How Does the FTB Handle Business Tax Collections?

The people who administer state tax laws generally show up in the news only when a newsworthy case is reported, typically one involving tax evasion, a “big fish” going to jail for not paying taxes.

The rest of the time, they’re doing their due diligence, keeping up with bureaucratic changes and working their hours much in the same way we do. They are not people that are looking to shut the doors of thriving businesses. California simply demands what it considers its share of your earnings if you choose to live and do business here.

The FTB is a very powerful organization, and if you find yourself receiving any notification that urges you to do something, I’d advise you not to sit on it.

For business owners, the FTB has established special procedures for its tax collections. It issues notices to business entities with tax concerns and provides business entities repeated opportunities to voluntarily meet their tax obligations.

The FTB notices educate business entities of their legal rights and responsibilities, providing them with FTB contact information. 

FTB Notices are used as a method to gain compliance, minimize enforcement costs, and ensure due process. The FTB must notify business entities in writing about outstanding tax issues, and allow reasonable time for the business entity to comply.

The most common notices are:

• Request for Past Due Tax Return
• Official Demand for Past Due Tax Return
• Single Period Return Information Notice
• Consolidated Return Information Notice
• Notice of Balance Due
• Past Due Notice
• Formal Demand Notice
• Final Notice Before Levy
• Notice to File Tax Returns
• Final Notice Before Suspension or Forfeiture
• Final Notice Before Contract Voidability
• Demand for Tax Return
• Notice of Proposed Assessment

The names of the notices may vary for different entity types.

The FTB must issue a notice prior to action to ensure due process. The FTB’s failure to provide notice before taking action may raise constitutional issues. Notices are generally issued for unpaid tax, unpaid penalty or unpaid interest. 

Beginning February 2001, new tax year liabilities are entered at FTB into the Business Entities Accounts Receivable Collection System (BE ARCS) from the Business Entities Tax System (BETS). 

The purpose of the BE ARCS billings is to advise business entities of their legal rights and responsibilities, and provide them a way to contact FTB for additional information. 

FTB staff must review an account’s billing history and verify that a BE ARCS notice has been issued.

To resolve some tax accounts, the FTB’s desk collectors transfer the accounts to field collectors. This occurs because some business entities evade tax collection, while others ignore it. 

Partnership Collections

When it comes to partnership collections, all general partners are jointly and severally liable for  all the debts and obligations incurred by the partnership. Partners in a LLP have limited liability except for liabilities arising from their own professional malpractice. In a limited partnership, a limited partner has no liability for debts of the partnership unless the limited partner takes part in the control of the business (Corporations Code section 15507).

If the partnership is no longer operating and all partnership assets have been distributed, collection action may be taken against the individual assets of the former partners without concern as to whether equal amounts are collected from each of them.

Each individual partner, depending on that partner's period of association with the partnership, may be held responsible for all, part or none of the total liability of the partnership. When a partner dissociates from a continuing partnership, that partner is generally not liable for partnership obligations incurred after the date of dissociation.

In the case of a disputed tax liability, the taxpayer has the burden of proof to show the liability is not owed. Accordingly, in cases regarding a partner's claim of dissociation, the burden of proving the date of dissociation is on the dissociating partner. Standard appeal procedures apply.

Dissociating general partners are each 100 percent liable for all the debts and obligations incurred by the partnership before dissociation, for the entire time they were in the partnership.

Field Collections

FTB field collectors visit business entities, encourage compliance, verify income activity, document asset information and identify assets for possible seizure (this includes identifying when warrants are needed). 

Following types of cases will be referred to field collectors:

1. Active businesses with valid addresses
2. Accounts with viable assets, including multiple real estate properties
3. Verified non-compliance cases
4. Businesses that repeatedly pay filing enforcement assessments without filing tax returns.
5. Businesses that repeatedly refuse to file their tax returns or pay their tax balances
6. Businesses that routinely abandon one business and start a new one to avoid tax liabilities

Before referring cases to field collections, FTB staff must exhaust other collection actions, mainly notices. The exception is when an account is at risk, such as a business entity liquidating assets to avoid collections or the business entity has a significant non-compliant history.

The internal FTB manual requires that there must be a viable asset in existence to justify field collection, such as a likelihood of income or a known physical asset. An internal field transfer request must demonstrate that the field action has a realistic potential to resolve an account.

When an account is determined to be uncollectible, it is removed from the FTB’s automated billing cycle and is considered discharged. Basically, it happens when the FTB determines that it is not cost-effective to pursue collection of this particular liability.

Upon discharge, the liability still remains due but collection action ceases. Once a year, accounts in collections will receive an annual notice to advise taxpayer entities of missing returns and unpaid liabilities.

Conclusion

If we look at the truth squarely in the eye, we know that the reason we keep compliant with the state and federal tax laws is because we don’t want to be audited. The FTB knows that this is a very unpopular action, but in order to collect state revenues, it’s one of the most important things that they do. 

“Knowing that state auditors might show up to examine the books has kept many a taxpayer from giving in to the temptation to cut corners — or large chunks — from their tax bills,” wrote Billy Hamiliton, in a Tax Notes article.

But we’re human, and as such, can be short-sighted, greedy, or just forgetful. If you’ve received a notice (or several) from the FTB and are unsure how to proceed, give my office a call and let’s talk. I’ll steer you in the right direction and will help you make sure that your business continues to do business.