LaviCPA is a Los Angeles CPA firm that represents real estate investors when the IRS, the California Franchise Tax Board or the CDTFA examines a return or sends a notice. Our CPAs can represent you before the IRS under Treasury Circular 230, once you sign Form 2848 naming them. We can represent you before the FTB with form FTB 3520-PIT for individuals or FTB 3520-BE for business entities, and before the CDTFA with form CDTFA-392.
Real estate exams tend to land on a few issues. Did you qualify as a real estate professional? Does the cost segregation study hold up? Can you prove the 1031 deadlines were met? Why does your California depreciation differ from your federal depreciation? Each answer comes down to records and the rule. Our job is to gather the records, match them to the rule and work to the deadline on the notice.
Shawn Lavi, CPA is LaviCPA's principal. Elias Lavi, CPA is co-owner and founder. We're a 10-person firm at 7707 Sunset Blvd, open Monday to Friday, 9 to 5. We meet in person or by video.
Book a free New Client Introduction
Who this is for
- You got an IRS letter asking about rental losses, real estate professional status or depreciation.
- The FTB sent a Notice of Proposed Assessment or a notice about an LLC's $800 tax or Form 568.
- The CDTFA opened a sales and use tax audit of a business you own.
- The IRS changed a federal return and you need to report it to California.
- You want to know what to send, and by when, before you answer anything.
When a letter arrives
- Find the date and the deadline. Most notices show both near the top. The deadline matters most.
- Keep every page. Include the envelope if the notice came by certified mail. Please don't send notices, returns or your Social Security number through this website, the booking form or regular email. After the intro, we'll send you a link to upload them to our secure client portal.
- Don't let the deadline pass. If you want us to represent you, talk to us before you call the agency or send documents. Once you sign a power of attorney, we deal with the agency directly.
- Pull the records the notice asks about. Leases, closing statements, logs, studies and bank statements. We'll tell you which ones.
No one can promise how an exam ends. What we control is the response. We work to the deadline, answer the question asked, and tie every number to a record.
The deadlines that can't slip
| Notice | What it means | Time to respond |
|---|---|---|
| IRS 30-day letter | The examiner's proposed changes | Generally 30 days to agree or request an Appeals conference |
| IRS notice of deficiency (90-day letter) | The IRS's formal determination | 90 days to petition the Tax Court (150 if addressed to you outside the US). This deadline can't be extended |
| FTB Notice of Proposed Assessment | The FTB proposes more tax | Protest by the "Protest By" date on the notice, generally 60 days |
| FTB Notice of Action | The FTB's decision on your protest | 30 days to appeal to the Office of Tax Appeals |
| CDTFA Notice of Determination | The CDTFA's audit finding | 30 days from the mailing date to file a petition for redetermination |
| Federal change to a return | The IRS changed your federal return | Report it to the FTB within 6 months of the final federal determination |
If the FTB proposes tax and you agree, paying in full within 15 days of the notice date stops more interest from building. A protest doesn't stop interest.
How far back can they go? The IRS generally has 3 years from filing to assess more tax. That becomes 6 years if more than 25% of gross income was left off the return. California generally has 4 years, and that window is extended when the IRS changes your federal return.
Real estate professional status and passive-loss exams
Federal law treats rental activity as passive, so losses are limited. Real estate professional status (REPS) is the exception. To qualify for a year, you must meet both tests.
- More than half of your personal services in all trades or businesses were in real property trades or businesses in which you materially participated.
- You worked more than 750 hours in those real property businesses.
Hours as an employee don't count unless you own more than 5% of the employer. Spouses can't combine hours to meet the 750-hour test. Even with REPS, each rental has to pass a material participation test on its own, unless you made the election to treat all your rentals as one activity.
Examiners ask for a log made at the time. Calendars, appointment books, emails, and property manager and contractor records all help. A summary built during the audit carries less weight. See how to keep a REPS time log for an audit and our REPS and passive losses page.
California doesn't follow the federal REPS rule. For California, all rental activities are passive, and the difference is figured on form FTB 3801. Even a valid federal REPS claim won't change your California return. See California and real estate professional status.
Cost segregation and depreciation questions
The IRS publishes the guide its examiners use to review cost segregation studies. It describes what a quality study includes, such as preparation by someone with real expertise, a clear method, proper documents, a reconciliation to total cost, and a schedule of assets. An exam usually tests the study against that list.
When we respond, we start with the study itself. We tie the asset schedule to the closing statement and the depreciation schedule, and answer the examiner's questions on method and classification.
California adds its own layer. California doesn't follow federal bonus depreciation, so California depreciation is often lower in the early years. When the federal amount gets carried onto the California return, an FTB notice can follow. See cost segregation and California bonus depreciation non-conformity.
1031 exchange substantiation
In a 1031 exam, the questions are about dates and documents.
- 45 days. The replacement property was identified in writing within 45 days of selling the old one.
- 180 days. The replacement closed within 180 days, or by your return's due date with extensions if that comes first.
- The money. A qualified intermediary held the funds, and you never had access to them.
- Form 8824. It was filed with the return for the year of the sale.
