Overview of California Back Taxes Resolutions (FTB)
The State of California has three tax agencies that handle the administration and collection of their taxes. These Departments are the Franchise Tax Board (FTB), the Employment Development Department (EDD), and the California Department of Tax and Fee Administration (CDTFA). The FTB is responsible for the State Income Tax. The EDD is responsible for the State Employment Tax. Finally, the CDTFA is accountable for the State Sales and Use Tax and other Special Taxes and Fees.
Enforcement and Income Tax Collection Process
Once a tax assessment has become final, the FTB will mail a notice and demand for payment to the taxpayer. The taxpayer will have 15 days from the date on the notice to make payment in full. If the taxpayer does not pay in full and contact the FTB to make other arrangements, the FTB will begin collection actions. At this point, the FTB will start to assess penalties, interest and collection fees. If the delinquent tax debt continues to remain unpaid, the FTB will file tax liens. The FTB may also pursue involuntary collection actions, such as bank, wage or asset levies.
California law requires the taxpayer to receive specific notices before the FTB may file a Notice of State Tax Lien or before taking any involuntary collection actions. In the case of a tax lien filing, California law requires the FTB to mail notice to the taxpayer at least 30 days before the filing, stating the authority by which they are filing the lien and the procedures available to the taxpayer to prevent the tax lien filing. In the case of levies, California law only requires the FTB to provide a notice in writing at least 30 days before taking a levy action.
Overview of Options for Those With Back Income Taxes
Taxpayers who owe delinquent income taxes to the State of California and cannot pay in full have four main options available to reach a reasonable resolution. These are:
- Installment Agreement (Payment Plan),
- Offer in Compromise,
- Establish a Financial Hardship (Currently Not Collectable, “CNC”), and
- Penalty Abatement
California’s FTB offers an Installment Agreement (IA), also known as a payment plan. An IA allows a CA taxpayer to pay the FTB over a series of monthly payments until the delinquent tax debt, including penalties, interest and collection fees, is paid in full. An Offer in Compromise is an agreement where the taxpayer and the FTB agree to settle the delinquent tax debt, including penalties, interest and collection fees, for less than the amount that is owed. Establishing a Financial Hardship/CNC is merely acquiring a hold on involuntary collection actions for a temporary period. A request for penalty abatement is a written request asking the FTB to waive some, or all, of the assessed tax penalties.
Establishing a Financial Hardship (Currently Not Collectible)
The taxpayer may be in a situation where they cannot afford any Installment Agreement, and they do not otherwise qualify for an Offer in Compromise. In these situations, the taxpayer should request that the FTB delay collection activities due to Financial Hardship. Otherwise stated, put into Currently Not Collectible (CNC) status.
If the FTB agrees, they will suspend enforced collection on the taxpayer for a specified period. The FTB provides essentially no guidance on how to apply for or qualify for this type of temporary relief. This relief is only a temporary fix and does nothing to reduce or resolve the delinquent tax debt. Further, penalties and interest will still accrue, and tax liens remain filed. This option is for those taxpayers who need time to qualify for a more appropriate form of tax resolution.
Alternative Options That May Be Available
Challenge the Assessment
If the taxpayer has a proposed assessment for additional income tax due as a result of an FTB audit they have the opportunity to protest the proposed assessment. The taxpayer can submit the protest online through MyFTB or file a written protest. The taxpayer must file the protest letter by the “protest by date” shown on the front of the proposed assessment notice. The protest process is informal and conducted by a hearing officer within the FTB. Taxpayers have the option of requesting an oral hearing, although not required. The FTB will issue a Notice of Action (NOA) informing the taxpayer as to their determination of the protest.
If the taxpayer cannot reach an agreement with the FTB audit protest office, they may appeal to the Office of Tax Appeals (OTA). The taxpayer must request an appeal within 30 days from the date on the NOA. The OTA is an administrative, judicial body that works in a formal, courtroom type manner. While a taxpayer may represent themselves in the OTA, many may recommend hiring a licensed attorney or tax professional who has experience practicing in front of the OTA.
Bankruptcy, just like many tax resolution services, can be an expensive endeavor. Therefore, this option is likely only practical for taxpayers who also have significant personal debt as well. Bankruptcy proceedings may discharge some state tax debts. Taxpayers should seek the advice of an experienced tax and bankruptcy attorney if they want to consider this option.
The California Tax Amnesty Program
The State of California has conducted numerous tax amnesty programs. Currently, this program is called the Voluntary Disclosure Program. It is open to qualified entities, shareholders, members, beneficiaries, or partners. It encourages delinquent taxpayers to become current by waiving penalties for those who file and full pay their delinquent tax debt. Many delinquent business taxpayers should consider taking advantage of this program. California and the FTB have run similar programs in the past for individual taxpayers as well.
California law does not provide taxpayers with the right to appeal determinations of the FTB concerning the collection of delinquent tax debt. However, there are a couple of practical tips a taxpayer should consider in an attempt to reach a reasonable resolution.
First, do not be afraid to escalate contentious issues to a manager within the FTB. Often a fresh set of eyes and the authority and experience of a supervisor can help resolve the matter amicably.
Second, if you believe that your case manager is not following California law, or discriminating against you, file a request for assistance with the Taxpayers’ Rights Advocate. The Taxpayers’ Rights Advocate is authorized to abate penalties, fees, additions to tax, or interest under certain circumstances which are attributable to an FTB error or delay. Taxpayers should file FTB 3705, Request for Taxpayer Advocate Equity Relief, found at https://www.ftb.ca.gov/forms/misc/3705.pdf
The FTB will release state tax liens after the delinquent tax debt, including any penalties, interest and collection fees, has been paid in full. They can also release them through an Offer in Compromise acceptance or Penalty Abatement.
Statute of Limitations
An important factor that a taxpayer may consider before pursuing a possible resolution pertains to the taxpayer’s legal rights under California law concerning the statute of limitation rules for the collection of delinquent tax debt.
California law prohibits the FTB from performing collection action on a delinquent tax debt that is more than 20 years from the assessment date, or commonly referred to by the FTB, the Statutory Lien Date (SLD). Under California law, the SLD is the point in time when the tax liability becomes “due and payable.” For practical purposes, and for most taxpayers, this date is the due date on the first assessment notice issued by the FTB for tax liability.
Taxpayers should be aware that certain circumstances may ‘stop the clock’ on the statute of limitations period. These circumstances are called “collection stays.” Some examples are:
- the taxpayer files bankruptcy,
- a taxpayer is in an approved installment agreement,
- the taxpayer is in a military or combat zone,
- a taxpayer is in child support collection,
- or a presidentially declared disaster or terroristic or military action suspends the FTBs ability to perform collection actions.
During these situations the time elapsed, and possibly longer, will not count towards the 20-year collection expiration date.
Taxpayers have many tools at their disposal when dealing with delinquent income tax debts with the State of California. With that said, the FTB has a government-friendly statute of limitations within which to work. Additionally, the penalty, interest and collection fees system can result in reasonable tax delinquencies ballooning into crippling debt. Therefore, taxpayers should consult with a licensed and qualified tax professional as soon as these problems arise. An experienced tax professional can help determine which course of action is most appropriate for their situation.
This article is not legal or tax advice. It should not be used as a substitute for the advice of a competent attorney or a licensed tax professional authorized to practice in your jurisdiction.