Guide to Franchise Tax Board Debt Collection
Franchise Tax Board–– An Overview
Before digging into FTB Collections issues, here is a brief overview of the California Franchise Tax Board.
The Franchise Tax Board is responsible for administering personal and corporate income taxes in the State of California. It is also responsible for many other non-tax functions, such as child support payments.
Most of the time, the FTB follows rules similar to the IRS and the federal internal revenue code.
For example, if you pay quarterly taxes, the FTB and the IRS may have the same or similar due dates. However, that is not a given. If an audit is required, the FTB will often use the results from an IRS audit as the basis for its own, decreasing the number of employees needed to perform auditing.
If taxes are not paid in full and on time, the FTB can put a lien in place to block the sale of any property that may be needed in the future to fund unpaid tax debts.
FTB Liens––When California Comes for Your Money
The repercussions of an unpaid balance due to California Franchise Tax Board (FTB) can be severe, especially for a small business owner with everything to lose. The law allows the FTB to pursue payment of tax debts aggressively through a number of involuntary collection actions. Not only is this unpleasant, it can often be financially devastating.
If you have received a notice from the FTB requesting payment in full on a past-due balance or informing you that a collection process has begun, you are probably under considerable stress. The first thing that you should do is make sure that you fully understand the situation, and if necessary, find qualified legal representation for the next steps.
A Quick Introduction to Tax Liens
The topic of tax liens can be complicated and intimidating the first time you approach it, but the basic principles are not difficult to understand.
- What are tax liens and how do they occur?
In simple terms, a tax lien is a public notice which establishes the government’s legal claim to your property as security for delinquent tax debts. Tax liens may occur at the local, state or federal level, and they may be applied to some or all of your assets.
A lien makes it extremely difficult to sell property or obtain financing, and if it goes unpaid for too long, it can leave you vulnerable to more drastic collection actions.
- When are you at risk for a tax lien?
In the case of the California Franchise Tax Board, a lien is generally recorded after a demand for payment has gone unanswered. The FTB will then send a notice of collection action to a delinquent taxpayer 30 days before recording the lien. This notice will contain your tax debt, your rights in contesting the debt, and the deadline for avoiding the collection action.
If your address has changed and you did not notify the FTB directly to change your address, you cannot use this as a defense. Simply mailing the notice to the last known address satisfies due process requirements.
- How is a FTB tax lien recorded?
If you do not respond to this notification, the FTB will record a lien with the county recording office in the county of your residence or a county in which you own real or personal property. They will then file a notice of state tax lien with the California Secretary of State.
The Consequences of Ignoring Payment Obligations
Like most tax problems, tax liens do not disappear when ignored. Neglecting to pay an active California FTB lien in a timely manner has serious fallout, and may trigger a cascading series of grievous personal, professional and financial issues. Under certain circumstances, you can be held personally responsible for your business tax debt.
Additional interest, fees and penalties
There are many extra fees which can quickly accrue to substantial amounts, including but not limited to interest, a late filing penalty,a late payment penalty, an estimated tax penalty and a demand to file penalty.
Damaged credit rating
Credit bureaus regularly check public records for recorded liens, which can have a disastrous impact on your credit score.
Under the authority of the California Revenue and Taxation Code (R&TC) the FTB may pursue one, some, or all of the following collection actions:
Seizure of assets
The FTB can issue warrants to enforce the payment of a lien, including warrants for the seizure and sale of assets that you own or hold an interest in. It is even possible to lose your house.
Levy of bank account
A bank levy allows the FTB to seize any funds in your bank account up to the full amount of your liability and related fees.
Garnishment of wages
Your employer may receive a notice from the FTB requiring them to continuously withhold up to 25 percent of disposable income owed to you. According to the FTB, your disposable income is your gross income after federal income tax, Social Security, State income tax and state disability have been deducted, but before 401(k) contributions, health benefit deductions, court-ordered assignments for support and voluntary deductions are taken out.
Even if you are self-employed, the FTB can still garnish income owed to you for contracted services.
How to Stop Collections
If you have had an FTB lien recorded against you, it is vital that you act quickly. Delays are dangerous, and communication with the FTB is your best chance of slowing the collections machine. There are several ways that you can get your lien released.
Pay the full amount due
Obviously, if at all possible, this is the best option. You will need to pay the total tax liability (including any penalties, accrued interest and fees) for whatever tax years the lien represents.
Once you have paid, the FTB will record a certificate of release in the office of the county recorder where the lien was recorded and will also file the release with the California Secretary of State within 40 days.
If you submit your payment by check, those 40 days will not begin until your bank/financial institution has honored the transaction.
Reach an installment agreement
If you can meet the financial hardship conditions determined by the FTB, it may be possible to arrange to pay your tax liability through a monthly installment plan. You will need to file any delinquent returns and pay a one-time fee to set up the agreement, which will be added to your liability.
FTB staff will determine your eligibility after you fill out a request form. The FTB may still record a lien on your property in order to secure the debt until it is paid, but the regular payment of installments will stop further collection actions.
If you regularly miss payments, have dishonored payments or incur further liabilities, your agreement may be revoked.
Make an Offer in Compromise
If you do not have the means, assets or income to pay your full liability now or in the foreseeable future, you may apply to make an Offer in Compromise, which the FTB says they are likely to accept when “the amount offered represents the most we can expect to collect within a reasonable period of time.”
An application for an Offer in Compromise is a fairly complex undertaking and may not immediately stop collection actions. You may also be required to enter into a collateral agreement for a term of five years.
This means that if your earnings increase substantially, you will be required to make further payments from any future income exceeding an agreed threshold.
If the lien is in error, you may file a dispute
Sometimes, the FTB makes mistakes and records liens against innocent taxpayers. If you believe that a lien has been filed in error, you must call or write to the FTB immediately to explain the error.
The FTB will investigate and if they agree, they will send a release to the county where they filed the lien. At your request, they will also mail a copy of the release to the relevant credit bureaus. You generally have 30 days to prove the error.
Cannot Afford to Pay
Unfortunately, in some cases an overwhelming tax liability can lead to bankruptcy, and bankruptcy does not always mean that tax problems go away. In some cases, a lien may survive the bankruptcy process.
FTB tax liabilities can be discharged by bankruptcy, but it is important to consult with a professional before taking such a drastic and complex step. There are many steps that must be followed in the correct order, and any business which owes overdue taxes must be dissolved so that it is unable to generate any further sales tax liability.
There are a number of relevant factors which affect whether or not your liability is dischargeable and several prerequisites that must be met before any type of tax debt can be discharged. The conditions, exceptions and events which could prevent the discharge of that debt are many.
A thorough review of all the documentation and conditions surrounding your tax situation by an attorney with experience in tax discharge issues is an absolute must. A qualified bankruptcy expert can lead you safely through the process to the other side, where you can begin to reclaim your life.
No matter where you may be in the FTB collections process, there is no reason to live in fear. When you can face the situation head on, armed with quality information and supported by a qualified advocate, you will have taken your first steps towards freedom and peace of mind.
Franchise Tax Board Liens–– Part Two
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.
A specific lien is enforceable for a specific obligation existing against the owner of the property and depends on the possession of a property by the 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. The 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.
The 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 the FTB discovers that the taxpayer transferred property to a third person but still retains control over it. No matter what, the property will be encumbered by the 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 the so-called Taxpayer Bill of Rights.
