penalty abatement succeeds fairly often.

When we review an AUD 1527 with a client, we look at the penalty exposure first, because penalty abatement is often the quickest way to reduce the total balance. If the underlying tax is correct and the client simply made an honest mistake, a penalty abatement request filed alongside the protest can cut the balance by 25% or more before we even start arguing about the tax itself.

Yes, but the Office of Tax Appeals (OTA) becomes available at a later stage — not at the AUD 1527 level. The proper sequence is: respond to the AUD 1527 at the audit level, receive the Notice of Proposed Assessment if the FTB doesn’t accept your protest, file a petition with the OTA within 90 days of the NPA, and then proceed to a formal appeals hearing. Skipping the audit-level protest and going straight to the OTA isn’t allowed — you must exhaust audit-level remedies first.

The OTA is California’s independent tax appeals body, created in 2017 to replace the Board of Equalization’s appeals function. It operates under formal rules of procedure and allows representation by CPAs, tax attorneys, or Enrolled Agents. OTA decisions can be appealed further to California Superior Court, though that’s rare and expensive. The OTA success rate for taxpayers varies by issue type — residency disputes and expense deduction cases have reasonably good track records when well-documented.

We’ve handled matters before the OTA on behalf of clients who couldn’t resolve audits at the field level. The key is building the record at the AUD 1527 stage — every fact and piece of documentation you present later at the OTA must have been raised earlier. Starting strong at the audit position letter phase is what makes an appeal viable if it comes to that.