Sam Brotman, JD, LLM, MBA July 2, 2020 102 min read

Guide to Franchise Tax Board Collections Procedure

Franchise Tax Board Business Collections

Voluntary Case Resolution Procedure

            FTB has established special procedures for business tax collections. FTB issues notices to business entities with tax issues. These notices provide business entities repeated opportunities to voluntarily meet their tax obligations. FTB notices educate business entities of their legal rights and responsibilities, and provides them with FTB contact information. Notices are used as a method to gain compliance, minimize enforcement costs, and ensure due process. 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. FTB's failure to provide notice before taking action may rise 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 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 FTB's desk collectors transfer the accounts to field collectors. This occurs because some business entities evade tax collection, while others ignore it. 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. 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 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 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.

Franchise Tax Board Business Collections

Notice Of Proposed Assessment (NPA)

            When an adjustment to a tax return results in additional tax, a Notice of Proposed Assessment (NPA) is issued. These NPAs are issued to business entities on the basis of:

  • Additional tax due based on an audit of an original or amended tax return.
  • Internal Revenue Service information.
  • Missing year tax returns.

            The purpose of the NPA is to inform the business entity of the adjustment and to allow time to protest the assessment. Entities have 60 days to protest the validity of the NPA. After 60 days, the NPA becomes final; a Notice of Balance Due is then mailed stating that the tax, penalties, and interest assessed are considered due and payable 15 days from that notice date. Usually FTB generates a Notice of Balance Due (also known as the NPA final bill) within 30 days after assessment protest period.The purpose of the Notice of Balance Due (NPA final bill) is to inform the entity that the assessment is due and payable 15 days from the notice date. FTB staff must ensure that this process has occurred prior to taking collection actions.

            Currently, there is no provision in the Revenue and Taxation Code for extensions of time for payment of tax due for a business entity. However, business entities may be faced with a financial hardship and be unable to pay in full all at once. FTB may consider payment deferral to allow business entities an opportunity to pay their debt in full. Business has to request it, and after reviewing the account history, Franchise Tax Board (FTB) staff will determine on a case-by-case basis if a request for payment deferral will be granted. If payment of the full balance due will create a financial hardship, FTB staff may allow payments. If a deferral is granted, involuntary collection actions should cease during this period, which may include a case hold.

            FTB staff will verify the following when reviewing file for deferral option:

  • Account information (e.g., address, bank, telephone number, status)
  • All tax returns have been filed?
  • If additional balances have been discharged
  • Pending Notices of Proposed Assessment (NPA)
  • Any recent involuntary collection actions

            FTB may also allow installment agreement in cases of financial hardship. Beginning January 1, 2005, a service fee of $20.00 will be added to the taxpayer's account. For installment agreement FTB staff will verify the following:

  • Business activity and type of business
  • Account information (e.g., address, bank, telephone number, status)
  • All tax returns have been filed?
  • If additional balances have been discharged
  • Pending Notices of Proposed Assessment (NPA)
  • Any recent involuntary collection actions
  • Financial Statements (e.g., bank, profit/loss, accounts receivable, credit denial

letter)

  • Liens filed (or document why a lien was not filed)
  • Notify the business entity that a lien may be filed

            Upon approval of an installment agreement, the collector must inform the taxpayer about $20 fee and issue business entity an Installment Agreement Acceptance Letter.  The Business Entities Installment Agreement Financial Statement is now online in a “fillable” format. If taxpayer defaults on agreement the FTB staff must issue an Installment Agreement Cancellation Notice. This notice must precede all involuntary collection actions by FTB.

 

  1. Franchise Tax Board Business Collections - Involuntary Case Resolution

Orders to Withhold

            FTB can use involuntary means of delinquent tax collection if voluntary means do not work. For example, an Order To Withhold (OTW) is a one time legal order seizing 100% of the available

funds from a financial institution or escrow company. Potential payors for an OTW include California banks or escrow companies holding funds (e.g., checking or savings account, or proceeds from a sale of property or another asset) of a business entity. An OTW can not be issued to a financial institution where no branches are located within California. Prior to remitting funds to FTB, banks are required to hold funds for 10 days from the date the OTW was received.

Miscellaneous payor sources for OTW may be, but are not limited to the following:

  • Rental income
  • Escrow companies
  • Oil and gas rights
  • Use of patents
  • Movie and television rights
  • Copyrights/literary works
  • Stock

            FTB must ensure due process by sending notice to business entity before issuing OTW. FTB can skip-trace to find new payors not listed on account yet. Enforcement of an OTW that attaches to non-cash assets, (stocks, securities, safe deposit boxes, etc.) is seized and sold at public auction per FTB warrant procedures. Any recipient of a levy failing to withhold and send to Franchise Tax Board (FTB) the amount due may be liable for the amount due, even if recipient is not related to taxpayer entity. It is not necessary for FTB to issue an assessment against the payor, which failed to honor the levy, before taking an involuntary action. The liability must be established and the non-complying party must be given notice and an opportunity for a hearing. In the case of a financial institution, if an OTW is mailed to the branch where the account is located or principal banking office, the financial institution is liable for a failure to withhold only to the extent that the accounts can be identified by information maintained at that location.

