Sorry to hear of the difficulty with the Franchise Tax Board. many practitioners would likely agree in my estimation that it is not the easiest or most pleasant organization to work with in getting disputes settled.
Fortunately, it sounds as though the root cause of the problem has been discovered - the report of the sale of the home.
From what was stated the problem may be resolved if you can show that the house was actually sold in 2002 rather than in 2005.
The fact that ten years have passed will complicate getting documentation that the house was sold in 2002; but that will be what is required as the legal burden is on the taxpayer since the courts give the presumption of correctness to the assessment by the governmental agency. Please do not shoot the messenger, here.
Another factor making it more difficult is your permanent residence in France. There could be documents on file in the county recorder's office in California to show when the sale occurred that are not available online or are mot easy to search except in person.
If you can arrange (or hire) someone to make the search for a deed, tax document reflecting ownership change, release of a mortgage or some such document that could be what is needed to strike down the tax board's assertion of sale in 2005. Attorneys offices and realtors, the lender and the title companies all may have some record of the sale (if retained this long) but it would take legwork to uncover if it still exists.
Often it can be useful to have an experienced local practitioner that has experience working with the agents at the tax board. One possible source to find a California tax practitioner is Find an Enrolled Agent sorting by location and profession (which is specialty Representation)
It may be important and useful to keep notes of any conversations with the agent and to use follow up letters after conversation to memorialize what was said for future reference (and possible appeal purposes). For example, a letter saying something like : "This letter is to clarify what was discussed via telephone on 07/15/2012 when the levy of funds from Bank was discussed. As I understand it the only year in question is 2005 and the only income in question is the sale of a house at 123 old address, CA "
Getting the agent to agree that only certain issues need to be resolved can help focus and limit what is being disputed and stop from going back over the same ground.
It is appropriate to ask what evidence the agent is using to conclude there was income unreported in 2005 and then perhaps be able to check with the source or find a flaw in that evidence. He should be able to assist in getting access to records from 2002 of what was filed. If he can not produce records from so long ago that may bolster your negotiating power if you are also unable to unearth old evidence.
Those actions to dispute and try to disprove the assertion that tax was not paid in 2005 but was in 2002 is one possible course of action. It very likely is best for you personally not to be the one speaking with the agent. A representative can be more impartial and less likely to be disturbed or agitated so can more easily work with some difficult agents.
Rather than trying to get help in California which will be hard, may be long and may or may not be successful in the end; the other real option to consider given the cost and effort to dispute the allegation is to pay the alleged tax. There is a distinct possibility the evidence may not be able to be uncovered from ten years ago and the efforts to find it might be wasted.
Sometimes the dollars are well spent to get rid of the grief and even fear from owing a past due tax. There might still be room for a representative to request (though there is no guarantee and it is a bit of a long shot) a waiver of some penalty due to the lack of warning before the levy occurred on the bank account, intervening time, etc.
As always, the choice is to fight or flee.
Fleeing by paying may be less expensive and less wrenching than trying and not being able to find any evidence.
Fighting does have a possibility of success if the evidence can be unearthed.
Of course, the choice is you and your wife's as to what is best for you.
Please ask if you need more discussion.
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