Barbara Attard has held the auditor position for four years.
City officials created the post in 1993 to have someone oversee the handling of complaints against police officers.
The City Council did not offer an explanation for why Attard was not being offered the position for the next four years.
The city will immediately begin a search process for new police auditor for the term that begins Jan. 1, according to Mayor Chuck Reed's office.
"Barbara Attard's service to the city of San Jose is sincerely appreciated," Reed said in a statement.
Attard issued a statement saying that the decision by the council undermines the position of the auditor.
She said it sends a message to future auditors that if the auditor makes "serious or controversial recommendations, she does so at risk of losing her job."
To function as an independent auditor there must be no fear of termination, she added.
"I am saddened that I will not be serving beyond Dec. 31 of this year," Attard said.
In her annual report, released in June, Attard made several suggestions on how to change the way complaints against police officers are handled.
The San Jose Police Department declined to comment on the council's decision.
