How FTB and IRS find mistakes in amended tax returns? Are their processes reliable?

Question

I helped my friend to fix her 2011 Tax Return. She initially incorrectly filed form 568 (LLC) for her business that was actually operating under General Partnership structure. After FTB received the amended form 565 (General Partnership) they sent us back a notice informing that they have found a mistake. And indicated code AJ as reason, which according to FTB explanations mean

AJ Limited partnerships (LPs), limited liability partnerships (LLPs), and real estate mortgage investment conduits (REMICs) must pay an amount equal to the minimum franchise tax. However, they are not subject to franchise or income tax.

I just double checked the amended form 565 that we sent them and made sure that I indeed have checked the checkbox J1 General Partnership and that Box 24 is $0, because General Partnerships don't have to pay this $800 Annual fee.

However, FTB is insisting that we still have to pay this $800 fee + penalties. I was actually hoping for $800 refund because this is what she unnecessarily paid together with the original return - I even mentioned this in the explanation letter with all of supporting documents, like, photocopy of $800 check.

Now getting back to the original question - are such errors even possible at FTB end where they incorrectly interpret amended tax forms?

In particular, I am trying to understand:

1. Is it human or computer trying to find mistakes in amended tax returns?
2. Is there really anyone that reads explanation letter attached to the tax forms?
3. Do they scan and archive all of these letters with amended tax forms? I plan to call them and hope that person over phone will be able to explain if this is error at their end or I am mistaken.

Answer 1

The FTB, as any government agency, is understaffed and underpaid. Even if someone took a glance and it wasn't just an automated letter - consider the situation: you filed as a LLC and then amended to file as a partnership. Unless someone really pays attention - the obvious assumption would be that you had a limited partnership.

Yes, you'll need to call them and work with them on fixing this. They do have all the statements you've attached. However, there's a lot of automation and very little attention to details when it comes to matching errors, so don't get surprised if no-one even looked at these statements.

Next time your elected government officials talk about "small government" and "cutting government expenses" - you can remind yourself how it looks in action with this experience.