The FTB can file lien where the taxpayer and the FTB entered into an installment agreement, but there is still a balance to close or history of non-payment by the taxpayer. The FTB must notify the taxpayer of this possibility when entering into an installment agreement, and must notify the 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 the FTB in accordance with the internal Lien Extension Guidelines and by taking into consideration factors listed in the Guidelines. If the FTB fails to extend the lien for any reason after 10 years from the date of its creation, the lien expires.
Franchise Tax Board Liens–– Part Two
The 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 the county recorder becomes a public record and is used mostly for real property. A Secretary of State lien will be filed to attach to consumer goods, fixtures, and bulk sales, as well as when personal property like accounts receivable, chattel paper, equipment, farm product or equipment, inventory and 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. The 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. A Notice of State Tax Lien is more likely to be filed by the FTB with the county recorder’s office if the taxpayer is self-employed, has real property, is contemplating filing a bankruptcy, is terminally ill or is involved in judicial proceedings.
The Taxpayer 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 the NSTL by the FTB may result in the FTB losing 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.
Owing Money to the FTB
The FTB administers two of the state’s big tax programs: personal income tax and corporation tax. Your debt may be related to your individual state income taxes or, if you own a business which operates in California or “derives income from sources within the state,” you may owe franchise tax or corporation income tax.
Generally, if you do not pay the taxes due to the state on time, you will be sent a notice in writing, informing you of how much you owe. You have 30 days from the date of that notice to pay the balance due or contact the FTB about other arrangements.
After those 30 days, the FTB may begin enforced collection actions such as imposing wage garnishments, filing state tax liens and imposing collection fees. If you wait long enough, they can eventually even seize your property.
If you know ahead of time that you will not be able to pay your taxes, you are still better off filing than not filing. If you fail to file your tax return the FTB will end up piling up some harsh penalties on top of your debt. The initial failure to file penalty is 5 percent of the tax due for every month that the return is late, up to a maximum of 25 percent. If you have ignored notices requesting information or demanding that you file a return, you face a delinquent filing fee of another 25 percent of the total tax liability assessed, without regard to any payments or credits.
Overview of a Tax Lien
Before digging into FTB Collections issues, here is a brief overview of the California Franchise Tax Board.
The Franchise Tax Board is responsible for administering personal and corporate income taxes in the State of California. It is also responsible for many other non-tax functions, such as child support payments.
Most of the time, the FTB follows rules similar to the IRS and the federal internal revenue code.
For example, if you pay quarterly taxes, the FTB and the IRS may have the same or similar due dates. However, that is not a given. If an audit is required, the FTB will often use the results from an IRS audit as the basis for its own, decreasing the number of employees needed to perform auditing.
If taxes are not paid in full and on time, the FTB can put a lien in place to block the sale of any property that may be needed in the future to fund unpaid tax debts.
A tax lien is filed in an effort to force you to pay your outstanding tax obligations. You might think of it as your property and bank accounts being held hostage. Liens exist to protect the government’s right to claim your personal property in the event you do not pay your taxes.
A lien is not a levy. A lien is a notice that your personal property and bank accounts may not be sold or cashed out until the lien is removed.
A levy is the actual seizure of bank accounts and sale of property up to the full amount of your tax liability and any related fees, penalties and interest.
The IRS will automatically record a lien when the amount of unpaid taxes reaches $10,000. It files a Notice of Federal Tax Lien to alert creditors that the IRS is claiming a legal right to your property.
The lien will be removed upon full payment of tax liability. The IRS also has an option for withdrawal of a lien, which allows other creditors to try to collect any outstanding bills. However, you are still required to pay the taxes.
The FTB records liens after a payment demand has gone unanswered. Typically, you are sent a notice of collection action 30 days before recording a lien. The notice contains the amount of tax debt, your rights in contesting the debt, and a deadline for avoiding collection action.
FTB Tax Liens and Your Credit
With a lien showing on your credit report, your credit score will go down, and the interest rates on any loans you may be eligible for will be significantly higher. In certain cases, you may not be able to apply for a line of credit at all.
Credit card companies, which seem to give credit to almost everyone, may still provide a credit card but at usurious interest rates.
Tax liens impact another form of credit that you may not typically consider. If you are planning to set up cell phone service and finance a new mobile phone through the agreement, you may find yourself shut out. A new mobile account may not be possible, even without the purchase of a new phone.
In fact, any transaction that hinges on your ability to pay future debt can become closed to you with a lien on your record.
How Long a Lien will Impact Your Credit Score
A lien could impact your credit score forever if you do not take care of your tax debt and make the proper notifications. Tax liens do not obey the seven-year removal deadline like other derogatory information.
Liens and Bankruptcy
If and when a lien is released because you paid the debt, you will still need to notify all three credit agencies yourself; the FTB will not notify them for you. Once the lien is gone from your credit record, the effects may still last on your credit score, but you now have a chance to restore your credit.
You must send a request for the lien notice to be removed; the credit agencies will verify it before removing the lien from your record.
Preventing a Lien
The best way to prevent a lien is to file and pay your taxes in full and on time. If that is not possible, you must at least file your income taxes and pay as much as you can toward the tax liability.
The earlier you notify and begin working with the FTB, the better off you will be. In the event that you may not ever be able to pay the entire tax debt, you can provide an Offer in Compromise. It is an agreement with the taxing agency that you will pay a lower amount, and the tax burden will be considered satisfied.
Another option is requesting an installment payment plan so you can pay an amount toward your taxes on a monthly basis.
Why You Should Hire a Tax Attorney
As mentioned at the beginning, taxes are complicated. The complications increase when you are unable to pay or if you break any tax law, even inadvertently.
A tax lawyer has the experience and familiarity with both federal and state tax law. You can be assured that all documentation will be filed correctly and on time. A tax attorney has your back when it comes to dealing with the IRS and the California Franchise Tax Board, both intimidating agencies to the common taxpayer.
If you do not pay your income taxes, the IRS and the FTB can and will record a lien against your property and your bank accounts until you have satisfied the debt.
A lien has a significant negative impact on your credit, increasing the interest requirements or keeping you from getting a line of credit or a loan in the first place.
That impact can remain on your credit report indefinitely and is not automatically removed upon release of the lien. Obtaining assistance from an experienced tax attorney can help you avoid a lien and the effect on your credit.
FTB Lien Release
Here Is a Quick Summary of Some of the Procedure Surrounding Franchise Tax Board Lien Release:
An FTB lien can be released without being satisfied under the following situations:
- 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
- The FTB has determined that the state tax lien has been recorded in error. In those instances, the FTB must send a copy of the lien release to the three major credit reporting companies
- A partial FTB lien release 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 FTB 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 FTB lien release with the SOS
- Deposit in the mail, or otherwise deliver, a FTB lien release to the taxpayer
If the FTB finds that lien is insufficiently secure or is unenforceable (as a result of bankruptcy discharge, for example), the 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. Please note that there is a difference between a FTB lien release and a withdrawal.
FTB Lien Release–– Part Two
One way for a taxpayer to satisfy a lien is through the sale or refinancing of real property. Liens discovered during title searches must be resolved before clear title can be conveyed and a FTB Lien Release should be requested. This is usually done by an escrow company, title company, financial institution or attorney.
A FTB Lien Release 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 FTB 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 FTB lien 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 FTB lien 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 whomever 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 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.