            To establish if levy was not complied with FTB can issue Subpoena Duces Tecum or simply a regular demand for information to any involved party. FTB can examine various documents, including:

  • Accounts payable records
  • Cancelled checks
  • Checking or savings account statements
  • Deposit slips
  • Escrow closing statements
  • Promissory notes
  • Rental, installment, or lease agreements

            Once FTB staff verifies payments were not sent to FTB, a letter to the non-complying party

must be sent. The “Response to Order to Withhold Tax”, FTB form 4931, is sent to a non-complying  party liable for the amount of the levy. The letter must be personally served or mailed via certified mail, return receipt requested. The non-complying party may request a hearing within 15 days from the date form FTB 4931 was issued. If there is no payment received, and there is no hearing requested within 15 days, or if at a hearing the non-complying party cannot substantiate a valid reason for failing to honor the levy, FTB issues an OTW against the non-complying party. Collection actions against the non-complying party's assets are taken as if the actions were being taken against the original debtor.

            A Continuous Order To Withhold (COTW) is a legal order seizing funds from a miscellaneous payor and remains in effect for up to a year from the date the COTW was issued. A COTW attaches rents, commissions or scheduled payments from a sale of property or any other type of asset where continuous multiple payments are made. COTW payors do not include funds held by a bank or escrow company. A COTW attaches 100% of the available funds at the time they are received, but does not exceed the amount due on the order. COTW is valid until the amount on the order is withheld in full or the twelve months has expired. The total amount due includes the total tax, penalties, fees and interest to the date of the COTW. Applicable tax years are all tax years with liabilities receiving due process that are due and payable.

            FTB staff may modify or withdraw an OTW/COTW to ensure the fair and reasonable collection of tax revenue and to assure funds are not over collected. Franchise Tax Board (FTB) staff may modify or withdraw an OTW/COTW for the following reasons:

  • Account balance indicates liability is lower than amount on the order
  • Delinquent/amended returns have been processed and decreased original balance due
  • Adjustments/corrections/errors reduce liability
  • Received certified funds
  • Verifiable funds allocated for payroll
  • Lack of due process
  • Liability is paid in full
  • Financial hardship
  • Agreement is made with the debtor allowing additional time for payment

            FTB staff is required to thoroughly review and verify all supplied documentation prior to modifying the order. When modifying or withdrawing an OTW/COTW, FTB staff must document the basis of the action, and cite all supporting documentation.  FTB staff should fax a copy to the bank and follow up by sending the hard copy via first class mail.

           

 

  1. Franchise Tax Board Business Collections - Involuntary Case Resolution

Assessments

            Missing year assessments are 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 FTB to assess taxes due in the absence of a tax return. Missing year assessments can be set up by FTB's automated system or manually by its staff. FTB 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:

  • 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 assessment is justified, FTB staff must notify the business entity by mailing form FTB 4960 Notice to File Tax Returns. Then the FTB 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 Assessments (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

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

Assumer Assessments

            An assumer is an individual or business entity that accepts legal responsibility for another business entity (takes owe its tax obligation) when requesting a tax clearance. Usually it occurs when taxpayer entity changes its form, gets merged or seizes to exist. Franchise Tax Board form FTB

3555 Request for Tax Clearance initiates this process. Once this form is accepted and the entity has completed the dissolution, surrender, cancellation, or merger process, the assumer becomes responsible for the entity’s taxes and/or unfiled tax returns. All returns remain subject to audit until expiration of the normal statute of limitations.

            An assumer differs from a transferee because an assumer voluntarily assumes any subsequent

liabilities or responsibilities for a business entity, where a transferee has the liabilities transferred to them without their consent. FTB indicates certain limitations in this respect:

  • An assumer cannot be a general or limited partnership.
  • The surviving entity of a conversion assumes the converted entities liability without a tax clearance unless they are a domestic or qualified corporations that are converting to another type of entity.

            FTB will include assumer in its automated system and will check with Secretary of State whether the original business entity taxpayer truly merged, dissolved, canceled, etc. Please note that  the statute of limitation for assumer assessments is one year beyond the statute for assessment of the original liability regardless of any extension.

Transferee Assessments

            Transferee assessments are issued when assets are inappropriately taken from a business entity, leaving the business insolvent and unable to meet its tax obligations. This process makes the transferee (the one who receives assets) responsible for the amount taken or the tax liability due (whichever is less). A transferee can be any of the following:

  • A company officer
  • Stockholder
  • A business entity

            Examples of transfers are:

  • Corporate officers who receive improper compensation, such as excessively high salaries or expenses
  • Stockholders who borrow from the corporation without repaying the loans
  • Other corporations, partnerships or sole proprietorships that receive assets from the corporation without adequate compensation

            FTB will identify transfers and transferees, and will make assessment. Such assessments are divided into two major categories:  transferee assessments based upon law, or based upon equity. For transferee assessments based upon “law,” a contract must exist in which the transferee agrees to pay the transferor’s tax. Transferor is one who gives away its assets to transferee. For transferee assessments based upon “equity,” all of the following requirements must be met:

  • Transfer of assets
  • Tax liability accrued before or in the taxable year the transfer was made
  • Transfer made without full and adequate compensation
  • Transferor left without assets sufficient to pay tax liability due to the transfer
  • Transfer must have been to actual beneficial owners
  • Creditor may be held as transferee only to the extent of the overpayment

            FTB staff must have exhausted all means available to collect from the business entity before proceeding with a transferee assessment. FTB will have to prove transferee before imposing assessment. Proof of transferee is determined by the following:

  • Identification of the asset transferred
  • Evidence that the transfer left the transferor insolvent or defrauded creditors
  • The value of the asset transferred
  • Asset transferred after tax accrued or during tax year in which liability arose

            After that FTB sends to transferee of the asset form 5900 and waits 45 days from mailing date before taking any action, for example, imposition a lien on the asset. Please note that the statute of limitations for setting up a transferee assessment is five years past the original due date of the tax return. For subsequent transferees, the statute of limitations is within one year of the expiration of the previous transferee assessments’ statute of limitations (up to a maximum of three years).

