If you have an outstanding tax liability owed to the California Franchise Tax Board (FTB) past the due date, your tax bill is at risk of growing much larger over time. By law, the Franchise Tax Board must charge interest on unpaid taxes. This interest is charged from the due date until the date it is paid, is adjusted twice a year, and compounds daily.
On top of this interest, a delinquent penalty rate is charged. The rate is 5% of the total unpaid tax, and a further 0.5% for each month or part of a month over the due date that the tax remains unpaid, up to 40 months. Other penalties for returned checks, understatement, negligence and fraud may also add to the overall total owed to the FTB. There is no “reasonable cause” exception for interest due on your tax assessment. In some specific cases, however, you may qualify for tax interest penalty abatement. This concession from the FTB can make paying your late taxes less of a burden.
Interest penalty abatement is the reduction or elimination of interest penalties under certain (often extraordinary) circumstances. The rules around tax interest abatement are very specific, and if you are seeking abatement, you must be prepared to present evidence proving that you meet the strict requirements. Reaching a successful abatement agreement with the Franchise Tax Board requires good information and careful preparation.
There are six recognized circumstances under which the Franchise Tax Board will consider tax interest abatement. Each has its own specific rules and requirements which must be met in full when applying for abatement.
The extreme financial hardship circumstance applies only to individuals, not to corporations, and you must be able to prove that your financial hardship is the result of a catastrophic circumstance or a significant disability. If you are requesting an abatement under these grounds, you will be asked to include the following with your application:
If your tax liability is due to the FTB issuing too large a refund, you are not required to pay interest on the overage amount. This circumstance applies to both individuals and business entities, and in this case you do not need to formally request an abatement: it will be granted automatically and should be reflected in your correspondence with the FTB .
This is another case where a mistake by the FTB can mean that you are not liable for interest on your tax liability, and it applies to individual taxpayers and businesses. Here is what this circumstance might look like:
If this is the circumstance of your overdue taxes, you will likely qualify for an abatement, however the requirements are very specific and legally significant. You must provide all of the following with your abatement request:
The FTB has special rules around interest charged to victims of disasters. The taxpayer must be located in a location that the President of the United States or the Governor of California has officially declared a disaster area or under a State of Emergency. During the period of the disaster, the FTB may declare extension periods and delay the mailing of bills and notices, and they will abate any interest due during this period. They also automatically follow any federal postponements announced by the IRS, so penalties and interest are cancelled for the postponement period, which may be up to one year.
The exact qualifications of abatements under disaster states depends on when the disaster was declared:
You will need to show that you were located in the disaster area for the tax year owed and that the FTB issued an extension in response to that disaster.
Active military personnel stationed outside the US are qualified to receive filing and payment extensions without interest or penalties, including in the case of back taxes.
The Franchise Tax Board has the discretion to abate interest for both individuals and business entities if the taxpayer can prove an “unreasonable error or delay by an officer or employee of the Franchise Tax Board (acting in his or her official capacity) in performing a ministerial or managerial act. (Rev. & Tax. Code, § 19104)”
This is a highly qualified statement, and there are several terms which you will need to understand. Here are the official definitions from the FTB:
“A ministerial act is a procedural or mechanical type act that does not involve the exercise of judgment or discretion. It occurs during the processing of a taxpayer’s case after all prerequisites to the act, such as conferences and review by supervisors, have taken place. A ministerial act does not involve the application of tax law to the facts of a case.
An example of a ministerial act is when a taxpayer contacts an FTB employee and requests a balance due. The employee fails to access the most current information and provides the taxpayer with an amount that is less than the actual balance due. The act of accessing the account information and providing that information to the taxpayer is a ministerial act.”
“A managerial act is an administrative type act that occurs during the processing of a taxpayer’s case. It is also the exercise of judgment or discretion relating to management of personnel. A managerial act does not involve the application of tax law to the facts of a case.
An example of a managerial act would be an FTB employee, in the process of reviewing a taxpayer's protest of an additional tax assessment, is sent to a training course for an extended period. If the protest case was not reassigned to another employee, the decision to send the employee to the training course and the decision not to reassign the taxpayer's protest to another employee, are both managerial acts.
There are are few other requirements you must meet in order to qualify for interest abatement under these circumstances.
It may be that your tax liability to the FTB was based on a final federal determination of tax by the Internal Revenue Service (IRS), and that the IRS committed the error or delay in the performance of a ministerial or managerial act. If the IRS agrees to an abatement under these circumstances, the FTB will follow suit for the same period of time. In the case of managerial acts, the FTB will only abate interest accrued on tax years starting on or after January 1, 1998.
There is a specific form to apply for abatement of interest based on errors or delays by the FTB or the IRS, FTB Form 3701, Request for Abatement of Interest. This request must be submitted alongside any protest against proposed deficiencies or any appeal from a notice of action on a protest.
A denial is not the end of the road. If your request is denied, you may file an appeal with the State Board of Equalization. You will need to:
Interest and penalties go hand in hand, and if you believe that you have reasonable grounds for any or all penalties to be cancelled, you can file a formal dispute. You will need to:
Dealing with the stress and confusion of an outstanding tax bill can be a huge drain on any individual or business, and the worry is made worse by fears of compounding interest and penalties. Whatever your circumstances, facing your liabilities directly is the best way to prevent your tax debt from growing into a much larger problem. You may have more options than you think. Consulting with a qualified tax attorney can give you a lot of comfort and peace of mind as you navigate your way through the tax system.
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