FTB Dishes out Penalties in Droves

If you’re familiar with the way the California Franchise Tax Board (FTB) operates in the process of collecting delinquent taxes, then you know that they impose a bunch of different penalties.  There are some common sense penalties, like the penalty for filing late and the penalty for paying late. But there are some other more obscure FTB penalties that may surprise you:

1. Cost Recovery Fees

If the FTB has to do anything to collect the tax due (besides sending you a bill), then they are likely going to charge some sort of collection fee.  And when I say “anything,” I mean anything, such as filing a tax lien, seizing and selling property, intercepting a federal tax refund, filing enforcement, and even simply assigning your case to the collections department.  The fee is supposed to cover the theoretical costs of these revenue collection efforts and I’m sure are rarely commensurate with the actual collection costs.

2. Dishonored Payment Penalty

If your check bounces, or your FTB payment is otherwise rejected due to insufficient funds, then FTB will impose a $25 penalty.  If your payment is $1,250 or more, then the penalty is 2 percent of the payment amount.

3. Mandatory e-Pay Penalty

Certain large payments over $20,000, or payments made where the total tax liability exceeds $80,000, must be made electronically according to California law.  The California tax underpayment penalty imposed by the FTB is 1 percent penalty for failure to comply.

4. Demand to File Penalty

If you don’t file your tax return by the filing deadline, then FTB charges a 25 percent late filing penalty.  If you still do not file after FTB demands that you file, then they will impose a 25 percent penalty on top of the initial failure to file penalty.  This is particularly brutal because they can actually impose penalties and interest even if your tax return shows that a refund is due!

5. Estimated Tax Penalty

This is the penalty imposed  for failure to pay an estimated tax installment.  It also applies when you pay late or underpay.

6. Post-Amnesty Penalty

Taxpayers who have been granted amnesty for any particular tax year must not subsequently owe any new or additional tax, otherwise… you guessed it, another penalty.

OIC Fees: It Matters How you Pay

A question came up recently about whether or not a taxpayer must submit his or her Offer in Compromise fees in the form of a cashier’s check or money order as opposed to a personal check.

Just a little background first.  When filing an Offer in Compromise, you must submit two payments: one is the $186 application fee, and the other is the 20% deposit or initial offer payment.  That’s 20% for “cash offers” or the first of 24 payments for “periodic payment” offers (the difference between these two types is not relevant here and could be the subject of a completely different blog entry).  If either of these payments are missing or insufficient, the offer is almost certainly going to be returned and you’ll have to start all over again.

First of all, the IRS does not require cashier’s checks or money orders.  In fact, the instructions in the Form 656 Booklet specifically state that a taxpayer may send a “personal check, cashier’s check, or money order.”  However, what is required is that the money be available in your personal checking account when the personal check is cashed by the IRS.  Since a cashier’s check or money order is already paid for, there is no risk of insufficient funds.  Therefore, if your tax attorney asks for a cashier’s check or a money order, he is not being a jerk, he is being cautious.

Offer in Compromise Fees

Sometimes taxpayers are not 100% clear about the role of the IRS.  Some IRS employees can be very convincing and will lead people to believe that they only want to help and provide some kind of service to the taxpaying public.  This is a nice concept (and one that is embraced by IRS mission statements as well), but it is not reality.  The reality is that the IRS exists to collect revenue, and only to collect revenue.  The more one delves into the “back office” of the IRS, the more obvious this becomes.  This fact is emphasized over and over (both explicitly and implicitly) in official IRS policies and procedures.

One example of this is seen in the Offer in Compromise (OIC) process, specifically with respect to OIC fees.  The IRS accepts offers from taxpayers who have very little to give in the first place, so it is interesting how the IRS places such a big emphasis on the accompanying OIC fees.  An OIC must include a non-refundable $150 processing fee and a 20% deposit (20% of the offer amount).  In fact, if either of these payments are missing then the offer is deemed “Not Processable,” and is returned to the taxpayer.  Yes, there is a fee waiver process for taxpayers who fall below the poverty line, but it rarely works as it should.

Also, IRS employees are given specific instructions on how to categorize offers that are received in Centralized Offers in Compromise sites based on whether or not the OIC packages include money.  IRM 5.8.2.2 lists the different categories, and I don’t believe it is any coincidence that the offers with fees are at the top of the list.

IA Set-Up Fees

The IRS charges a one-time processing fee for setting up an installment agreement (IA). The fee is $105 for most people. However, if you agree to a “direct debit” IA — meaning that you allow the IRS to automatically debit your bank account each month — then the IRS charges only $52. This option is attractive, but some taxpayers are reluctant to give the IRS their bank information and would rather just send them a check. The IA set-up fee is even lower ($43) if your income is below the IRS’ poverty threshhold.

The IRS is usually willing to take the set-up fee out of your first payment as long as the payment amount is sufficient to cover the fee. For example, if your set-up fee is $105 and your monthly payment is $200, then the IRS will take $105 out of your first month’s payment and apply $95 to your back tax debt.

If you can afford to pay your entire tax debt in 3 months or sooner, then the best option is to obtain a “120 day extension to full pay.” You only have 3 months to pay, but you completely avoid having to pay any kind of set-up fee.

Fee Increase for California Installment Agreements

Starting October 26, the Franchise Tax Board will be raising the fees for installment agreements as follows:

Personal Income Tax Installment Agreements: $34 (previously $20)

Business Entity Installment Agreements: $50 (previously $35)

See the Installment Agreement information page for more information, but note that it has not been updated with the new amounts yet.

Fees are still subject to change (again) without notice.