FTB Penalties at Every Turn

Can anyone keep track of all the different California Franchise Tax Board (FTB) fees and penalties? If you owe taxes, you’ve got to keep an eye on them, or your tax liability can quickly get out of hand. At a minimum, you should know that they exist.

The most obvious penalties are the “late filing penalty” and the “late payment penalty.” The late filing penalty is imposed for filing after April 15th, or after the extended due date, as the case may be. The amount of this penalty is 25 percent of the amount due. The late payment penalty is assessed if the full tax on the return is not paid by the original due date. The penalty is 5 percent of the amount that was not paid, plus .5 percent monthly, until it is paid (subject to a 25 percent maximum).

Other common penalties include the “estimated tax penalty” and the “demand to file penalty.” Obviously if you are required to make estimated tax payments and you either don’t pay in full or pay late, you’ll be subject to the estimated tax penalty. The demand to file penalty is almost what you’d think. If FTB sends you a letter demanding that you file a certain tax return, or provide certain information, and you disregard it, they will impose a 25 percent penalty. The catch is that they figure the penalty based on the FTB’s assessment before applying any payments or credits (not your own return), which sometimes has seemingly unfair results. Where else might you owe penalties and interest even if your tax return shows that a refund is due? Not with the IRS, that’s for sure.  The IRS does not typically care if you file a return if that return is going to result in a refund.

I do understand the rationale of requiring a return, even if reported income and withholding information suggests that no tax would be due. The reasoning is that the FTB simply wants the taxpayer to certify (by filing a return) that there is no additional income or taxable events that may have not been reported by third parties.

There are also a number of “cost recovery fees” that could be imposed by FTB that drive up the balance of a tax bill. FTB charges a fee if your account is assigned to filing enforcement or to collections. There are also fees associated with filing a tax lien or seizing and selling property. You can read all about FTB collection procedures in publication 1140.

The first step in taxing space starts tomorrow in Sacramento

Have you ever thought about space travel? Or even being one of the first human colonists to Mars? If you have, you should also be prepared to pay a tax. Seriously. That’s right, with the developments in space exploration, the Franchise Tax Board (FTB) is preparing to develop a tax strategy for space travel and commerce.

Taxation strategy of the final frontier begins tomorrow in Sacramento during an interested parties meeting at the FTB’s mother ship. If you didn’t book your tax space voyage in time, you can still attend by phone by calling (877) 923-3149 at 10:00 a.m. Enter the participant pass code 2233420, followed by the # sign.

The official captain’s log for the meeting is to discuss possible regulatory efforts for the apportionment and allocation of income derived from space transportation activities, including the transportation of people or cargo into and from Space. I didn’t think it would be possible, but even the FTB can make this meeting sound boring.

According the news release issued by the FTB, during the upcoming initial meeting, FTB staff members will solicit input from industry and practitioners on issues that may arise in the application of a regulation on such space activities, including, but not limited to:

– How should space transportation activities be defined in a regulation?

– At what point should aircraft or space vehicles be considered as traveling into space?

– How should unsuccessful missions be treated?

– What apportionment factors should be used to apportion and allocate income from space transportation activities? How many apportionment factors should there be, and how should they be weighted? Launch factor, recovery factor, mileage factor, or some other factor?

– Should a regulatory effort address the potential for “nowhere income,” and if so, how should it be addressed?

– What issues might be encountered with combining space transportation activities with a taxpayer’s other trade or business activities?

– Should a regulatory effort distinguish between transporting cargo and people?

– Any other issues that industry believes FTB staff should consider.

Isn’t this exciting!? I do wonder however if a Foreign Bank and Financial Account Report (FBAR) will be required if life is found on Mars, and a human opens a bank account there? I suppose that’s a federal question and the July meeting, I further suppose, is limited California state tax matters.

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.

FTB Call-Back Service

There are many things that the California Franchise Tax Board (FTB) does that I would hope the IRS never adopts.  But some might appreciate it if the IRS would follow the example of the FTB when it comes to their customer service phone lines.

Clearly the IRS could never deliver the same level of customer service as a state taxing entity, due to the insanely large number of calls that IRS gets each day.  I don’t think anybody really expects them to compete on that level.  Likewise, it is naive to think that the state should be able to answer every call as it comes in without leaving taxpayers on hold.  However, FTB has figured out a way to make it much more convenient for the caller.  The FTB phone system has a feature that allows the taxpayer to request a call-back during times of heavy call volume.  The system estimates about how long you’ll have to wait on hold if you choose to hold, and then gives you the option of leaving your name and number and having a customer service rep call you back during that same time frame.

This call-back feature is handy for tax attorneys and tax practitioners, but it is especially useful for unrepresented taxpayers.  I have used the call-back feature a few times, but I typically do not mind holding either.  I often have a handful of cases that are queued up and ready to go once they pick up, and while I wait there’s always Instagram and TIGTA reports, but mostly Instagram.  But taxpayers calling in on their own case can be really discouraged by a 30+ minute wait, and it is nice to have the option of saving your place in line without actually waiting on the line.