California Bank Levy Release
When a California taxpayer fails to make proper tax payments, the Franchise Tax Board can take a number of actions against them.
One of these measures includes initiating a California bank levy against the taxpayer, which is a seizure of their assets in their bank account. The only way to prevent this is to obtain a California bank levy release.
One important thing to note is that a levy on the assets in your bank account is one method that the California Franchise Tax Board has as a means of ensuring taxpayer compliance.
However, in cases where the Franchise Tax Board initiates a California bank levy, it is important to be aware of the proper tax procedure that is involved and what steps must be taken before funds are appropriated by the Franchise Tax Board.
Accounts Subject to a California Bank Levy
First, if you owe a California state tax balance to the Franchise Tax Board, they are granted legal authority to collect on your account in the event of non-payment or absent of a payment arrangement under California Revenue and Taxation Code Sections 18817 and 18670.
Typically, there is a 21-day holding period associated with a FTB levy so that the taxpayer has time to enter into a payment arrangement or seek a California bank levy release.
As a word of caution, California bank levy releases are difficult to obtain and after this 21-day holding period, the bank will turn over the levied funds to the Franchise Tax Board.
Also, the Franchise Tax Board can levy up to 100 percent of the balance owed in order to satisfy the liability.
California bank levies can attach themselves to any account listed in the name of the tax debtor. For example, joint accounts or any bank account where the individual in question has the ability to draw funds can be targeted by the FTB in order to satisfy the liability. This includes accounts where funds were deposited by someone else other than the taxpayer.
The main thing to realize is that if the taxpayer has control over the funds in the account, irrespective of whose funds they are, then the Franchise Tax Board can levy them in satisfaction of the tax debt.
How to Obtain a California Bank Levy Release
California bank levy releases are best obtained by calling the Franchise Tax Board and working to immediately resolve the liability.
Economic hardship or substantial cause in favor of why the funds should not be levied should be presented in order to get the FTB to release the levy.
If they are resistant toward releasing the levy, which they are known to be, it may be beneficial to consult with a California tax attorney or a qualified tax professional to examine what your best options are.
However, the one thing that you should not do is ignore the problem. The Franchise Tax Board will continue to press you and take adverse action against you until the problem is solved.
Income Withholding Order: How to Process an EWOT
Being served with an income withholding order can be a disconcerting experience as an employer. These orders can come from a variety of sources, but they are all legally binding and require careful handling. Understanding how these orders work, what your obligations are regarding them, and how to comply with them is very important.
Failing to do so can have severe consequences for you and your business.
An Introduction to Income Withholding Orders
As an employer, you may receive an income withholding order in relation to one of your employees. These are wage garnishments, where employers are required to withhold a portion of the employee’s income and pay that money to the issuing agency in order to repay an outstanding debt.
The debt may be in relation to child or spousal support, student loans or other existing debts. One common reason is to repay an unpaid tax debt and in this case, the order will be an Earnings Withholding Order for Taxes or EWOT.
This is issued under authorization of Sections 706.070 through 706.084 of the California Code of Civil Procedure to enforce payment of a tax liability currently due to the State of California. As with any court order, you must comply. It is illegal not to do so and you may be held personally liable for the debt.
What to Do if You Receive an EWOT
Before taking further action, read the document carefully to identify the issuing party. Next, notify all parties involved that you have received the order; in the manner specified below.
If there are multiple withholding orders, determine the priority of the orders. You can also read how to do this in the outline below. Additionally, you will need to determine the amount to be withheld; and arrange payments to the EWOT’s issuer.
You must complete the following actions within the mandated time period, to avoid being in contravention of the order:
- Deliver Employee’s Copy Pages 1A, 1B and 3 to the employee within 10 days of receipt.
- Complete and return the Employer’s Acknowledgement, Page 2A and Page 2B (if applicable), within 15 days of receipt
- With each payment that you send, include a copy of Employer’s Copy Page 1A of the EWOT
- The first payment should be sent at the end of the next pay period, i.e., the one that occurs at least 15 days after receipt of the order
- Continue making payments until the balance of the EWOT is paid, you receive written instructions that the EWOT is withdrawn or you receive a higher-priority Earnings Withholding Order.
How to Process an EWOT Payment
EWOT payments are made in the amount of 25 percent of an employee’s disposable income.
Disposable income is calculated as follows:
- Calculate your employee’s gross income. That includes the total amount of all wages, salary, commissions, bonuses and vacation pay.
- Subtract deductions that are required by law, like federal and state income tax, State Disability Insurance, Social Security and Medicare.
- Do not subtract payments to which the employee has agreed voluntarily, such as union dues, 401K contributions, health or life insurance contributions or charitable contributions. This also includes existing spousal or child support payments and any existing payments that the employee has agreed to make to creditors.
- The amount that remains is the employee’s disposable income. Each EWOT payment will be 25 percent of that amount unless the amount falls below the minimum which is specified on Page 6 of the EWOT.
- You may also deduct $1.50 from the employee’s pay for each EWOT payment as reimbursement for your time in making the payments.
Determining the Priority of Various Withholding Orders
If there is more than one withholding order issued, the priority is as follows:
- First Priority: Court ordered withholding orders for child or spousal support.
- Second: Jeopardy withholding order for taxes (JWOT)
- Third: Earnings withholding order for taxes (EWOT)
- Fourth: Earnings withholding order (EWO)
If a higher priority order, such as a court ordered withholding order for child support or JWOT, is issued after an EWOT, it takes priority. The EWOT will then be calculated as the remainder of 25 percent of the disposable income, if any.
The total withheld cannot be more than 25 percent of the employee’s disposable income, so if the child/spousal support order exceeds that amount, the EWOT ceases to be in effect.
If a second EWOT is issued when a first EWOT is in effect, the first EWOT remains in effect and is not displaced. The second issuer should be notified that the first EWOT is in place and you are already withholding on that order. An EWO will be displaced by an issued EWOT.
If the employee’s disposable income falls under the specified minimum, then no monies should be withheld. If the disposable income is above the minimum but under a specified threshold, the money withheld will be the difference between those two amounts where that is less than 25 percent. The amounts are laid out on Page 6 of the EWOT.
FTB Wage Garnishments
A Continuous Order To Withhold (COTW) is a legal order seizing funds from a miscellaneous payer 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 payers do not include funds held by a bank or escrow company.
A COTW attaches 100 percent of the available funds at the time they are received, but does not exceed the amount due on the order.
A COTW is valid until the amount on the order is withheld in full or the 12 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. 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.
Penalty Abatement: Eliminating FTB Tax Interest
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 percent of the total unpaid tax, and a further 0.5 percent 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.
An Introduction to Tax Interest Penalty Abatement
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.
Circumstances for Abatement
There are six recognized circumstances under which the FTB 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:
- A completed Financial Statement, Form FTB 3561.
- A detailed statement from your physician, if it applies to your case.
- Verification of catastrophic circumstance(s) or significant disability, such as insurance documentation, etc.
If your tax liability is due to the FTB issuing a large 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 .
Reliance on formal written advice
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:
- You make a formal written request to the FTB for specific clarification about whether any particular transaction or activity is subject to tax.
- The FTB responds, in writing, to your request, with information stating that the activity or transaction is not subject to tax.
- You reasonably rely and act on this advice, and do not remit tax, based on the advice.
