“Whether you agree that raising taxes during an economic recession is bad for the economy or not, state and local governments should be doing everything in their power to bid Congress to provide more direct aid. This would minimize the need for tax increases or spending cuts,” wrote Michael Mazerov in Tax Notes.
In previous articles, I touched on tax liability issues that predominantly covered taxpayers owing money to the IRS. The citizens of California could also owe taxes to the California Franchise Tax Board (FTB).
What does the FTB collections process look like for individuals in California and how has COVID-19 impacted these policies? Until the Feds come up with a plan for more direct aid to the states, I’ve written about some of the FTB penalties to look out for and resources that could help you.
Owing taxes to the California Franchise Tax Board can be very stressful and lead to drastic outcomes if not handled delicately. The FTB says, “if you have a balance due, failure to contact us and resolve your balance could cause us to garnish your wages, file and record a lien against your property, seize your property, and levy your bank accounts.”
The introduction on the FTB’s Personal Income Tax Collections Information page indicates it takes collection matters very seriously.
Why? It is viewed as a debt to be repaid. Wouldn’t you take it seriously if somebody who owed you money wasn’t paying up? To prevent this loss, the FTB suggests a few ways that taxpayers can prevent involuntary collections:
· Pay the liability in full.
· Enter into an installment agreement.
· File required tax returns and pay the balance due or provide proof that there is no filing requirement.
· Make an acceptable Offer in Compromise.
· Establish that a financial hardship prevents the taxpayer from paying the liability.
People who cannot pay their liability in full may seek to set up an installment agreement. However, if the installment agreement is rejected, the FTB will send a notice stating the reason for the rejection. The taxpayer can contact the FTB to dispute this rejection.
As I pointed out, FTB penalties can be drastic. One such penalty is a tax lien. If the taxpayer does not pay their entire California income tax liability by the time it becomes due and payable, the unpaid amount is subject to a state tax lien.
The FTB may record a notice of state tax lien in the taxpayer’s county recorder’s office and file a notice of state tax lien with the California Secretary of State. To remove the lien, the taxpayer must pay the total tax liability, including penalties and accrued interest and fees, for the tax years represented by the lien.
Another drastic FTB penalty is the interest rate policy. Similar to the IRS “interest accrues on unpaid taxes from the original due date of the return until the date [the FTB] receive[s] full payment.” In addition, “interest [also] accrues on penalties from the effective date of the penalty until the date [FTB] receive[s] full payment.”
Here is a list of fees and penalties that the FTB can levy:
· Cost Recovery Fees: if the FTB has to take action to resolve filing and payment delinquencies. Cost recovery fees may include a filing enforcement fee, a collection fee, a lien fee, a federal treasury offset fee, and fees to cover of seizing and selling property.
· Late Filing Penalty: 25% of the amount due, after applying any payments and credits made on or before the original tax return due date.
· Dishonored Payment Penalty: if a taxpayer’s financial institution does not honor a payment, there is a 2% penalty for a payment of $1,250 or more, and for a payment less than $1,250, the penalty is $25 or the payment amount, whichever is less.
· Estimated Tax Penalty: this penalty is for failure to pay, late payments, or underpayments on an estimated tax installment. This penalty is calculated on a case-by-case basis and is dependent on when the liability was paid.
· Late Payment Penalty: a penalty imposed if the taxpayer does not pay the total amount due shown on the tax return by the original due date. The penalty is 5% of the unpaid tax plus 0.5% of the unpaid tax for each month with a maximum penalty of 25% of the unpaid tax.
· Demand to File Penalty: if the taxpayer does not comply with a demand to file income tax returns, the FTB will impose a penalty of 25%.
Probably not for the first time in the past year, you are asking “What now?” Many taxpayers are really struggling to make payments. Not unsympathetic to the pandemic and the problems that have arisen because of it, the FTB has implemented COVID-19 relief policies.
Like the IRS, the FTB put a temporary suspension in effect on a number of personal income tax collection activities. Wage attachments, bank levies, liens, and field agent calls and visits were suspended through July 15, 2020. An extension was also given to taxpayers whose financial hardship was scheduled to expire.
Regarding payment plans, the FTB now asserts that taxpayers who cannot comply with the terms of their existing installment agreement may request skip payments. For new payment plans, taxpayers can apply for installment agreements if unable to fully pay their state taxes.
The FTB will not issue any Offers in Compromise (“OIC”) denials before July 15, 2020. Taxpayers also had until July 15, 2020 to provide requested information to support a pending OIC. Finally, any OIC payment due before July 15, 2020 was extended until July 15.
Now that July 15, 2020 has passed, it is unclear what relief, if any, taxpayers will receive. One thing that does seem to be clear: the FTB is collecting taxes again.
In one case, a firefighter and his wife were assessed with unpaid tax due, a late filing penalty, and interest. The husband claimed he did not have access to necessary information to file because he was assigned to a Federal Incident Management Team. The husband and his wife then filed for a tax refund arguing that the late filing was due to reasonable cause.
“The FTB denied the claim. Taxpayers appealed but the Office of Tax Appeals (“OTA”) found the taxpayers did not establish the dates and locations of the husband’s deployments, whether he returned home between deployments, the total amount of time he spent at home, and whether he could have transferred the necessary tax documents to his wife. Therefore, the OTA affirmed the FTB’s denial of Taxpayers’ refund claim.”
For taxpayers who are looking to get their tax liens released, the FTB will take these requests on a case-by-case basis. Taxpayers looking to have their tax lien released will need to contact the FTB and obtain any necessary documentation. The FTB emphasizes it will consider whether the lien release would be in the interest of the taxpayer and the state.
Like many individuals, California also fell on hard times this year, and has felt its budget tighten. This is reason to believe California’s tax collections enforcement might get stronger, not weaker. As discussed in previous articles, the IRS enforcement trends of 2021 are projected to be stricter due to the loss of government tax dollars and revenue in 2020.
It would be extremely unpopular to raise taxes in the current climate of coronavirus with so many Americans struggling. Thus, the current language regarding COVID-19 relief from the California Franchise Tax Board sounds optimistic for taxpayers. However, based on the recounted firefighter story, the increased zealousness with which it enforces tax laws could be cause for concern.
If you are a taxpayer who currently owes money to the FTB, it would be a good idea to call our office. We can setup an appointment to discuss the state of your California tax liabilities, and a plan for tax debt resolution that will get you back in the black again.
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-Aileen Dwight, Licensed Clinical Social Worker & Psychotherapist
Last updated: March 25, 2023
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