I understand the administrative burden this feature would cause though.  It’s not a huge amount of extra work, but even a little extra work on such a large scale can be reason enough to just maintain the status quo.  IRS customer service has really gone down the toilet in the last few years, so really status quo wouldn’t seem too awful right about now compared to any additional slippage in service.

More than half of Stanislaus’ FTB non-filers live in Modesto

The Franchise Tax Board is beginning its annual force filing season. Haven’t heard of force filing season? If you are one of the million plus people that the FTB is currently investigating, you will soon.

Force filing season is where a taxing government seeks to file an estimated tax return for you, when the government did not receive a tax return from you. The procedure is a profitable one. Last year the FTB collected more than $715 million through its force filing investigation and assessment efforts.

Since we’re now in tax season, the FTB knows that you should be thinking about your taxes. So, this is the time of year that the Franchise Tax Board notifies taxpayers that it didn’t receive a tax return from a particular tax payer and that it believes that a tax return should have been filed.

If you live in Stanislaus County, in Modesto particularly, you may need to contact a Modesto tax attorney in short time. Of the 6,696 Stanislaus taxpayers that the FTB is investigating, 3,570 of them live in Modesto. That’s more than half of the Stanislaus taxpayers that will likely need a Modesto tax attorney.

The first step in the force filing investigation is for the Franchise Tax Board to identify social security numbers where a tax return was not received by the tax return deadline. The FTB then compares those social security numbers to information provided by banks, employers, local governments, the IRS, and other third parties. If the Franchise Tax Board believes that you were required to file a California tax return, but did not do so, you will receive a tax return demand letter.

So if you are one of the 3,570 Modesto residents that recently received one of these tax demand letters, or one of the remaining 3,126 who live elsewhere in Stanislaus County, you have a potential tax debt looming. Our Modesto tax law firm may be able to help you. Speak directly to one of our Modesto tax attorneys by calling us at (209) 248-7157.

California FTB frustrated the poop out of someone this week

Are you frustrated with California’s Franchise Tax Board? The Sacramento tax collectors at the Franchise Tax Board must have frustrated, or possibly scared the poop out of someone recently with their collection efforts. For obvious reasons, in a story not widely publicized this week, someone recently took FTB tax relief to a lower level.

Earlier this week a package sent to the Sacramento FTB office containing a brown liquid with a strong odor required the Sacramento Metro Fire Department to be summoned. Franchise Tax Board personnel, possibly working to assess and collect taxes against the sender of the anonymous package, had to emerge from the bowels of their Sacramento taxing office as a level two hazmat emergency caused an evacuation. The cause … dog poop!

Based on the stress and sleepless nights caused by FTB tax audits and Franchise Tax Board tax collections, I’m surprised it was only dog poop that was sent. Apparently, you can order a variety of crap through the internet. Literally, ranging from elephant crap to cow dung.

Obviously, these types of tax relief tactics are not tax relief at all. They’re a useless waste of time and dangerous. The sender will also likely be in more trouble now than they would have been had they used actual tax law strategy to resolve a tax problem and build a collection defense. Using legitimate legal means to resolve a tax debt will often relieve the stress caused by the taxing agency whether it’s the FTB or the Internal Revenue Service.

IA Eligibility Requirements

Who is eligible to pay back taxes to the California Franchise Tax Board via an installment agreement?  It can be a little complicated.

It’s difficult not to compare FTB and IRS collection tactics.  Both almost always first demand/request payment in full.  The collection notices are worded in a way that if you don’t read beyond the first sentence, it will appear that full payment is your only option.  And when you call them up, that’s the first thing out of their mouth.  IRS will usually say “Do you have the ability to pay your tax bill in full?” If you cannot write them a check, then the discussion typically shifts to what is required for an installment agreement.  However, the FTB will often (at least at first) demand full payment without regard for your ability to pay and then very reluctantly tiptoe around the option of paying back your taxes in installments.

The eligibility requirements for an FTB installment agreement are more stringent than the IRS requirements.  First and foremost, it is very difficult to obtain an installment agreement with FTB if you have an active earnings withholding order (EWO).  An EWO is just another word for “wage garnishment” or “wage levy.”  Once the FTB has brandished this collection tool, and they have a steady stream of payments coming in, it is very difficult to convince them that they should trade these “guaranteed” payments for a promise to pay from the taxpayer.

Like the IRS, the FTB does require that all back tax returns have been filed so there is no question as to how much is owed.  Also, like the IRS, FTB requires that the entire tax debt be paid off within a specified time frame.  They give as much as 60 months for some tax debts, but only 36 months for others.  The IRS will allow a full 72 months for tax debts under $50,000.