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:
- A copy of your original written request for advice. This request must not include any misstatement or omission of relevant facts or important information, or your claim will be denied.
- A copy of the written advice you received from the FTB.
- A statement outlining the facts on which you are basing your claim. This statement is made under penalty of perjury, which means that you must be able to state these facts truthfully under oath in court.
- Any other relevant information required by the FTB.
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:
- For disasters that were declared on or after January 1, 1998, the FTB will not charge interest for the extension period for individual taxpayers who were victims of a disaster. This provision does NOT apply to estates and trusts or to corporations, and covers up to 90 days of interest.
- For disasters that were declared on or after September 11, 2001, the FTB will not charge interest for the extension period for any taxpayer, including individuals, estates and trusts, business entities and corporations who are victims of a disaster.
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 U.S. are qualified to receive filing and payment extensions without interest or penalties, including in the case of back taxes.
- Military personnel serving outside the United States in a designated combat zone or in a qualified hazardous duty area (QHDA) at any time during the tax filing period of January 1 to April 15: You are entitled to an interest- and penalty-free filing and payment extension of 180 days after leaving the combat zone or QHDA, as well as an additional extension for every day you served in the combat zone or extension, up to 106 additional days.
- Military personnel serving outside the United States but NOT in a designated combat zone or in a qualified hazardous duty area (QHDA): You are entitled to an interest- and penalty-free filing and payment extension of 180 days after your return to the USA.
- If you owe back taxes, you will be able to defer payment in most cases without interest or penalty in most cases, for up to 180 days after you return to the USA. In the case of a National Guard or reservist called into active duty and this service materially affected your ability to pay your tax liability, you can request an interest- and penalty-free determent from the date you were called to full-time service until 180 days after you left full time service. You will also need to submit a certificate signed by an appropriately authorized officer of the military which includes the following:
- Dates you entered and left service
- Place where service occurred
- Rank, branch, and unit
- Monthly pay received at the date the certificate was issued.
- If you receive a notice from the FTB, you should call the number on the notice to discuss your military status and qualification for interest abatement.
- To qualify for deferral or abatement will need to provide the FTB with:
- Your name and social security number (SSN)
- Your mailing and/or permanent address
- Your branch of service
- Name and number of your unit
- Dates you entered and left service
FTB/IRS error or delay
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 a few other requirements you must meet in order to qualify for interest abatement under these circumstances.
- The interest must have accrued after September 25, 1987.
- No significant aspect of the error or delay can be your fault or attributable to you.
- The error or delay must have occurred after the date you first heard from the FTB in writing regarding your deficiency or payment.
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:
- Fill out and mail form FTB 5847I Procedure for Appealing a Denial or Partial Denial of a Request for Abatement of Interest.
- Prepare supporting evidence and documentation for your appeal hearing.
How to File a Penalty Dispute
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:
- Fill out and mail either Form FTB 2917 Reasonable Cause – Individual and Fiduciary Claim for Refund or Form 2924 Reasonable Cause – Business Entity Claim for Refund
- Send a copy of the notice you are disputing.
- Provide evidence and documentation supporting your case.
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.
Franchise Tax Board Business Collections
Voluntary Case Resolution Procedure
The FTB has established special procedures for business tax collections. It issues notices to business entities with tax issues which 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. The 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. The FTB’s failure to provide notice before taking action may raise 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 into 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, the 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:
- Active businesses with valid addresses
- Accounts with viable assets, including multiple real estate properties
- Verified non-compliance cases
- Businesses that repeatedly pay filing enforcement assessments without filing tax returns.
- Businesses that repeatedly refuse to file their tax returns or pay their tax balances
- 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.
The 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 the 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 the 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 Settlements – Part One
The California Franchise Tax Board (FTB) has authority to settle administrative civil tax disputes. Such authority allows the FTB to settle civil tax disputes that arise out of protests, appeals or refund claims filed by taxpayers.
The FTB’s Settlement Bureau is the body responsible for the negotiation of settlements. The Settlement Bureau is not allowed to settle court litigation cases – such cases must be settled outside of Bureau.
If a taxpayer is not disputing that they owe tax (tax liability), and is merely seeking relief from an obligation to pay a tax liability because they are not able to pay, the taxpayer must instead contact a program called Offer in Compromise program at (916) 845-4787.
The settlement process is fairly complicated. The Executive Officer of the Franchise Tax Board may recommend to the Franchise Tax Board a settlement of dispute. The Executive Officer can also authorize the FTB’s Chief Counsel to make such a recommendation. The recommendation is then submitted to the Attorney General.
Within 30 days, the Attorney General must review the recommendation and advise the FTB is writing whether such recommendation is reasonable. The FTB then submits the recommendation to members who must approve or disapprove it within 45 days after submission.
Disapproval can be made only if the majority of members voted to disapprove. If FTB members do not approve or disapprove within the 45-day time period, then such recommendation is automatically approved. In cases involving reduction in tax or penalties in the amount of $8,500 or less, the Executive Officer and the Chief Counsel can jointly approve or disapprove without submitting to Attorney General.
A statement is placed in the office of the Executive Officer of FTB if approved reduction in tax or penalties is more than $500. Such statement is a public record and contains following information:
- The name or names of the taxpayers who are parties to the settlement
- The total amount in dispute
- The amount agreed to pursuant to the settlement
- A summary of the reasons why the settlement is in the best interests of the State of California
- For any settlement approved by the Franchise Tax Board, itself, the Attorney General’s conclusion as to whether the recommendation of settlement was reasonable from an overall perspective.
Except for the public record statement above, all other settlement information is considered confidential. To ensure confidentiality, the FTB and taxpayer sign a non-disclosure agreement prior to negotiations and all information other than what is in the public record statement generally cannot be used in subsequent legal proceedings in any administrative agency or court, and cannot be disclosed to third persons unless law requires to disclose it in limited circumstances.
All settlement agreements between the FTB and a taxpayer are final and cannot be appealed, unless it can be shown that one side defrauded the other regarding facts material (important) to settlement.
Franchise Tax Board Settlements – Part Two
A taxpayer who wants to settle must submit a written request, which must include the following information:
- Taxpayer’s name and current address
- Taxpayer representative’s name, current address, fax and telephone number
3.Taxpayer’s Social Security number or taxpayer identification number
- Taxable year(s) involved
- Tax amount involved
- Present status of dispute (i.e., is it a protest, appeal, or claim for refund)
- Copy of representative’s power of attorney (FTB form 3520), unless a valid form is already on file with the FTB
- Good faith settlement offer (amount offered to settle), including the grounds in support of the offer
- Identification and discussion of all issues in contention, including legal and factual grounds for positions taken by the taxpayer
- A listing of all Notice(s) of Proposed Assessment (NPA) and Claim(s) for refund for the taxable years involved that are not part of the taxpayer's settlement request. The taxpayer must also provide the present status of each NPA(s) and Claim(s) for Refund and the amount(s) involved.
All settlement requests by taxpayers are reviewed by FTB Settlement Bureau staff who determine if the case is a good candidate for the settlement program. Then staff notifies the taxpayer of their decision – to begin settlement negations or not.
The FTB usually negotiates if the dispute is real, but the FTB is not required to accept it into the settlement program. Usually the FTB is more willing to negotiate if there is a higher risk of litigation or the taxpayer presents well-developed facts.
