As a tax attorney, I get asked a lot of questions everyday regarding – you guessed it – the rather specialized world of California taxation. To be sure, some questions are asked more frequently than others. In light of this, I’ve given some thought to four frequently asked questions and hope that my answers provide you with the information that you’re interested in.
The first thing that I would tell you about setting up a payment plan for delinquent tax liability is California is going to be much more aggressive in the payment of that liability than the IRS will be. California is pretty cash-strapped, so the thresholds for the seriousness of a certain liability are a lot lower than they are at the IRS level.
For example, if you owe $20,000 to the IRS, to them, it is not that huge of a deal. The IRS has hundreds of thousands of people who owe them $20,000. In California, a $20,000 liability would get you into what is called the complex account recovery unit.
California takes smaller liabilities much more seriously than the feds do. They are a lot quicker to assess them, too. As well, they are a lot quicker to take collections actions and they are a lot more aggressive in those collections actions.
One of the problems in dealing with the State of California is that everything with the IRS is usually pretty formulaic and it is regulated by the internal revenue manual. In California, the franchise tax board (CDTFA) is the administrative agency that governs income tax.
The CDTFA has a collections manual, but it is nowhere near as in-depth or as detailed as the IRS manual. Because of the lack of detail, there is a lot more discretion that is given to the frontline collection agents and the managers.
What naturally tends to happen is California squeezes taxpayers a lot harder and they demand more stringent payment terms than the IRS would. Generally speaking, when we have a client who has an IRS liability and a franchise tax board liability, oftentimes, we will deal with the state first knowing that they are going to be the most aggressive and then we will deal with the IRS second.
The reason for this is if the state gets their pound of flesh and gets out of this, then we can probably negotiate a much easier resolution with the IRS. Just know that the state is going to put you under a tougher financial standard.
The payment plan timelines that they are requesting are going to be a lot shorter and they are not going to be as flexible with their deadlines.
When we do a state payment plan, they are generally pretty quick. It gets us documents within a week or a few days turnaround and a decision very quickly. There is usually a lot of pressure that goes along with that.
In fact, one of the reasons why our practice is centered around California tax issues is because even though people have liabilities with the IRS that are much, much greater than what their state liabilities are, there is more pain at the state level.
The systems that I have talked about in the past and the lack of a judicial check on the administrative tax agencies in California, creates a lot of problems for people and it is very difficult setting up collections resolutions with them.
This is particularly true for any state liability that is $20,000 or more, that is going to involve the complex account recovery unit at the franchise tax board. or any liability that involves the Employment Development Division (EDD), which administers payroll taxes or the CDTFA. The CDTFA is very, very aggressive and very inflexible, particularly for active businesses.
Any time that you have a business liability with California it is very difficult to get those negotiated. My recommendation is that you speak with an expert on the subject, get an attorney involved, and work on protecting the cash flow of the business so that California does not come in and just drain everything out of the business's operating account.
From an individual perspective, you do not want to commit to a payment plan that is going to be too aggressive and that you are going to struggle to keep up with. Again, take into consideration your situation, your family, how much you need, and then negotiate collections resolutions that satisfy the interest of the government but still protect you, your personal cash flow, and what you need to live.
My recommendation for payment plans when you are dealing with the state, is to bring somebody in to help you negotiate, particularly if you start having problems with the state’s representative.
It depends. Innocent Spouse (IS) relief is a highly factual situation. It is really difficult for me to give you a “yes” or “no” answer on this one. What I will tell you is much like everything with California, it is a little bit more difficult to deal with California and to get determinations versus on a federal level.
When it comes to innocent spouse relief, you really have to jump through a few hoops with California in order for them to make that determination.
If a husband and wife or registered domestic partnership (registered with the Secretary of State) owe a tax/fee to the CDTFA, both parties are individually and jointly liable for the amount due when the account is registered as a co-ownership or a partnership.
However, California law recognizes that it is not always reasonable or equitable to hold a spouse accountable for the liability when certain conditions exist. Innocent Spouse (IS) claims usually occur when spouses divorce, separate, or no longer live with one another.
Generally, the requesting spouse claims that he or she was not involved with the business when the liability was generated. The burden of proof for this claim rests with the requesting spouse.
A claiming spouse whose request for IS relief is denied may still be eligible for Equitable Relief (ER). The claimant has 30 days from the date of the denial letter to file a request for ER. If the claiming spouse does not respond within 30 days, the CDTFA assumes that the claiming spouse is not interested in pursuing equitable relief and the OIC Section will close the case file.
Many of our innocent spouse cases in California will end up in appeals or with some hearing officers. The important thing getting all of your facts straight at the beginning of your innocent spouse application.