Keep the exchange agreement, the identification letter, both closing statements and the intermediary's ledger. If you sold California property and bought replacement property outside California, California requires form FTB 3840 every year until the deferred gain is recognized. See Form 8824 and Form 3840 and our 1031 exchange page.
How the FTB looks at residency
California taxes its residents on all income, wherever it's earned. When someone moves out of California, or splits time between California and another state, the FTB may ask whether they really left. It looks at where the person has the closest connections. No single factor decides it. The FTB's list includes:
- days spent in California and elsewhere
- where your spouse and children live
- your principal home
- your driver's license, vehicle registration and voter registration
- professional licenses
- where your bank accounts are and where your financial activity comes from
- your doctors, dentists and other providers
Other FTB notices we see from real estate investors include penalty notices for an LLC's missed $800 tax or late Form 568, proposed assessments after an IRS change, and California depreciation mismatches. For estimated tax penalties, see FTB estimated tax penalty abatement.
CDTFA sales and use tax audits
The CDTFA, California's Department of Tax and Fee Administration, audits sales and use tax. That can reach a real estate investor in two ways. One is through a business that holds a seller's permit. The other is use tax on purchases from out-of-state sellers that didn't charge California tax, such as furnishings or equipment bought online.
We represent you in the audit under form CDTFA-392. We review the auditor's schedules and sampling against your records, and answer the auditor's requests. If the CDTFA issues a Notice of Determination and you disagree, you have 30 days from the mailing date to file a petition for redetermination. A timely petition holds off collection of the disputed amount while it's reviewed. The other route is to pay and file a claim for refund.
What to send us, and when
Have these ready for the intro. After it, we'll send you a link to upload them to our secure client portal:
- every page of the notice
- the return the notice is about
Then, as the issue needs:
- REPS: your time log or calendar, your W-2s, and property manager and contractor records
- Cost seg: the study, the closing statement and the depreciation schedule
- 1031: the exchange agreement, identification letter, both closing statements and the intermediary's ledger
- CDTFA: sales records, purchase invoices and prior sales and use tax returns
How it works with LaviCPA
- New Client Introduction. It's free and runs 30 minutes, by Zoom, by phone or at our office. Tell us what the notice says and its deadline. Don't send the notice itself yet.
- Power of attorney. You sign Form 2848, FTB 3520 or CDTFA-392, so we can speak for you.
- The response. We collect the records, match them to the rule and work to the deadline.
- Follow-through. We track the exam or protest through its result, including any required report to California after a federal change. We represent you in IRS Appeals and before the Office of Tax Appeals.
IRS and FTB audit FAQs
Who can represent a Los Angeles real estate investor in an IRS audit?
A CPA, an enrolled agent or an attorney can represent you before the IRS with a signed Form 2848. LaviCPA, a Los Angeles CPA firm at 7707 Sunset Blvd, represents real estate investors in IRS exams, FTB notices and CDTFA audits, with a focus on REPS, passive losses, cost segregation, depreciation and 1031 exchanges.
How long do I have to respond to an IRS audit letter?
It depends on the letter. A 30-day letter generally gives you 30 days to agree or ask for an Appeals conference. A notice of deficiency gives you 90 days to petition the Tax Court, or 150 days if it is addressed to you outside the United States, and that deadline cannot be extended. Always check the date printed on the notice.
How long do I have to protest an FTB Notice of Proposed Assessment?
You must protest by the Protest By date on the notice, which is generally 60 days. After that, the assessment becomes final. If you agree and pay in full within 15 days of the notice date, interest stops. A protest does not stop interest. If the FTB denies the protest in a Notice of Action, you have 30 days to appeal to the Office of Tax Appeals.
What records prove real estate professional status in an audit?
You need to show more than 750 hours in real property trades or businesses and more than half of your working time there, plus material participation in each rental unless you elected to group them. Records made at the time work best: calendars, appointment books, emails, and property manager and contractor records. Employee hours count only if you own more than 5% of the employer, and spouses cannot combine hours for the 750-hour test.
Does California allow real estate professional status?
No. California did not conform to IRC section 469(c)(7). For California, all rental activities are passive, and the difference from your federal return is figured on form FTB 3801. A federal REPS claim does not change your California passive-loss limits.
What does the IRS look at when it examines a cost segregation study?
The IRS Cost Segregation Audit Techniques Guide lists 13 elements of a quality study, including preparation by someone with expertise and experience, a described method, proper documentation, a reconciliation of allocated costs to total actual costs, and a schedule of assets. Examiners usually test the study against those elements and tie it to the closing statement and depreciation schedule.
What documents do I need for a 1031 exchange audit?
The exchange agreement with the qualified intermediary, the written identification of replacement property within 45 days, closing statements for both properties showing the replacement closed within 180 days, the intermediary's ledger, and Form 8824. If you exchanged California property for property outside California, California also requires form FTB 3840 every year until the deferred gain is recognized.
Do I have to tell California when the IRS changes my return?
Yes. You must report a federal change to the FTB within six months of the final federal determination. California generally has four years to assess, and that period is extended when there is a federal change.
Can you help with a CDTFA sales and use tax audit?