The settlement program provides an expedited method of resolving civil tax disputes. Usually a tentative settlement is reached within nine months after a taxpayer's settlement request and when settlement is reached, the taxpayer must sign a written agreement with terms of settlement.
Settlements become final after approval by the FTB for larger settlements and by the Executive Officer for small settlements. If settlement is not reached within nine months, then the case is removed back into original pre-settlement status (protest, appeal or claim for refund).
CONTACTS: Taxpayers seeking additional information or desiring to initiate settlement of their civil tax matters in dispute should call or write (providing the required information set forth above) to:
Patrick J. Bittner
Director, Settlement Bureau, Mail Stop A270
Franchise Tax Board
P.O. Box 3070
Rancho Cordova, CA 95741-3070
Telephone: (916) 845-5624
Fax: (916) 845-4747
General Settlement Message Line: (916) 845-5034
What is an Offer in Compromise?
The quick definition of an offer in compromise is “a settlement for less than the full amount you owe.” In practice, it’s slightly more complicated. Generally, an offer in compromise is something of a last resort. The FTB will generally consider an offer in compromise if you can prove that you have no way to pay your outstanding taxes, and when the amount offered is “the most the Franchise Tax Board can expect to collect within a reasonable period of time.”
California Offers in Compromise
If you owe money to the State of California, the one kernel of good news is that you can also make an offer in compromise as you would with the IRS. It is a problem that many individuals or business owners in California have faced. You may have had a difficult year financially, and when tax time rolls around you discover that you owe more to the California Franchise Tax Board (FTB) than you can afford to pay.
If this is your situation, there is light at the end of the tunnel. The FTB is willing to work with cooperative delinquent taxpayers to come up with a solution that works for both parties. One of these solutions is the offer in compromise (OIC). Could it be the right choice for you? You need to understand what is involved, how it can help your situation, whether you are eligible and how to apply before you can make a decision.
Should You Consider Making an Offer in Compromise?
The FTB will expect you to exhaust most other avenues for paying off your tax debt. The most common way to pay off outstanding taxes is an installment agreement, but you will also need to consider taking out a loan or selling off assets. If you absolutely cannot find a way to pay and have no prospect of being able to pay the full amount within five years, you will have to look at making an offer in compromise.
The main benefit to the OIC, aside from having to ultimately pay less money to the FTB, is that in most cases it will halt the collections process. The FTB will usually release any state tax liens on your property and stop the actions of any third-party collection agencies.
Making an offer in compromise is not without its drawbacks, however. It is a financially invasive process, and the standards for acceptance are stringent. You may need to sell assets and forfeit tax credits and refunds. There is no guarantee that your offer will be accepted, and even if it is, you will need to be perfect in your tax dealings for the foreseeable future. One missed payment or late filing could jeopardize the agreement.
You will likely be waiving some tax benefits such as the statutes of limitations on investigation and collections. An OIC will likely stop the clock and leave you open to future scrutiny. You may also be asked to enter into a collateral agreement with the FTB. In a collateral agreement, you must promise to pay the FTB a percentage of any future income over a certain threshold for a period of five years.
To apply for an offer in compromise, you must have filed all your tax returns to date. To be eligible, your financial situation must be fairly dire, and it is up to you to prove your inability to pay the total debt. Each case is decided individually, and the FTB gives specific consideration to the following factors:
- Your ability to pay
- Your equity and assets
- Your present and future income
- Your present and future expenses
- The potential for changed circumstances
- Whether the offer is in the best interest of the state
The taxpayer can apply for a California State Tax Offer in Compromise only if they filed tax returns or are not required to file tax returns. The taxpayer also must fully complete the Offer in Compromise application, and provide all supporting documentation.
Then, the consumer must come to an agreement with the FTB regarding the amount of tax they owe, and must authorize the Franchise Tax Board to conduct an investigation and verify information on the taxpayer’s application.
If the Franchise Tax Board thinks the taxpayer has a potential for a future increase in earnings, it may, after approval of the application, require that the taxpayer enter into a so-called collateral agreement with the FTB. The agreement is for a duration of five years and will require the taxpayer to pay the FTB a percentage of future earnings if earnings become higher than certain threshold established by the FTB and agreed to by the taxpayer.
The FTB usually does not require collateral agreement if the taxpayer is on fixed income or has limited potential for increase in income.
Unfortunately, collection activity by the FTB does not stop even if it enters into an agreement with the taxpayer. The FTB may continue to collect tax if stopping collection efforts can potentially result in loss of the FTB’s ability to collect what is owed. Interest also continues to accrue.
The taxpayer submits an agreed-upon payment amount only when the Franchise Tax Board requests payment according to the Offer in Compromise Agreement. The Franchise Tax Board requires lump sum payment under this program.
The FTB can also work with an installment agreement if the taxpayer has the ability to make monthly payments that in total will exceed the amount initially offered by the taxpayer and accepted by the Franchise Tax Board.
To fill out a California State Tax Offer in Compromise application, the taxpayer will need to provide a significant volume of information. That includes verification of income, documents, such as pay stubs for the previous three months, or financial statements for the previous two years, if self-employed.
Any investment or ownership in the business or trust will have to be disclosed. For expenses, the taxpayer can provide billing statements for the previous three months. The Franchise Tax Board will require complete bank information, including statements for all accounts for the last six months for those who are employed, and for the previous two years for self-employed taxpayers.
Information submitted must also include closed bank accounts.The FTB also requires information about securities owned, interest in real estate, information from the IRS, legal documents such as divorce decrees or marital settlement agreements, medical information such as any medical condition that should be considered by the Franchise Tax Board and any powers of attorney.
On the application, the taxpayer 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. The application will ask detailed information about the taxpayer’s expenses, too.
Business taxpayers 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 and securities must be provided.
The Franchise Tax Board will ask for business references, for detailed income information, about salaries and disposals of assets worth more than $500 in recent period.
Because every case is unique, it is impossible to say what the chances are that the FTB will accept your offer. It is worth noting that even if the IRS has accepted your offer in compromise, the FTB will not automatically also accept your offer on the state level. They will review your case themselves. The FTB is stricter and more aggressive than the IRS in determining which offers in compromise will be accepted.
The Process: How to Make Your Offer
The first step towards making an offer in compromise is to fill out the appropriate form. You have three choices. If you are an individual taxpayer and your OIC is regarding your personal tax liability, you can fill out either the OIC FTB Application – FTB 4905PIT or the OIC Multi-Agency Application – DE 999CA.
The multi-agency application allows you to submit offers to all three California tax agencies (FTB, BOE and EDD) at once. Each agency will consider the offers individually, but it will save you some time in your application process. If you are making an OIC for Business Income Tax you will need to fill out the OIC FTB Application – FTB 4905BE.
You will be required to submit substantial documentation with your application form, such as pay stubs and statements from all of your bank accounts for the last six months to two years, including any bank accounts which you have closed. The forms ask for highly detailed information about assets, investments debts, insurance, court proceedings and pending litigation and even medical information if you have a condition which the FTB should take into account.
Legal documents to include are:
- Vehicle registrations
- Marital settlement agreements
- Divorce decrees
- Marital property settlements
- Trust documents
- Bankruptcy documents
If you are making an OIC for a business, you will probably have to include all of the above along with business references and comprehensive information about ownership, management, salaries and more.