Franchise Tax Board Business Collections

Involuntary Case Resolution

            FTB can use involuntary means of delinquent tax collection if voluntary means do not work. For example, an Order To Withhold (OTW) is a one time legal order seizing 100% of the available funds from a financial institution or escrow company. Potential payors for an OTW include California banks or escrow companies holding funds (e.g., checking or savings account, or proceeds from a sale of property or another asset) of a business entity. An OTW can not be issued to a financial institution where no branches are located within California. Prior to remitting funds to FTB, banks are required to hold funds for 10 days from the date the OTW was received.

Miscellaneous payor sources for OTW may be, but are not limited to the following:

  • Rental income
  • Escrow companies
  • Oil and gas rights
  • Use of patents
  • Movie and television rights
  • Copyrights/literary works
  • Stock

            FTB must ensure due process by sending notice to business entity before issuing OTW. FTB can skip-trace to find new payors not listed on account yet. Enforcement of an OTW that attaches to non-cash assets, (stocks, securities, safe deposit boxes, etc.) is seized and sold at public auction per FTB warrant procedures. Any recipient of a levy failing to withhold and send to Franchise Tax Board (FTB) the amount due may be liable for the amount due, even if recipient is not related to taxpayer entity. It is not necessary for FTB to issue an assessment against the payor, which failed to honor the levy, before taking an involuntary action. The liability must be established and the non-complying party must be given notice and an opportunity for a hearing. In the case of a financial institution, if an OTW is mailed to the branch where the account is located or principal banking office, the financial institution is liable for a failure to withhold only to the extent that the accounts can be identified by information maintained at that location.

            To establish if levy was not complied with FTB can issue Subpoena Duces Tecum or simply a regular demand for information to any involved party. FTB can examine various documents, including:

  • Accounts payable records
  • Cancelled checks
  • Checking or savings account statements
  • Deposit slips
  • Escrow closing statements
  • Promissory notes
  • Rental, installment, or lease agreements

            Once FTB staff verifies payments were not sent to FTB, a letter to the non-complying party

must be sent. The “Response to Order to Withhold Tax”, FTB form 4931, is sent to a non-complying  party liable for the amount of the levy. The letter must be personally served or mailed via certified mail, return receipt requested. The non-complying party may request a hearing within 15 days from the date form FTB 4931 was issued. If there is no payment received, and there is no hearing requested within 15 days, or if at a hearing the non-complying party cannot substantiate a valid reason for failing to honor the levy, FTB issues an OTW against the non-complying party. Collection actions against the non-complying party's assets are taken as if the actions were being taken against the original debtor.

            A Continuous Order To Withhold (COTW) is a legal order seizing funds from a miscellaneous payor and remains in effect for up to a year from the date the COTW was issued. A COTW attaches rents, commissions or scheduled payments from a sale of property or any other type of asset where continuous multiple payments are made. COTW payors do not include funds held by a bank or escrow company. A COTW attaches 100% of the available funds at the time they are received, but does not exceed the amount due on the order. COTW is valid until the amount on the order is withheld in full or the twelve months has expired. The total amount due includes the total tax, penalties, fees and interest to the date of the COTW. Applicable tax years are all tax years with liabilities receiving due process that are due and payable.

            FTB staff may modify or withdraw an OTW/COTW to ensure the fair and reasonable collection of tax revenue and to assure funds are not over collected. Franchise Tax Board (FTB) staff may modify or withdraw an OTW/COTW for the following reasons:

  • Account balance indicates liability is lower than amount on the order
  • Delinquent/amended returns have been processed and decreased original balance due
  • Adjustments/corrections/errors reduce liability
  • Received certified funds
  • Verifiable funds allocated for payroll
  • Lack of due process
  • Liability is paid in full
  • Financial hardship
  • Agreement is made with the debtor allowing additional time for payment

            FTB staff is required to thoroughly review and verify all supplied documentation prior to modifying the order. When modifying or withdrawing an OTW/COTW, FTB staff must document the basis of the action, and cite all supporting documentation.  FTB staff should fax a copy to the bank and follow up by sending the hard copy via first class mail.

            FTB can also use interagency intercept. Interagency Intercepts allow a business entity’s credit balance with one government agency to be transferred to pay or reduce the business entity’s balance due with a different government agency. Intercepts from the Employment Development Department (EDD), and the Board of Equalization (BOE) are an automatic process performed electronically  based on a list from these agencies of corporations with available funds. FTB can also intercept funds from the California Department of Health Services (CDHS). When FTB staff determines that a business entity has funds held by CDHS, FTB staff can issue an Interagency Offset Notice; form FTB 2970, to intercept the funds to satisfy the liability held by FTB. The process of intercepting funds for other state agencies is the same when they locate excess funds within the Franchise Tax Board (FTB). Intercepts can be requested against cash and time certificate deposits held by state agencies. A Medi-Cal Intercept can attach a health care provider’s funds paid by CDHS. Any monies sent by the EDD or BOE based on an interagency intercept cannot be released if the liability was previously satisfied. The intercept payment will then be appropriated to other income years with liabilities or refunded to the business entity. If California Employment Department or Board of Equilization sends money for liability that was already satisfied, FTB can apply this money to liabilities form other years, or will refund business.

