California Department of Tax and Fee Administration (CDTFA) declared that it its policy is to encourage and assist all taxpayers in making an accurate and timely self-declaration of tax liability. CDTFA will impose penalties when justified by the acts or omissions of the taxpayer. However, whenever there is any doubt as to whether factual conditions justify a penalty for negligence or fraud, that doubt must be resolved in favor of the taxpayer.
Negligence and fraud penalties are based on recommendations submitted to CDTFA by field auditors and their supervisors based on facts they find during audit. CDTFA cannot impose negligence penalty and fraud penalty concurrently because they are mutually exclusive. Only one or the other can be imposed at the same time. The same is true of the penalty for negligence and the penalty for failure to file a return. However, for example, a fraud penalty and a 10 percent penalty for failure to file a return can be imposed in relation to the same amount of tax owed to CDTFA.
Penalties are divided into two categories: mandatory or discretionary penalties. Both categories of penalties are imposed in accordance with provisions of the Revenue and Taxation Code (RTC). Mandatory penalties are imposed automatically, but the taxpayer may receive relief (cancellation or reduction). Discretionary penalties can be assessed by auditors during audits. When there is a choice between discretionary or mandatory penalty, CDTFA will usually apply mandatory penalty. For example, the penalty for failure to file a return (mandatory penalty) rather than the negligence penalty (discretionary penalty) will be applied in those cases where either penalty could be applied.
CDTFA provides examples of the following mandatory penalties:
- Failure to file a return – 10% under RTC 6511 and 6591
- Failure to pay taxes - 10% under RTC 6565 and 6591
- Failure to pay prepayment amounts - 6% under 6476 and 6477
- Amnesty interest penalty - 50% under RTC 7074(a) and Double amnesty penalty 7073
- Failure to pay prepayment amounts by suppliers and wholesalers of fuel - 10% under RTC 6480.4 The rate of penalty is increased to 25 percent if the supplier or wholesaler knowingly or intentionally fails to make a timely remittance of the prepayment amounts.
Discretionary payments include:
- Negligence or intentional disregard of the law or authorized rules and regulations (can be applied in a variety of circumstances) - 10% under RTC 6478 and 6484
- Fraud or intent to evade the law or authorized rules and regulations - 25% under RTC 6485 and 6514
- Improper use of a resale certificate for personal gain to evade the tax penalty can be imposed under RTC 6072 and 6094.5 (10% of the tax due or $500 whichever is greater)
- Failure to remit sales tax reimbursement or use tax collected - 40% under RTC 6597
- Knowing failure to obtain a valid permit for the purpose of evading the payment of tax - 50% under RTC 7155
- Registration of a vehicle, vessel, or aircraft outside the State of California for the purpose of evading the payment of tax - 50% under RTC 6485.1 and 6514.1
- Failure to obtain evidence that the operator of catering truck holds a valid seller’s permit - $500 under RTC 6074
- Failure of a retail florist to obtain a permit before engaging in or conducting business as a seller - $500 under RTC 6077
Penalties are billed on a Notice of Determination sent by CDTFA to taxpayer and can be protested, or even canceled, if they are found to have been imposed by CDTFA by mistake. Only CDTFA can make a decision to impose penalties and any change in penalty must be made only by the elected CDTFA members – the CDTFA. This means that auditors generally can not on their own impose penalties.
Relief From Mandatory Penalties
The CDTFA is allowed to remove (cancel) mandatory penalties when taxpayers fails to pay taxes or file a return for a good reason and because of circumstances beyond his or her control. However, the taxpayer must still be able to prove that he or she exercised diligence and did not simply neglect tax obligations.
Taxpayers who wish to request a relief from penalties must do it after they receive a determination letter form the CDTFA. Taxpayer must present a request for relief in a written statement, under penalty of perjury, explaining the facts on which the request is based. The use of CDTFA Form CDTFA–735, Request for Relief from Penalty (available at www.CDTFA.ca.gov), is recommended but not required. After submission of the written statement by taxpayer, CDTFA will review and approve or deny the request. Recommendation to approve or deny a request for relief above $50,000 is usually forwarded to the CDTFA Deputy Director for additional review and then submitted to the CDTFA for consideration.
Even if taxpayer's request for relief from penalty is denied, taxpayers can apply to CDTFA for reconsideration of the negative decision. For penalties of $50,000 or less, CDTFA sends taxpayer a denial letter, in which it usually explains that the decision to recommend denying relief from penalty can be reconsidered by CDTFA if the taxpayer provides new information within 15 days of the denial letter. The letter also explains that if the taxpayer provides additional information and the CDTFA staff still recommends to deny taxpayer's request, the request for relief will then be reviewed by the Deputy Director. If the Deputy Director agrees with the recommendation to deny the request, the Deputy Director will send a letter to the taxpayer saying that he or she agrees with the CDTFA staff recommendation. Despite established 15-day deadline, CDTFA may still consider information received from taxpayer after 15-day period has expired.
Penalty for Failure to File a Return
CDTFA can impose penalty for failure to file a tax return. Every taxpayer with active CDTFA account is required to file returns at regular intervals as required by the law and CDTFA. RTC section 6591 imposes a 10 percent penalty for failure to file a return on the amount of taxes due, with respect to the time period for which that return was required. For example, if the taxpayer is on a monthly reporting basis and failed to file a return for only one month during a period under audit, a penalty would apply only to tax due for that month.
Failure to Pay Penalty
Revenue and Taxation Code section 6591 imposes a 10 percent penalty for failure to pay tax if tax is not paid on time, as follows:
- To self-declared tax, when not paid on or before the due date of the return or before the expiration of any extension.
- To determinations made by the CDTFA, when not paid on or before the penalty date shown on the Notice of Determination, unless a timely petition (for redetermination) has been filed.
- To redeterminations, when not paid on or before the penalty date shown on the Notice of Redetermination.
RTC section 6565 imposes a 10% penalty for failure to pay amount determined by the CDTFA if it is not paid before or on the date determination becomes final (30 days after service of the notice of determination on taxpayer). However, this period is extended if the taxpayer files a petition for redetermination with the CDTFA.
RTC section 6476 imposes a 6 percent penalty on the amount of a prepayment that is paid late, but which is paid before the last day of the month following the quarter in which that prepayment was due. If the failure to make the prepayment was because of negligence or intentional disregard of the Sales and Use Tax Law or other rules and regulations, RTC section 6477 is increased by RTC section 6478 to 10 percent instead of 6. The same 10 percent penalty applies under similar circumstances to any deficiency in prepayment. The penalties imposed in RTC sections 6479.3 and 6591 apply to taxpayers who are required to pay taxes by means of Electronic Fund Transfer (EFT) but fail to do so. Prepayment penalties are not assessed in sales and use tax audits.