You want to make sure that you have a sequence of events, that you have a timeline, and you state a good case for why you deserve getting innocent spouse relief. You want to put a package together with as much information as you can.
The more comprehensive you are at the beginning, the more likely your innocent spouse claim will go through. Once you put that together, the franchise tax board will usually issue you some sort of response. Having this put together and really being comprehensive is important because it limits the avenues for any attack that the CDTFA would have.
Also, understand that there is a robust appeals process, so should your innocent spouse claim get denied, you have the option of going through that.
Because innocent spouse is a factual determination, it is something that you should definitely consult with an attorney on – someone who is familiar with the law and the procedures of pushing these things through in California.
As I have previously explained, California is going to put you through a much more rigorous standard than the IRS. This is because the procedures that govern financial analysis for California are generally a lot looser than the IRS, and it is up to the discretion of the individual agents.
While there are a lot of good people who work for the State of California, in general our firm's experience with California has not been very positive. Some collections agents have said some pretty ridiculous things to our clients over the years or have taken very unreasonable positions with respect to things.
This is particularly true with our business clients. The state is very, very harsh on businesses. When collections have a business in their sights, they see revenue coming in.
Because businesses are often seen as cash cows, they rarely take the time to understand that when a business generates revenue it also generates expenses. Revenue does not come from thin air, you either have to have goods sold, which costs money (i.e cost of goods sold) or you have to have services provided and you have to pay for the cost of said services.
No matter what the business is producing there is a cost to it. The state does not understand that because most collection agents have never run a business before.
Understand that what you are going to be put through during the financial analysis is pretty rough, and that is because of a lack of defined standards. However, there are various forms that get submitted with each of the different state agencies. For example, for the franchise tax board, you will need to submit a 3561.
Form 3561 is designed to do the same thing as the IRS forms do, which look at the available assets. They target any equity in those assets, looking for anything that they can squeeze out of them.
Next, they will put you through an income and expense analysis in order to determine how a taxpayer can satisfy an outstanding liability. The California Franchise Tax Board may require substantial documentation and substantiation in order to prove expenses and income.
This process will be closely scrutinized by the FTB in order to find any and all taxable income. When it comes to an income and expense analysis, it is important to shape a narrative that paints the whole story of a business – an entity that has to spend money in order to make money.
This is a very interesting subject and one that tax practitioners talk about quite frequently. The first way California tracks you is through any filings that you do with a statement. For example, everybody in California files a tax return with the Franchise Tax Board and you have an address with them.
They use the address based on your FTB returns and the addresses that are submitted to third parties like banks and credit institutions to track your current information.
Another way is pulling your credit report. The State of California has access to the same credit report that you can pull through Experian or TransUnion, only they use it to locate taxpayers and their assets.
California also gets data from the IRS. The IRS has an expanded taxpayer database, particularly for taxpayers who have moved out of California or might be in other places.
The federal government is often a much more reliable and more accurate source of information. If those options fail to find the targeted taxpayer, the state – particularly if they are serious – uses a program called Accurint.
Accurint is a massive public records database. As you think about it, you and I go through our daily lives. We have utility bills. We have a driver's license. We have voting records. All these things are available and can be made public record.
Accurint collects all of that information into a database that the CDTFA agents, government agents, law enforcement and varying degrees of people have access to. It is very, very accurate and specifically focused on helping them find you very quickly.
The final thing that the IRS and collections uses – which really should not come as much of a surprise – is the internet. They do Google searches. They look on social media and they have an increasing reliance on those sources of information plus other sources that are culled through big data.
I hope that I have fully answered the 4 frequently asked questions about California state taxes to your liking. The CDTFA, FTB and EDD are three of the least forgiving tax organizations in the U.S. to deal with when you get behind, or “forget” to pay your taxes. California has a long reach with a lot of people working in and for the system.
California collections agents are generally not that friendly, rarely listen to sob stories and want you to pay what you owe, as well as any penalties and interest accrued immediately if not sooner.
That’s why it’s a good idea to consult a tax attorney if you have received a letter from one of them. Or, maybe you’re going through a divorce and there’s a family business involved with some tax issues you didn’t know you had... or maybe you neglected to pay your payroll taxes for the last 8 years...in any case, give me a call.
"Sam is a wonderful, results-oriented and extremely knowledgeable and talented attorney, who really has 'heart' in working on behalf of his clients, and explains options in a straightforward, respectful manner. He has assisted us with great outcomes which have added to our quality of life. I would not hesitate to recommend Sam for his services as he is an ethical, personable and expert attorney in his field. You will likely not be disappointed with Sam's work ethic, approach and his efforts."
-Aileen Dwight, Licensed Clinical Social Worker & Psychotherapist
Last updated: May 27, 2023
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