Assessments

            Missing year assessments are 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 FTB to assess taxes due in the absence of a tax return. Missing year assessments can be set up by FTB's automated system or manually by its staff. FTB 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:

  • 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 assessment is justified, FTB staff must notify the business entity by mailing form FTB 4960 Notice to File Tax Returns. Then the FTB 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 Assessments (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

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

Assumer

            An assumer is an individual or business entity that accepts legal responsibility for another business entity (takes owe its tax obligation) when requesting a tax clearance. Usually it occurs when taxpayer entity changes its form, gets merged or seizes to exist. Franchise Tax Board form FTB

3555 Request for Tax Clearance initiates this process. Once this form is accepted and the entity has completed the dissolution, surrender, cancellation, or merger process, the assumer becomes responsible for the entity’s taxes and/or unfiled tax returns. All returns remain subject to audit until expiration of the normal statute of limitations.

            An assumer differs from a transferee because an assumer voluntarily assumes any subsequent

liabilities or responsibilities for a business entity, where a transferee has the liabilities transferred to them without their consent. FTB indicates certain limitations in this respect:

  • An assumer cannot be a general or limited partnership.
  • The surviving entity of a conversion assumes the converted entities liability without a tax clearance unless they are a domestic or qualified corporations that are converting to another type of entity.

            FTB will include assumer in its automated system and will check with Secretary of State whether the original business entity taxpayer truly merged, dissolved, canceled, etc. Please note that  the statute of limitation for assumer assessments is one year beyond the statute for assessment of the original liability regardless of any extension.

Transferee Assessments

            Transferee assessments are issued when assets are inappropriately taken from a business entity, leaving the business insolvent and unable to meet its tax obligations. This process makes the transferee (the one who receives assets) responsible for the amount taken or the tax liability due (whichever is less). A transferee can be any of the following:

  • A company officer
  • Stockholder
  • A business entity

            Examples of transfers are:

  • Corporate officers who receive improper compensation, such as excessively high salaries or expenses
  • Stockholders who borrow from the corporation without repaying the loans
  • Other corporations, partnerships or sole proprietorships that receive assets from the corporation without adequate compensation

            FTB will identify transfers and transferees, and will make assessment. Such assessments are divided into two major categories:  transferee assessments based upon law, or based upon equity. For transferee assessments based upon “law,” a contract must exist in which the transferee agrees to pay the transferor’s tax. Transferor is one who gives away its assets to transferee. For transferee assessments based upon “equity,” all of the following requirements must be met:

  • Transfer of assets
  • Tax liability accrued before or in the taxable year the transfer was made
  • Transfer made without full and adequate compensation
  • Transferor left without assets sufficient to pay tax liability due to the transfer
  • Transfer must have been to actual beneficial owners
  • Creditor may be held as transferee only to the extent of the overpayment

            FTB staff must have exhausted all means available to collect from the business entity before proceeding with a transferee assessment. FTB will have to prove transferee before imposing assessment. Proof of transferee is determined by the following:

  • Identification of the asset transferred
  • Evidence that the transfer left the transferor insolvent or defrauded creditors
  • The value of the asset transferred
  • Asset transferred after tax accrued or during tax year in which liability arose

            After that FTB sends to transferee of the asset form 5900 and waits 45 days from mailing date before taking any action, for example, imposition a lien on the asset. Please note that the statute of limitations for setting up a transferee assessment is five years past the original due date of the tax return. For subsequent transferees, the statute of limitations is within one year of the expiration of the previous transferee assessments’ statute of limitations (up to a maximum of three years).

Suspention and forefeiture

            Under some circumstances, the FTB can forfeit all rights and provileges under state law of a domestic business entity.  Similarly, a foreign business entity may have its rights and privileges forfeited. A foreign business is any business that does not have California as their state of incorporation. The reasons for Franchise Tax Board suspension or forfeiture are:

  • Failure to file a return(s)
  • Nonpayment of taxes, penalties and interest

            Legal requirements for suspension or forfeiture are:

  • Failure to File - 12 months from the end of the accounting period
  • Failure to Pay - 11 months from the date of the first billing
  • Failure to File an annual Statement of Information with the Secretary of State

            When a business entity’s rights and privileges have been suspended or forfeited, the business can still amend its Articles of Incorporation to change the entity’s name and/or apply for “exempt” status. Unincorporated entities acting and filing as a corporation are subject to contract voidability. The reasons for contract voidability are the same as for suspension and forfeiture.Under suspension or forfeiture, an entity:

  • Loses the right to conduct any business activity
  • Loses the right to enforce contracts
  • Loses the right to initiate or defend a lawsuit
  • Loses exclusive rights to the entity name
  • May be subject to a $2,000.00 penalty while operating under suspension/forfeiture
  • Loses the right to make a claim for refund or amend a return
  • Loses the right to protest an assessment
  • Loses the rights to sell, transfer, or exchange real property
  • Loses the privilege for an extension to file tax returns

            To ensure due process, a final notice before suspension/forfeiture, form FTB 4974, must be mailed by the FTB to the entity at least 60 days before the date of suspension/forfeiture, form FTB 2520. If the suspension notice does not go out in 90 days from the Final Notice Before Suspension, the suspension process must start over. FTB staff may defer suspension or forfeiture in their system for a period up to 90 days while negotiating compliance.