The most challenging part of any OIC application is usually determining the amount to offer. The IRS has a set formula as a starting point for this calculation, but the FTB does not. At this point, it may be worth speaking with an experienced tax attorney. While representation is not required, it can help.
If your offer is accepted, you will have to pay the OIC in full. The FTB does not accept installments for offers in compromise. They will ask for a cashier’s check or money order for the full amount of your offer. If they do not accept your offer, they will contact you to discuss your case.
They may counter with a higher sum, or it may be that they have determined that you can afford to pay off the debt within five years. In that case they will help you set up an installment agreement. This is another area where a tax attorney can help. The appeals process for an FTB OIC is fairly casual, but negotiations are best handled with a professional by your side.
A huge tax bill can be devastating, especially when you do not have the means to pay it. For many people, the natural first reaction is avoidance and denial, which can quickly make a tough situation much worse.
Consequences for delinquent unpaid taxes are severe, and the longer you take to respond, the more trouble you can cause for yourself or your business. Remember that there are always options. If you are willing to work with the FTB, they will be willing to work with you.
At my firm, Brotman Law, we have seen and negotiated many deals with the FTB and can help you review your specific situation to arrive at a reasonable dollar amount with the highest likelihood of acceptance.
California Interagency Offer In Compromise
California’s streamlined Offer in Compromise process, where now a single application can be used for three different agencies: California Department of Tax and Fee Administration (CDTFA), Employment Development Department (EDD) and Franchise Tax Board (FTB). The application is located at http://www.edd.ca.gov/pdf_pub_ctr/de999ca.pdf.
Just like before, taxpayers can apply for an offer in compromise program when they are unable to pay their full tax liabilities to the state. The program allows taxpayers to negotiate a reduced amount of their non-disputed tax liabilities.
The state will consider an Offer In Compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. However, previously California taxpayers had to submit a separate form to each of the three agencies. Now, they can submit a single interagency application with the state, and all three agencies will coordinate the offer in compromise process among themselves.
The form is available online at the California Tax Service Center (www.taxes.ca.gov), as well as at each of the three tax departments’ websites (CDTFA (www.cdtfa.gov), EDD www.edd.ca.gov, FTB www.ftb.ca.gov).
The individual agencies must still negotiate each Offer in Compromise separately for their respective taxes. For example, the FTB will negotiate a state income tax liability with the taxpayer and the CDTFA will negotiate a sales or use tax liability.
Main requirements for application have not changed. The taxpayer will have to agree with the amount due and the amount due is final, and the CTFA determines you do not have, and will not have in the foreseeable future, the income, means or assets to pay the amount due in full.
Generally, respective agency rules regarding offer in compromise programs did not change significantly. However, some recent changes have been made. For example, effective January 1, 2009, through January 1, 2018, the CDTFA will also consider an offer in compromise for open and active businesses that have not received reimbursement for the taxes, fees, or surcharges owed; successors of businesses that may have inherited tax liabilities form their predecessors; and consumers, who are not required to hold a seller’s permit, but incurred a use tax liability.
Certain conditions apply, however, like signing a collateral agreement prior to approval of an offer and agreeing to remain current on all tax returns filed during the succeeding five-year period.
Like before, these three agencies will not initiate tax collection activity while the offer is pending. Agencies will look at taxpayer’s ability to pay, amount of equity in taxpayer’s assets, present and future income and expenses, likely future change in circumstances, and whether tax evasion or fraud is involved. Agencies can use both public and private sources of information to verify the taxpayer’s financial condition. If the offer is approved, then all tax liens will be released.
Therefore, a single application for all three agencies is a positive development, but the fact that three agencies still negotiate separately is probably a drawback.
Currently Non-Collectible (CNC) Status
Sometimes your financial fortunes take a turn for the worse, and you find yourself owing back taxes to the Franchise Tax Board. You can not afford to make installment payments, yet you would like an alternative to filing for bankruptcy. An Offer in Compromise may be off the table if you can not afford to pay a lump sum.
Under certain circumstances, you may be eligible for an IRS and FTB program in which your account can be labeled as Currently Not Collectible.
Currently Not Collectible (CNC) is a status used by the IRS and FTB for taxpayers suffering extreme financial hardship and cannot afford to pay their back taxes. The taxpayer’s account is placed on hold or suspended. It will be reviewed at a later date for possible collections.
The IRS and FTB will cease all phone calls, notices, wage garnishments, and bank levies. You may receive a periodic statement showing your balance owed but no demands for payment. However, the tax agencies may file a lien on your property to secure their interests.
Other important considerations:
- CNC status is not permanent.
- Interest and penalties still accrue to your account, including the failure-to-pay penalty.
- Any tax refunds will be retained and paid toward your tax bill.
- It does not “settle” your back taxes; it simply delays payments for a time.
Also, the clock continues to run on the statute of limitations. There is the potential that the time the tax agencies have to collect will expire while your account is CNC. In that case, collections actions stop.
You may make voluntary payments without fear the Currently Not Collectible status will be rescinded because of them.
How Do You File for CNC Status?
Filing for Currently Not Collectible status requires close attention to the paperwork. Knowledge of the California state rules and regulations on taxes is also a requirement. A tax attorney has the knowledge and ability to help you with the process.
The decision to place a taxpayer’s account on CNC is based on an examination of your Collection Information Statement (CIS) that has been completed updated to the time of the examination. A Tax Compliance Officer takes the CIS as well as your health and age into account when making the decision.
If the FTB believes that in the future their collection efforts will be successful, a state lien will be filed against you before your account is officially declared CNC.
What Is Financial Hardship?
To obtain CNC status, you must be able to prove financial hardship. What you feel is a financial hardship may not match the requirements of the tax agencies.
For example, when your financial picture is reviewed for CNC, you are budgeted a certain amount per week for groceries. In California, groceries are more expensive than the same groceries would be in Nebraska. However, the agency depends on the grocery price averaged across the country. Even though the California prices are higher, it will not make a difference in your designation for economic hardship.
Currently Not Collectible status is meant for severe economic hardship; it is not easily granted. Once it is, your financial status must change significantly for it to be revoked. At that time, the FTB (and the IRS) will resume collections via payment in full or through an installment agreement.
For this reason, you must keep your tax status and filings up-to-date throughout your time on CNC status.
What Are the Effects of CNC Status?
If your account is placed on CNC status, it is taken temporarily out of collections. Wage garnishments, asset seizures, and bank levies will end or never be started. CNC is a time for the taxpayer to focus on meeting personal expenses without being placed in further hardship.
Periodically, the IRS and FTB will re-evaluate your situation to see if your financial status has changed enough to begin collections again. The IRS re-evaluates every 12 months while the FTB offers CNC status in six, nine, and 12-month periods between reassessments.
Although collection attempts will cease during CNC status, the Franchise Tax Board will place a lien on any property you have to secure their interests. A Notice of Tax Lien places a negative impact on your credit score and can make it difficult to sell the property, even though your intent is to use the proceeds to pay your tax bill.
Is a CNC Status the Best Remedy?
While receiving a Currently Not Collectible status can relieve the necessity to pay money you do not have, it is not a situation that benefits anyone, you or the tax agencies.
If your financial situation is such that you qualify as an extreme hardship case, you are already in bad shape. Nobody would want to remain in that position for long, even if improving your financial picture means you must pay taxes again.
Do not forget, interest and penalties continue to accrue on the unpaid balance, and you must continue to file your tax returns every year to avoid additional penalties for failure to file.