Yes. LaviCPA represents clients in CDTFA sales and use tax audits under form CDTFA-392. If the CDTFA issues a Notice of Determination you disagree with, you have 30 days from the mailing date to file a petition for redetermination. A timely petition holds off collection of the disputed amount while it is reviewed.
How far back can the IRS and FTB audit?
The IRS generally has three years from filing to assess more tax, or six years if more than 25% of gross income was left off the return. California generally has four years, extended when the IRS changes your federal return.
Book a New Client Introduction
If a deadline is close, say so when you book or call. Please don't type your Social Security number or tax details into the booking form.
The intro is free and runs 30 minutes, by Zoom, by phone or at our office on Sunset Blvd. It covers fit, scope and next steps. Tax answers come after that, as paid work.
Book a New Client Introduction or call 323-463-2600.
Related pages
- CPA for real estate investors with several LLCs
- Real estate professional status and passive losses
- How to keep a REPS time log for an audit
- Cost segregation
- 1031 exchanges
- IRS first-time penalty abatement
- IRS CP162A notice for S corps
- Real estate CPA in Los Angeles
The information on this page is for educational purposes and is not tax, legal or investment advice. Tax rules change and your situation is your own. Talk to LaviCPA or another qualified CPA before acting on anything here. LaviCPA is a CPA firm and not a law firm.
Sources
- IRS Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund (30-day letter, notice of deficiency, 3-year assessment period): https://www.irs.gov/publications/p556
- Taxpayer Advocate Service, 90-day notice of deficiency (90/150 days, can't be extended): https://www.taxpayeradvocate.irs.gov/notices/90-day-notice-of-deficiency/
- IRC §6501 (assessment periods, 6 years for omission over 25%): https://www.law.cornell.edu/uscode/text/26/6501
- IRS Form 2848 (names the individual representatives): https://www.irs.gov/forms-pubs/about-form-2848
- Treasury Circular 230 §10.3(b) (CPAs may practice before the IRS): https://www.irs.gov/pub/irs-pdf/pcir230.pdf
- IRS Publication 925, Passive Activity and At-Risk Rules (REPS tests, employee hours, spouses, material participation): https://www.irs.gov/publications/p925
- IRC §469(c)(7) and Treas. Reg. §1.469-9(g) (election to aggregate rentals): https://www.law.cornell.edu/uscode/text/26/469 and https://www.law.cornell.edu/cfr/text/26/1.469-9
- Treas. Reg. §1.469-5T (material participation tests and records): https://www.law.cornell.edu/cfr/text/26/1.469-5T
- IRS Real Estate Audit Techniques Guides: https://www.irs.gov/businesses/small-businesses-self-employed/audit-technique-guides-real-estate
- IRS Publication 5653, Cost Segregation Audit Techniques Guide (2-2025), Chapter 4 elements of a quality study: https://www.irs.gov/pub/irs-pdf/p5653.pdf
- Treas. Reg. §1.1031(k)-1(b) (45-day and 180-day rules): https://www.law.cornell.edu/cfr/text/26/1.1031(k)-1
- IRS Form 8824 instructions: https://www.irs.gov/instructions/i8824
- FTB, 2025 Instructions for Form FTB 3801 (California did not conform to IRC §469(c)(7)): https://www.ftb.ca.gov/forms/2025/2025-3801-instructions.html
- R&TC §17561(a): https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=17561.&lawCode=RTC
- FTB, If you disagree with a Notice of Proposed Assessment (Protest By date, 15-day payment and interest, how to protest): https://www.ftb.ca.gov/file/after-you-file/audit/disagree-with-an-npa.html
- FTB, Taxpayer dispute process (Notice of Action, 30-day appeal to OTA): https://www.ftb.ca.gov/file/after-you-file/audit/taxpayer-dispute-process-npa.html
- FTB Publication 7275 (protest rights): https://www.ftb.ca.gov/forms/misc/7275.html
- R&TC §19041 and §19042 (protest period, finality): https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=19041.&lawCode=RTC
- FTB, Submit a power of attorney (FTB 3520-PIT, FTB 3520-BE): https://www.ftb.ca.gov/tax-pros/power-of-attorney/submit-a-power-of-attorney.html
- FTB 2025 Form 568 Booklet (report federal changes within 6 months, 4-year statute, FTB 3840): https://www.ftb.ca.gov/forms/2025/2025-568-booklet.html
- FTB Publication 1031, Guidelines for Determining Resident Status (2025, closest-connections factors): https://www.ftb.ca.gov/forms/2025/2025-1031-publication.pdf
- FTB Residency and Sourcing Technical Manual (Rev. 01/2026): https://www.ftb.ca.gov/tax-pros/procedures/residency-and-sourcing-technical-manual-disclosure.pdf
- CDTFA Publication 17, Appeals Procedures (petition for redetermination, collection held, claim for refund): https://cdtfa.ca.gov/formspubs/pub17.pdf
- CDTFA Regulation 35007 (30-day petition period): https://cdtfa.ca.gov/lawguides/vol1/rta/35007.html
- CDTFA-392, Power of Attorney: https://cdtfa.ca.gov/formspubs/cdtfa392.pdf