Ultimate Guide to Franchise Tax Board Collections

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.

For a more in-depth understanding of how the FTB works, read our Ultimate Guide To Franchise Tax Board Collections.

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

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