Leaving yourself and your family in such limbo means you still have all the stress of paying for your personal expenses with nothing to cushion further economic blows. If you hope to wait out the statute of limitations for collections in the State of California, you must remain in extreme financial hardship for up to 20 years, double the statute of limitations for IRS collections.
Obviously, the inability to collect taxes does not benefit the state or the federal government because that means less money is available for government services.
Clearly, CNC status is meant for those in the very worst of financial circumstances and it is not a permanent remedy. Currently Not Collectible status merely delays the requirement to pay taxes and does not settle your back taxes. Interest and penalties continue to swell the tax burden.
If you can, instead, arrange an installment payment agreement, the interest accrual only impacts the remaining balance. Each time an installment is paid, the balance is lower, meaning less interest will be charged.
An Offer in Compromise allows you to settle your tax bill for less than you owe. Your account will no longer accrue interest and penalties because your tax debt is considered to be paid off.
Both of these remedies do far more for your situation than CNC status because they eliminate your tax burden and allow you see the light at the end of the tunnel.
Franchise Tax Board Lawyer Hiring Criteria
First, I want to state that I do not believe everyone needs a franchise tax board lawyer to handle their California state tax issues. One of the main reasons that I started blogging was to help people. I wanted to motivate “self-help” style legal solutions by taking the knowledge that I have as an attorney and making it available on the web.
Indeed, if you take the time to read much of what I have written on the blog, you can almost become as knowledgeable as I am on many of these same subjects (although I have an experience edge dealing with this stuff in practice).
However, I am cognizant of the fact that there are some situations where it is beneficial to hire a franchise tax board lawyer to handle your California state tax issues. I am not talking about routine collection issues, where most people with some basic financial knowledge can work their way through.
Rather, I am talking about more complicated matters where having a franchise tax board lawyer can really make the difference. Although I am certainly available to help you with any Franchise Tax Board matter (see my California state tax attorney services page), I realize that not everyone is comfortable with the virtual law office model and I wanted to take the opportunity to provide you with the things that I think are really important in hiring a good franchise tax board lawyer.
I think many of these factors are applicable to hiring attorneys in general as well, but specifically I wanted to give you some practical advice on hiring someone to handle your California state tax matter.
California Franchise Tax Board Lawyer Hiring Tip 1 – Rapport
When asked what I believe is the number one hiring criteria for selecting a lawyer, even more than a person’s experience, education, or pedigree, I believe it is the rapport that the client has with the lawyer. Dealing with a lawyer is like any business relationship in that you need comfort and harmony to affect things efficiently.
As such, if you do not have a level of comfort and trust with your franchise tax board lawyer then there is no basis for any sort of attorney/client relationship. Trust and rapport is something that can be gauged in the first meeting or contact with the attorney.
Does this person sound like they know what they are talking about and do they give complete and full answers to the questions being asked? Do I believe the answers that this person is giving me? Do I feel comfortable with this person and do I believe I am being treated honestly, fairly, and ethically?
These are all factors that go into whether or not you have a rapport with your franchise tax board lawyer. If you can answer each of these questions in the affirmative, then I believe you are more than 50 percent of the way to finding a franchise tax board lawyer you can trust. Yes, 50 percent That’s how important I believe rapport is.
California Franchise Tax Board Attorney Hiring Tip 2 – Experience
Second to rapport, experience is one of the main factors that I feel separates franchise tax board attorneys from one another. Dealing with the FTB is slightly different than dealing with the IRS. It is important to retain the services of someone who has experience dealing with the FTB and who is generally familiar with the rules and procedures of California tax law.
In addition, your Franchise Tax Board Attorney should have specific experience with the types of matter that you are retaining them for. This can be delineated from asking the attorney specific questions about their background and looking at the representative matters section of their website.
For example, if someone asked me about FTB collection matters, I could rattle off four or five that immediately came to mind. This is because I have worked on Franchise Tax Board issues recently and deal with them frequently in my own practice.
Likewise, if the attorney that you hire deals frequently with California state tax issues then this someone that you are going to want to consider hiring. There is simply no substitute for practical experience.
California Franchise Tax Board Attorney Hiring Tip 2 – Reputation
One of the greatest ways to evaluate an attorney is through what other people have said about the person. With the advent of the internet, information on professional service providers is often readily available and easily accessed. As such, many people have often posted reviews about attorneys that you can read and evaluate for yourself.
When evaluating reviews though, I tend to take what the reviewer is saying with a grain of salt. Reviews that are too over-the-top should be met with some degree of skepticism. I do an excellent job for my clients and a great many of them have thanked me online through some third-party review sites. Although I am often flattered by the things that they have to say, I also know that I am by no means perfect, 100 percent, all of the time.
I feel as though sometimes people will embellish things because they want the person being reviewed to know that they wrote this big glowing review. Rather, I look for reviews that tell it like it is and that list both positive and negative characteristics about the person being reviewed.
One final tip on reviews, I tend to be wary of review sites like Yelp and tend to look more favorably on professional sites and the recommendations on those sites. As a result, when hiring a Franchise Tax Board attorney, I would encourage you to review sites like Avvo and LinkedIn to check what other people say about the person you are contemplating hiring. Oftentimes those sites will provide more accurate metrics than sites such as Yelp.
I hope this article has been helpful in giving you some criteria that I would look for when hiring a Franchise Tax Board attorney. For further assistance, or if you have any questions, please feel free to contact me using the information contained on this site.
FAQs Specific to California
What advice can you give me about setting up a payment plan with the State of California?
The first thing to note about setting up a payment plan for delinquent tax liability is that California is aggressive in their pursuit to collect; perhaps more aggressive in their collection efforts than the IRS. California is a cash-strapped state, so the dollar amount that a liability becomes a serious matter crosses that threshold sooner than an amount considered by the IRS.
For example, the IRS generally does not view a $20,000 liability as an exceptional amount of outstanding liability. The IRS has hundreds of thousands of people who owe them $20,000. Resources are finite, and the IRS has bigger fish to fry. In California however, a $20,000 liability would land you in the complex account recovery unit. The point is, California takes smaller liability amounts more seriously than the feds do.
Not only is California more quick than the IRS in their assessment of liability; but they are also more likely to take collection action earlier than the IRS. Lastly, bear in mind that California also takes more aggressive measures than the IRS in their efforts to collect.
Since we are drawing comparisons to the IRS, another drawback is the lack of consistency you may encounter in an FTB matter. IRS matters are generally formulaic; matters are more or less predictable because the process is closely dictated by a detailed internal revenue manual. Although the CDTFA has a collections manual, it is nowhere near as in-depth or as detailed as the IRS manual. The need to fill in the gaps requires more discretion being given to frontline collection agents and managers in order to resolve the ambiguities in the law.
What typically happens as a result is that California taxpayers get squeezed a lot harder. To add insult to injury, the FTB is also more stringent in their negotiation of payment terms in comparison to the IRS.
When we have a client who has both an IRS liability and a franchise tax board liability; we will generally prioritize resolution of the state matter first. This is because we recognize that the FTB is more aggressive in their pursuit of outstanding liability.
If we can settle with the state and allow them to move on with their pound of flesh,we can more efficiently use our resources to negotiate better terms with the IRS. How you choose to handle your case may depend on the facts and circumstances of your matters; but be sure to keep in mind the challenges that accompany a matter pending resolution with the state.