III. I. Franchise Tax Board Business Collections - Involuntary Case Resolution

Suspention and forefeiture, Intreagency Intercepts

            Under some circumstances, the FTB can forfeit all rights and provileges under state law of a domestic business entity.  Similarly, a foreign business entity may have its rights and privileges forfeited. A foreign business is any business that does not have California as their state of incorporation. The reasons for Franchise Tax Board suspension or forfeiture are:

  • Failure to file a return(s)
  • Nonpayment of taxes, penalties and interest

            Legal requirements for suspension or forfeiture are:

  • Failure to File - 12 months from the end of the accounting period
  • Failure to Pay - 11 months from the date of the first billing
  • Failure to File an annual Statement of Information with the Secretary of State

            When a business entity’s rights and privileges have been suspended or forfeited, the business can still amend its Articles of Incorporation to change the entity’s name and/or apply for “exempt” status. Unincorporated entities acting and filing as a corporation are subject to contract voidability. The reasons for contract voidability are the same as for suspension and forfeiture.Under suspension or forfeiture, an entity:

  • Loses the right to conduct any business activity
  • Loses the right to enforce contracts
  • Loses the right to initiate or defend a lawsuit
  • Loses exclusive rights to the entity name
  • May be subject to a $2,000.00 penalty while operating under suspension/forfeiture
  • Loses the right to make a claim for refund or amend a return
  • Loses the right to protest an assessment
  • Loses the rights to sell, transfer, or exchange real property
  • Loses the privilege for an extension to file tax returns

            To ensure due process, a final notice before suspension/forfeiture, form FTB 4974, must be mailed by the FTB to the entity at least 60 days before the date of suspension/forfeiture, form FTB 2520. If the suspension notice does not go out in 90 days from the Final Notice Before Suspension, the suspension process must start over. FTB staff may defer suspension or forfeiture in their system for a period up to 90 days while negotiating compliance.

            FTB can also use interagency intercept. Interagency Intercepts allow a business entity’s credit balance with one government agency to be transferred to pay or reduce the business entity’s balance due with a different government agency. Intercepts from the Employment Development Department (EDD), and the Board of Equalization (BOE) are an automatic process performed electronically  based on a list from these agencies of corporations with available funds. FTB can also intercept funds from the California Department of Health Services (CDHS). When FTB staff determines that a business entity has funds held by CDHS, FTB staff can issue an Interagency Offset Notice; form FTB 2970, to intercept the funds to satisfy the liability held by FTB. The process of intercepting funds for other state agencies is the same when they locate excess funds within the Franchise Tax Board (FTB). Intercepts can be requested against cash and time certificate deposits held by state agencies. A Medi-Cal Intercept can attach a health care provider’s funds paid by CDHS. Any monies sent by the EDD or BOE based on an interagency intercept cannot be released if the liability was previously satisfied. The intercept payment will then be appropriated to other income years with liabilities or refunded to the business entity. If California Employment Department or Board of Equilization sends money for liability that was already satisfied, FTB can apply this money to liabilities form other years, or will refund business.

Franchise Tax Board Business Collections

Voluntary Case Resolution

            FTB has established special procedures for business tax collections. FTB issues notices to business entities with tax issues. These notices provide business entities repeated opportunities to voluntarily meet their tax obligations. FTB notices educate business entities of their legal rights and responsibilities, and provides them with FTB contact information. Notices are used as a method to gain compliance, minimize enforcement costs, and ensure due process. 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. FTB's failure to provide notice before taking action may rise 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 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.

 

Notice Of Proposed Assessment (NPA)

 

            When an adjustment to a tax return results in additional tax, a Notice of Proposed Assessment (NPA) is issued. These NPAs are issued to business entities on the basis of:

  • Additional tax due based on an audit of an original or amended tax return.
  • Internal Revenue Service information.
  • Missing year tax returns.

            The purpose of the NPA is to inform the business entity of the adjustment and to allow time to protest the assessment. Entities have 60 days to protest the validity of the NPA. After 60 days, the NPA becomes final; a Notice of Balance Due is then mailed stating that the tax, penalties, and interest assessed are considered due and payable 15 days from that notice date. Usually FTB generates a Notice of Balance Due (also known as the NPA final bill) within 30 days after assessment protest period.The purpose of the Notice of Balance Due (NPA final bill) is to inform the entity that the assessment is due and payable 15 days from the notice date. FTB staff must ensure that this process has occurred prior to taking collection actions.

            Currently, there is no provision in the Revenue and Taxation Code for extensions of time for payment of tax due for a business entity. However, business entities may be faced with a financial hardship and be unable to pay in full all at once. FTB may consider payment deferral to allow business entities an opportunity to pay their debt in full. Business has to request it, and after reviewing the account history, Franchise Tax Board (FTB) staff will determine on a case-by-case basis if a request for payment deferral will be granted. If payment of the full balance due will create a financial hardship, FTB staff may allow payments. If a deferral is granted, involuntary collection actions should cease during this period, which may include a case hold.

            FTB staff will verify the following when reviewing file for deferral option:

  • Account information (e.g., address, bank, telephone number, status)
  • All tax returns have been filed?
  • If additional balances have been discharged
  • Pending Notices of Proposed Assessment (NPA)
  • Any recent involuntary collection actions

            FTB may also allow installment agreement in cases of financial hardship. Beginning January 1, 2005, a service fee of $20.00 will be added to the taxpayer's account. For installment agreement FTB staff will verify the following:

  • Business activity and type of business
  • Account information (e.g., address, bank, telephone number, status)
  • All tax returns have been filed?
  • If additional balances have been discharged
  • Pending Notices of Proposed Assessment (NPA)
  • Any recent involuntary collection actions
  • Financial Statements (e.g., bank, profit/loss, accounts receivable, credit denial

letter)

  • Liens filed (or document why a lien was not filed)
  • Notify the business entity that a lien may be filed

            Upon approval of an installment agreement, the collector must inform the taxpayer about $20 fee and issue business entity an Installment Agreement Acceptance Letter.  The Business Entities Installment Agreement Financial Statement is now online in a “fillable” format. If taxpayer defaults on agreement the FTB staff must issue an Installment Agreement Cancellation Notice. This notice must precede all involuntary collection actions by FTB.

