Normally her income isn't enough for any filing requirement, but she did take an early IRA withdrawal for 20K that year and did an indirect rollover within 60 days, so theyre right, she needs to file a return to show this BUT you don't see that on the CA return, since it starts with the fed AGI.  

(I'm expecting the CP2000 to arrive any day now, not sure how CA managed to know about it before the feds)

I will be E-filing it, but the printed copy of the return says DO NOT ATTCH FEDERAL RETURN, so how does CA know that the distribution was actually reported?  Does it pick up something from the Federal return in the E-filing?  

I'm guessing CA knows how much it was for or they wouldn't have sent the letter, seems like they would be expecting it to appear on the return, but nothing on the CA return shows the distribution or that it was a rollover.