Both FTB and IRS recognize certain events that will cause an installment agreement to default.  Some of these events include (a) failure to make timely payments, (b) failure to timely file a future tax return, and (c) incurring a new tax debt.

Whether you owe FTB or IRS (or both) it would be a mistake to think that you can always just request an installment agreement to avoid enforced collection action.  It’s not always that simple.

FTB Holding $16 Million in Returned Tax Refunds

When you move to a different residence, do you immediately contact your creditors to let them know where you are?  Suuuure you do.  When you get around to it…

It’s no secret that some people spend their lives moving from place, just one step ahead of the IRS or other taxing agencies.  Although certainly not advisable, some people have good reasons for keeping their location a secret.  And then there are the others.  The brilliant 45,000 or so people in California who haven’t claimed their prior year state refund(s) yet.  The refund amounts range from $1.00 to $54,000.00 (total more than $16 million), and a majority of these people simply moved and didn’t update their address with FTB.  In other words, it isn’t so much that they haven’t claimed the refunds, but they were returned by the Postal Service due to the FTB having a bad address.

There is an easy fix to this problem.  Keeping your address up-to-date would be one way, but there is an even better fix.  DIRECT DEPOSIT.  If you use direct deposit for your tax refund, you get your payment so much quicker, and if you move you still get paid right on schedule (assuming you didn’t change banks).

FTB Updates Top 500 List

The California Franchise Tax Board (FTB) updated its “Top 500 Delinquent Taxpayers” list this week.  And to dispel any doubt about the effectiveness of this program, FTB also announced that the list shrunk to only 350 before it went live on their website.

Two times a year, the FTB publicizes a list of individuals and corporations with the biggest state tax debts.  Those on the Top 500 list are identified by name, city/state/zip, amount due, tax lien filing date, and information about state-issued licenses.  The license information is relevant because one of the consequences of being in the Top 500 is the FTB has the authority to suspend state-issued licenses such as drivers license, contractor license, state bar membership, medical board, bureau of real estate, department of insurance, etc.

There are several doctors, attorneys, real estate agents, and contractors on the Top 500 list.  There are about 14 individuals shown to be licensed by the State Bar of California and, interestingly, all but one of those licenses are still active.  The one that is no longer active bears the status of “disbarred,” which leads me to believe that the bar itself revoked the license, not the FTB.  Perhaps the FTB understands that suspending a bar license would severely restrict its ability to collect what is owed.

At the top of the list is the individual with the largest state tax debt on the books — the one I like to call “the winner” — Mr. Mon Bill Hom of Los Angeles.  Hom happens to be an attorney with an active bar license.  He owes $6.3 million, with tax problems dating back at least to 1995 (the year the tax lien was filed).  In looking at his state bar profile, it appears that he was suspended for two years back in 1999 after the IRS cleaned out his client trust account and he didn’t have the money to replace it.

I started this post by saying that the Top 500 list is an effective enforcement tool.  Back in August the FTB sent out letters to the potential Top 500 candidates explaining to them that they can avoid being publicly named by resolving their accounts before October 15th.  And in a span of about two months, 150 of them came forward and resolved their accounts with the FTB by either paying in full, entering into an acceptable installment agreement, or settling by way of Offer in Compromise.  I’m sure some of them appealed their cases or filed bankruptcy (which also results in removal from the list), but FTB stated that it was able to collect $5.3 million specifically from debtors trying to avoid the Top 500 list.  I’d call that a success.

The Taxpayers' Rights Advocate's Big Announcement

You’ve probably heard of the National Taxpayer Advocate Service (TAS) — this is the quasi-independent agency charged with looking out for the rights of taxpayers across the nation.  They like to say that they’re “your voice at the IRS.”  The head of TAS is Nina Olson and she has made her way into this blog on several occasions.  And if you live in California, you may know that we have a state counterpart to TAS called the Taxpayers’ Rights Advocate’s Office, the top advocate being Steve Sims.

These advocate groups, on both the national and the state level, love to point out what they have done to fight for the average taxpayer in the name of tax relief.  So I wasn’t surprised to see a self-congratulatory statement from Sims in the July 2013 edition of the FTB Tax News newsletter.  And I wasn’t surprised that the statement had to do with increasing the lien filing threshold for Californians with state tax debts.  The IRS did this too some time back as a way to help those who struggle with heavy tax burdens in a down economy.

A tax lien is a collection tool used by both the IRS and FTB to protect their interest when taxes are owed.  When a notice of tax lien is filed, it puts other creditors on notice and acts as a smudge on that person’s credit.  Increasing the threshold for lien filings is a good thing for both taxpayers and the taxing entity; it has been shown that they are one of the least effective tax collection tools anyway.

So, what was surprising then?  Well, Steve Sims announced that FTB “increased the general guideline amount for filing a lien from $1,000 to $2,000 beginning in July 2013.”  What a miserable little success that was for him and his staff!  Hardly worth bragging about in my humble opinion.