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

Franchise Tax Board Liens

            The FTB is authorized to impose liens on taxpayer's property to recover tax debts. A lien is a charge on taxpayer's personal or real property to satisfy tax debt or duty. Once lien encumbers the property, taxpayer generally can not sell it or or transfer through escrow as long as lien exists. FTB files liens if a non-compliant taxpayer or business entity has a delinquent liability. California Revenue and Taxation Code Section 19221 provides that if a tax liability is not paid at the time that it becomes “due and payable” and due process is served; an enforceable state tax lien is created for the amount of the tax liability. Since the lien arises by operation of law, it is called a “statutory lien.” Revenue and Taxation Code Section 19221 also defines when a tax liability becomes “due and payable” for purposes of creating a state tax lien also known as the statutory lien date. The conditions vary for different types of FTB assessments. The general rule is that state tax lien arises on the date the amount is established on the records of FTB (or other department, like EDD for the amount of any liability disclosed on a return filed before the date payment is due and after payment is due). The state lien can also arise on the date a Jeopardy Assessment notice is mailed to taxpayer for issued amounts determined by the Jeopardy Assessment.

            Note: the Franchise Tax Board, Internal Revenue Service, Board of Equalization, and the

Employment Development Department have an agreement to compare statutory lien dates to

determine priority for payment on competing liens. It means that if liens by several departments are imposed on taxpayers property, the first lien to be satisfied will be lien with the earliest date. The remaining property will be used to satisfy second lien with a later date, and so on. Government Code section 7170.5 provides that between competing state tax liens, or as between a state tax lien and a federal lien, the lien that first comes into existence (based on  the statutory lien date) has priority over the lien that later comes into existence. The priority is not affected by the recording or filing of a Notice of State Tax Lien (NSTL) by FTB.

 

Here are methods to determine major statutory lien dates:

 

 -For returns self-assessed by the taxpayer, it is the posting date of return in the respective department (FTB, EDD, Board of Equalization).

- For a Notice of Proposed Assessment by FTB – the date assessment becomes final (the legal effective date). Usually it is 60 days after the issuance of the Notice, unless it is protested by taxpayer.

- For a protested Notice of Proposed Assessment – 30 days after the Notice of Action is issued.

 

- For Jeopardy Assessments – the date the notice is mailed or issued.

            It is possible to have multiple statutory lien dates for a single tax year. For example, a self-assessed no pay return is filed (lien date is posting date of return) and subsequently a Notice of Proposed Harassment is issued for the tax year.

            Liens can be general or specific in nature. A general lien is enforceable by the holder (FTB, EDD or other state agency with appropriate authority) for all outstanding obligations that exist against the taxpayer – owner of the property. Specific lien is enforceable for a specific obligation existing against the owner of the property and depends on the possession of a property by taxpayer. For example, when an automobile is taken to a repair shop, the mechanic can hold the automobile

until the repair bill is satisfied. The expense of repair is the basis of the lien and the possession of the automobile by the mechanic makes the lien effective.

            A state tax lien is a general lien, which arises by operation of law (Revenue and Taxation

Code Section 19221) and continues in effect for 10 years from the date of its creation. It attaches to all property and rights to property, whether real or personal, belonging to the taxpayer or entity located in California. The lien attaches to property owned by the taxpayer or entity at the time the lien arises and even to property subsequently acquired by the taxpayer or entity.

            There are limited exceptions to ban for transfer of property encumbered by state lien. Taxpayer may still transfer interest in real property via a Quit Claim deed or other reconveyance document despite an FTB lien, as long as no escrow is involved. FTB’s lien will continue to encumber the property, although the liable taxpayer or entity no longer retains ownership. If the new owner sells the property through escrow, the proceeds will be attached to pay the outstanding liability in order to clear the property’s title from the lien. So, lien will be attached to property until it is satisfied.

            A nominee lien will be issued if FTB discovers that taxpayer transferred property to a third person but still retains control over it. No matter what, the property will be encumbered by lien. A lien should not be filed by the FTB on unpaid balances older than 10 years from the effective date of the liability and any attachment of a lien is always subject to so-called Taxpayer's Bill of Rights.

            FTB can file lien where taxpayer and FTB entered into an installment agreement, but there is still balance to close or history of non-payment by taxpayer. FTB must notify taxpayer of this possibility when entering into installment agreement, and must notify taxpayer prior to filing the lien. Sufficient time should be allowed by the FTB after the issuance of a lien to allow the taxpayer or entity adequate time to respond before another action is taken.

            The lien is valid for 10 years but may be extended by FTB in accordance with internal Lien Extension Guidelines and by taking into considerations factors listed in Guidelines. If FTB fails to extend lien for any reason after 10 years from the date of its creation, lien expires.

            Government Code Section 7171 authorizes both the recording of a Notice of State Tax Lien

(NSTL) in the office of a county recorder and the filing of a NSTL with the Secretary of State (SOS) at any time after the state tax lien is created and before it is extinguished. Any recording with county recorder becomes a public record and is used mostly for real property. A Secretary of State lien will be filed to attach consumer goods, fixtures, and bulk sales, as well as when personal property like accounts receivable, chattel paper, equipment, farm product or equipment, inventory, negotiable documents of time or interest in a partnership or LLP. The state tax lien attaches personal property and, consequently, a taxpayer or entity's interest in a partnership may not be sold, assigned or otherwise conveyed free of a state tax lien. Notice to Taxpayer and Notice to Partnership are used to notify the taxpayer and partners of the force and effect of the state tax lien.  Although the state tax lien attaches to a taxpayer's interest in a partnership, it does not attach to specific partnership distributions of profits and surplus.

