Sam Brotman, JD, LLM, MBA August 24, 2014 7 min read

Franchise Tax Board Assessment

A Franchise Tax Board assessment are usually made on a tax year basis (i.e. per tax year). A missing Franchise Tax Board assessment is usually defined by which type of entity they are. For non-qualified in California corporation, missing years are created when a business entity does business or derives income during a tax year but doesn’t file a tax return. For California qualified corporations - any time a qualified franchise tax filer doesn’t file a return. Business activity and income do not determine the filing requirement for a corporation who has qualified through the California Secretary of State. Missing year assessments enable the Franchise Tax Board to assess taxes due in the absence of a tax return. Missing year assessments can be set up by Franchise Tax Board's automated system or manually by its staff. Franchise Tax Board staff must evaluate the cost effectiveness of setting up a missing year assessment if there is no indication of company's business activity, income, or transferee assessments.

FTB staff will contact a business and will verify the following when making Franchise Tax Board assessments:

• Is the business entity actively doing business (in or out of California)?

• What kind of business does the entity conduct?

• What were the entity’s gross receipts for the certain year(s) of ?

• Does the entity have any other locations?

• Verify all active addresses.

• Gather asset info (bank, accounts receivable, property, etc.).

• Does the entity use a Doing-Business-As (DBA) name? This information is important if

a lien or levy is required.

If a missing year Franchise Tax Board assessment is justified, FTB staff must notify the business entity by mailing form FTB 4960 Notice to File Tax Returns. Then the Franchise Tax Board fills out the missing year assessment form FTB 6923A to determine the income basis of the assessment. The following income sources are listed in priority order by the FTB:

• Taxpayer information

• Board of Equalization (BOE)

• Prior year return

• Industry income average

• FTB determination

Jeopardy Franchise Tax Board Assessment (J/A) are issued when it is determined by FTB that the collection of a tax or deficiency for any year, current or past will be jeopardized. J/As may be issued to a business entity, transferee (a party to whom taxpayer transferred property), or assumer (someone who assumed obligations of taxpayer). A J/A is due and payable at the time assessed and collection action may commence at once. FTB considers that the collection of tax might be in jeopardy if one or more of the following is established:

• Entity received income from illegal sources and has assets that are in immediate danger of attachment (attachment of third party's claim to assets) or assignment (assigned rights away to another person or business).

• There is evidence that the entity is assigning and/or placing assets in the name of a third party for the purpose of concealment.

• Entity is selling business and has not filed tax returns.

• Entity has a previous history of collection difficulty or is a non-filer of tax returns; and the entity has access to a large amount of cash or escrow funds and it is the last verifiable asset of the entity.

• Entity has unpaid liability from tax return(s) filed.

Taxpayer is then sent a Notice of Proposed Assessment, but unlike with regular NPA the taxpayer has:

• 30 days to protest that collections was not in jeopardy

• 60 days to protest on the grounds that the assessment was incorrect

FTB can send jeopardy assessment in conjunction with demand to pay for delinquencies for all years for which liens were placed on taxpayer's assets or/and Order to Withhold for all years' delinquencies for which liens were not placed. To stay collections actions the entity must post a bond for 125% of the amount of jeopardy assessment by FTB, or show substantial evidence that the funds are not in jeopardy.

The following is the income basis for jeopardy assessments:

• Taxpayer information

• Board Of Equalization (BOE)

• Prior year return

• Industry income average

• Collection Filing Enforcement (CFE) basis

The Franchise Tax Board must send a taxpayer letter explaining what information they relied upon in issuing the Franchise Tax Board assessment, detailing method of computation. Also, the Franchise Tax Board must prove a reason why it determined that the collection of the Franchise Tax Board assessment would be jeopardized by delay.

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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