The State is going to evaluate your case under a tougher financial standard. The payment plan timelines that they are requesting are going to be a lot shorter, and they are not going to be as flexible with their deadlines.
To the State’s credit, however, they are generally pretty quick to respond once we execute a state payment plan. A decision is made and documents are usually returned within a week; in some cases this process may even take as little as a few days. Of course, the level of involvement required in short amounts of time may add pressure to the situation. Particularly if you have a family or business to tend to.
Even though people have liabilities with the IRS that are far greater in liability, there is more pain involved in matters dealt with at the state level. In fact, this is why we have centered our practice around California tax issues.
The systems that I have talked about in the past and the lack of a judicial check on the administrative tax agencies in California, creates a lot of problems for people and it is very difficult setting up collections resolutions with them.
This is particularly true for any state liability that is $20,000 or more, that is going to involve the complex account recovery unit at the franchise tax board. or any liability that involves the Employment Development Division (EDD), which administers payroll taxes or the CDTFA. The CDTFA is very, very aggressive and very inflexible, particularly for active businesses.
Any time that you have a business liability with California it is very difficult to get those negotiated. My recommendation is that you speak with an expert on the subject, get an attorney involved, and work on protecting the cash flow of the business so that California does not come in and just drain everything out of the business's operating account.
From an individual perspective, you do not want to commit to a payment plan that is going to be too aggressive and that you are going to struggle to keep up with. Again, take into consideration your own situation, take into consideration your family situation, how much you need, and then negotiate collections resolutions that satisfy the interest of the government, but still protect you, your personal cash flow and what you need to live.
My recommendation for payment plans when you are dealing with the state, is to bring somebody in to help you negotiate, particularly if you start having problems with the state’s representative.
Will California grant me innocent spouse relief?
It depends. Innocent spouse relief is a highly factual situation. It is really difficult for me to give you a “yes” or “no” answer on this one. What I will tell you is, much like everything with California, it is a little bit more difficult to deal with California and to get determinations versus on a federal level.
When it comes to innocent spouse relief, you really have to jump through a few hoops with California in order for them to make that determination.
A lot of our innocent spouse cases in California will end up in appeals or they will end up with some hearing officer. The important thing is, number one, you want to get all of your facts straight at the beginning of your innocent spouse application.
You want to make sure that you have a sequence of events, that you have a timeline, and you state a good case for why you deserve getting innocent spouse relief. You want to put a package together with as much information as you can.
The more comprehensive you are at the beginning, the more likely your innocent spouse claim will go through. Once you put that together, the franchise tax board will usually issue you some sort of response. Having this put together and really being comprehensive, is important because it limits the avenues for any attack that the CDTFA would have.
Also, understand that there is a robust appeals process, so should your innocent spouse claim get denied, you have the option of going through that.
Because innocent spouse is a factual determination, it is something that you should definitely consult with an attorney on; someone who is familiar with the law and the procedures of pushing these things through in California.
How does financial analysis work for collections cases in California?
As I have previously explained, California is going to put you through a much more rigorous standard than the IRS. This is because the procedures that govern financial analysis for California are generally a lot looser than the IRS, and it is up to the discretion of the individual agents.
While there are a lot of good people who work for the State of California, our firm's experience with California has been generally not very positive. Some collections agents have said some pretty ridiculous things to our clients over the years or have taken very unreasonable positions with respect to things. This is particularly true with our business clients. The state is very, very harsh on businesses and when they see businesses, they see revenue coming in.
They see the business as a cash cow and do not understand that when the business generates some revenue it means expenses. Revenue does not come from nowhere, you either have to have goods sold, which costs money (i.e cost of goods sold) or you have to have services provided and you have to have cost of services.
No matter what the business is producing there is a cost to it. The state does not understand that because most collection agents have never run a business before and they do not understand that.
Understand that what you are going to be put through coming into the financial analysis is pretty rough, and that is because of a lack of defined standards. There are various forms that get submitted with each of the different state agencies. For example, with the franchise tax board, you are going to submit a 3561.
Form 3561 is designed to do the same thing as the IRS forms, looking at the available assets. They are targeting any equity in those assets or anything that they can get out of them and then they are putting you through an income and expense analysis.
How does California locate taxpayers and their assets?
This is actually a very interesting subject and something that we as tax practitioners talk about quite frequently. The first way California tracks you is through any filings that you do with a statement. For example, everybody in California files a tax return with the Franchise Tax Board and you have an address with them.
They use the address based on your FTB returns and the addresses that are submitted to third parties like banks and credit institutions to track your current information.
The second way is they pull your credit report. The State of California has access to the same credit report that you can pull through Experian or TransUnion, and they can use it to locate taxpayers and their assets.
Number three is that California gets data from the IRS. The IRS has a much more expanded taxpayer database, particularly for taxpayers who have moved out of California or might be in other places.
The federal government is often a much more reliable and more accurate source of information. The next thing the state does, particularly if they are serious, is use a program called Accurint.
Accurint is a massive public records database. As you think about it, you and I go through our daily lives. We have utility bills. We have a driver's license. We have voting records. All these things are available and can be made public record.
Accurint collects all of that information into a database that the CDTFA agents, government agents, law enforcement and all these varying degrees of people have access to. It is very, very good and specifically focused on helping them find you very quickly.
The final thing that the IRS uses, which really should not come as much of a surprise, is collection agents go on the internet. They do Google searches. They look on social media and they have an increasing reliance on those sources of information plus other sources that are culled through big data.
The reason they do this is because of the frequency in which people interact with social media accounts, because of the updates and they are able to get much more accurate and reliable information. That is the way the State of California searches for people and they are usually pretty good at finding them.
FAQs About Income Withholding Orders
Either you or your employee may have questions about this process. Below are the answers to some of the more commonly raised issues.
My employee claims that the payment will create a hardship. Can I adjust the payment?
No. Your employee may apply to the issuing agency for a review of the EWOT, which will be determined on a case-by-case basis. If it is determined that your employee’s circumstances warrant an alteration in the EWOT, you will be notified in writing. Without that instruction, you are required to comply in the terms specified.
The employee has left the company.
If they have left the company permanently, you should complete the Employer’s Acknowledgement, Page 2A, and return. If the employee is out on disability, leave of absence or for any other temporary reason, and is expected to return within 12 months, you should withhold the monies as directed once they return to work and resume receiving an income.
Can I send one check if multiple employees are being levied?
Yes. However, you should specify which amounts apply to each employee. The check should identify each employee’s SSN, name, tax year and amount.
My employee claims that the EWOT is in the wrong amount or that the order has been cancelled.
You are legally obligated to continue the order until told otherwise by the issuing agency. If the employee believes that there has been a mistake, advise them to contact the issuing agency and request that the EWOT be terminated or changed. Their case will be reviewed and if there is a change in your obligations you will be instructed by the issuing agency in writing.
When may I stop making payments?
All withholding payments should continue until either the full amount of the EWOT has been satisfied or a termination order is sent by the issuer of the EWOT. If you receive a higher priority notice, contact the issuing agency to inform them and then adjust payments as outlined above.
While complying with an EWOT may cause some inconvenience to you as the employer, it is extremely important that you understand your obligations and comply.
Both state and federal law provide some protection to employees who have a withholding order, so please seek legal advice if you are considering terminating your employee on the grounds of the withholding order.