            Government Code Sections 7171 and 7220 authorize the filing of a NSTL with the

SOS. The filing of the notice establishes a public record of the existence of the state tax lien against all personal property belonging to the taxpayer and located in the state. Notice of State Tax Lien is more likely to be filed by FTB with the country recorder’s office if taxpayer is self-employed, has real property, is contemplating filing a bankruptcy, is terminally ill, or is involved in judicial proceedings.     The Taxpayers' Bill of Rights (Revenue and Taxation Code Section 21019,  effective January 1, 1989) requires notification be sent to the taxpayer or entity at least 30 days prior to the filing of a lien. The notification must include the  statutory authority for issuing a NSTL, the earliest date on which the lien may be filed or recorded, and the remedies available to the taxpayer or entity to prevent  the filing of the NSTL. Generally, the FTB will file a lien in each case where an accumulated unliened case balance is due. A NSTL should be recorded in the county where the taxpayer resides, or was last  known to reside. Additional notices should be recorded in any county where the  taxpayer transacts business or owns real property. A NSTL should be recorded in the county where the entity owns property and transacts business. Failure to record NSTL by FTB may result in that FTB looses priority to third persons' interest in property.  Government Code Section 7170(c) describes in detail priority of liens involving state department v. liens by third parties.

            For individual married taxpayers, If there are balances due for multiple tax years and spouses are jointly liable for only some of the years, two notices of state tax lien should be recorded. One notice should name both spouses and the balances due for the joint tax years. The other notice should name the spouse liable for the remaining tax years and the balances due for those separate years.

 

FTB Lien Release

             An FTB lien can be released without being satisfied under the following situations:

  • Franchise Tax Board (FTB) staff determines the amount due is sufficiently secured by a state tax lien on other property or the release of lien will not jeopardize collection
  • FTB staff finds the liability underlying the state tax lien is legally unenforceable. For instance, in certain circumstances a liability may become legally unenforceable as a result of a discharge in bankruptcy proceedings under federal law
  • FTB has determined that the state tax lien has been recorded in error. In those instances FTB must send a copy of the lien release to the three major credit reporting companies
  • A partial release of lien fully removes a state tax lien from a specific piece of property as described in the partial release. Other property owned by the entity, or subsequently acquired by the entity, remains subject to the state tax lien

            A lien release establishes a public record showing the state tax lien was satisfied and no longer encumbers the taxpayer or entity’s property. If the FTB has recorded a NSTL in a county recorder's office and the liability secured by the lien is satisfied in full, Government Code Section 7174(c) requires the department to issue a release of lien not later than 40 days after the liability is satisfied. If the department has filed a NSTL with the Secretary of State (SOS) and the liability secured by the lien is satisfied in full, Government Code Section 7174(e) requires the FTB do one of the following not later than 40 days after the liability is satisfied:

  • File a release of lien with the SOS
  • Deposit in the mail, or otherwise deliver, a release of lien to the taxpayer

            If FTB finds that lien is insufficiently secure or is unenforceable (as a result of bankruptcy discharge, for example), FTB in its own discretion may or may not release the lien. Liens recorded in error must be released. A NSTL is considered recorded in error if any of the following circumstances exist:

  • Notice was recorded after the effective date of payment of the liability
  • Notice was recorded using an incorrect name or Social Security Number (SSN) (a typographical error or an SSN used by the taxpayer does not invalidate the lien)
  • Liability underlying the state tax lien was established in error
  • Notice was recorded using an incorrect entity name, Federal Employer Identification Number (FEIN), or corporation number.

            In those instances when a lien is issued in error, Revenue and Taxation Code Section 21019 states, that upon request from the taxpayer, the department must send a copy of the lien

release to the three major credit reporting companies in the county where the lien was filed. For married taxpayers,  if one spouse is granted relief from liability, the state tax lien should be released

with respect to that one spouse only.

            One way for a taxpayer to satisfy a lien is through the sale or re-financing of real property.  Liens discovered during title searches must be resolved before clear title can be conveyed. This is usually done by an escrow company, title company, financial institution or attorney.

            A release of lien should be requested on an immediate basis based on the following scenarios:

  • Liens recorded in error - upon taxpayer or entity demand
  • Protested assessments - upon taxpayer or entity demand
  • Liens recorded to secure a state tax liability - upon taxpayer or entity demand after

payment in full, in cash or certified funds

            Government Code Section 7174 authorizes the department to issue a partial lien release when it is determined that the liability is sufficiently secured by a lien on other property or that the partial release will not jeopardize the collection of the liability. Requests for partial releases are common in cases when the taxpayer or entity no longer owns property that is somehow encumbered by the state tax lien. This can occur as a result of a transfer of title by way of foreclosure or, in some cases, a Grant Deed in Lieu of Foreclosure. A partial release should also be appropriate when the taxpayer is selling property for an amount insufficient to satisfy the liability and it is in the best interest of the department to permit the sale and accept less than the full amount due from the taxpayer. Under California law, consideration will be given by FTB to a request for a partial release, after the taxpayer, entity, or

requesting party submits the following information:

  • A letter of explanation as to why they are requesting a partial release
  • An estimated closing statement prepared by the escrow company or whoever is holding funds
  • A current preliminary title report that includes the property description
  • An appraisal or documentation that establishes the fair market value of the property
  • Documentation to substantiate the payoff of lien holders

            If the decision is made to issue a partial release, the taxpayer, entity, or requester will be

advised of the conditions under which the release may be recorded.

            Through a subordination of lien, the Franchise Tax Board (FTB) permits another lien on a

specific property to take priority over the FTB state tax lien even though the other lien may

not otherwise have priority over the FTB state tax lien. A subordination of lien differs from a

partial release of lien. A partial release of lien removes the FTB state tax lien from a specific

property. A subordination of lien does not remove the FTB state tax lien, but simply lowers

the priority of the FTB state tax lien in favor of some other lien by a third party against the property.  Subordination of lien by FTB is discretionary and not mandatory under any circumstances. A subordination of lien may be advantageous when a taxpayer or entity is attempting to refinance all or part of real property.

FTB's Offer in Compromise Program

            Individual California taxpayers without the income, assets or means to pay state tax liability right away or in the foreseeable future can try to use the option of “Offer in Compromise” (OIC). The Offer in Compromise program allows taxpayer to offer a lesser amount for payment of a final tax liability, if taxpayer does not dispute it. Generally, FTB approves an Offer in Compromise when the amount offered by taxpayer is pretty much the most FTB can expect to collect from taxpayer within a reasonable period of time.  FTB look at the following facts:

  • The taxpayer's ability to pay.
  • The amount of taxpayer's assets or equity.
  • The taxpayer's present and future income.
  • The taxpayer's present and future expenses.
  • The potential for change in circumstances.
  • Whether the offer is in the best interest of the state.

            Taxpayer can apply for OIC only if he or she filed tax returns or is not required to file tax returns. Taxpayer also must fully complete Offer in Compromise application, and provide all supporting documentation. Then consumer must come to an agreement with FTB regarding the amount of tax he or she owes, and must authorize FTB to conduct investigation and verify information on the taxpayer's application.

            If the FTB thinks taxpayer has a potential for future increase in earnings, it may, after approval of the application, require that taxpayer enters into so called “collateral agreement” with the FTB. The agreement is for a duration of 5 years and will require the taxpayer to pay FTB a percentage of future earnings if earnings become higher than certain threshold established by FTB and agreed to by taxpayer. FTB usually does not require collateral agreement if taxpayer is on fixed income or has limited potential for increase in income.

            Unfortunately, collection activity by FTB does not stop even if FTB and taxpayer enter into agreement. FTB may continue to collect tax if stopping collection efforts can potentially result in loss of FTB's ability to collect what is owed. Interest also continues to accrue.

            Taxpayer submits agreed upon payment amount only when FTB requests payment according with the Offer in Compromise Agreement. FTB requires lump sum payment under this program. FTB can also work in installment agreement if taxpayer has the ability to make monthly payments that in total will exceed the amount initially offered by taxpayer and accepted by FTB.

            To fill out offer in compromise application, individual taxpayer will need to provide significant volume of information. That includes verification of income documents, such as paystubs for the previous 3 months, or financial statements for previous 2 years, if self-employed. Any investment or ownership in business or trust will have to be disclosed. For expenses taxpayer can provide billing statements for previous three months. FTB will require complete bank information, including statements for all accounts for last six months for those who are employed, and for previous two years for self-employed taxpayers. Information submitted must include closed bank accounts. FTB also requires information about securities owned, interest in real estate, information from IRS, legal documents such as divorce decrees or marital settlement agreements, medical information such as medical condition that should be considered by FTB and any powers of attorney. On the application taxpayers will be required to provide information about any court proceedings, bankruptcies, repossessions, recent transfers of assets, assets owned (like vehicles), life insurance, other assets, including anticipated assets and anticipated increase in income. Application will ask detailed information about taxpayer's expenses too.

            Business taxpayer will have to provide additional information, including complete information about ownership and management of business, all bank accounts and credit cards, all assets and liabilities of a business,  life insurance, receivables, pending litigation or pending judgments. Also,  information about machinery, equipment, vehicles, trucks, aircraft, securities. FTB will ask for business references, for detailed income information, about alaries and disposals of assets worth more than $500 in recent period.

            FTB mails its decision within 90 days of receiving the OPIC application but for complex cases it can take longer than that. FTB does not consider prior payments, so this fact must be taken into consideration by taxpayer when deciding whether to apply for offer in compromise option.

            After approval of OIC, FTB releases all state lien claims. Taxpayers who contemplate filing bankruptcy should discuss strategy with their attorney prior to applying for offer in comprise, as bankruptcy filing may help to reduce or discharge tax liability of taxpayer.

 

 

Receive the Best of
Brotman Law

Get this topic delivered straight to your inbox.

Book an Action Plan
avatar

Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

COMMENTS

BECOME AN INSIDER

Our best stuff: secrets, tax saving tools, and tax defense strategies from the braintrust at Brotman Law.

  • Expanded benefits during your first consultation with the firm.
  • Priority appointment scheduling and appointment times.
  • Complementary access to our firm’s concierge services.
  • Receive updates and “insider only” tax strategies and tactics.
  • And many more benefits.

Not Sure Where to Start?

Step 1 Start Here

Start Here

These ten big ideas will change the way you think about your taxes and your business.

Start Here

Step 2 Learn About Your Situation

Learn About Your Situation

Find the articles and videos you need to make the right tax decisions in the learning center.

Visit the Learning Center

Step 3 Explore Our Services

Explore Our Services

It is not just about what we do, but who we are, why we do it, and how that benefits you.

View All Services

Step 4 Get Your Game Plan

Get Your Game Plan

Meet with us to outline your strategy. No further obligation, 100% money-back guarantee.

Book an Action Plan