Common CA Back Tax Penalties & Penalty Abatement (FTB)
Like with most taxation authorities, the taxpayer will face penalties for not paying or filing on time. Concerning delinquent income tax debt, there are two penalties that a taxpayer should know.
Late Filing Penalty
The first is the late filing penalty. Specifically, the FTB will assess the late filing penalty when the taxpayer fails to file their tax return by the due date, including extensions. The late file tax penalty is 25% of the tax due, after applying any payments or credits made timely. The FTB calculates it from the original due date of the return. The minimum late file penalty is $135 or 100% of the tax due after applying timely payments and credits, whichever is less.
Late Payment Penalty
The second is the late payment penalty. In fact, the late payment penalty is 5% of the unpaid tax, plus 0.5% of the unpaid tax for each month (or part of a month) that the delinquent tax goes unpaid. Furthermore, the maximum penalty is 25% of the tax not paid.
Interest accrues on unpaid taxes from the original due date of the return until the day the taxpayer pays in full. Moreover, interest accrues on penalties from the effective date of the tax penalty until the time the taxpayer pays in full. The current interest rate, as of January 1, 2019, is 5%.
With this in mind, these penalties can become very steep. Therefore, even if a taxpayer is unable to pay (or pay in full) the tax due they should strive to file their income tax return on time (and make a partial payment, if possible). By doing so, the taxpayer can avoid or reduce the impact of these penalty and interest assessments.
CA FTB Penalty Abatement
California law permits the FTB to abate penalties if the taxpayer fails to comply with the provisions of the tax code due to reasonable cause. Consequently, taxpayers can find the form for filing a penalty abatement request with the FTB at, https://www.ftb.ca.gov/forms/misc/2917.pdf. The FTB defines “reasonable cause” to mean that the taxpayer exercised ordinary business care and prudence in meeting their tax obligations but failed to comply.
A taxpayer may file for a pre-payment penalty waiver or a post-payment wavier, in the event the taxpayer has already paid the tax penalty in full. When requesting a refund of a tax penalty already paid in full, the taxpayer must submit the request within the applicable statute of limitations.
Currently, the statute of limitations is the latest of:
(a) 4 years after the original tax return date,
(b) 4 years after the date of a timely filed return, or
(c) 1 year from the date of overpayment.
Nevertheless, before the FTB considers a refund abatement, the taxpayer must pay in full the balance due for the tax period in question.
Examples of Reasonable Cause
The FTB provides a few examples of what they consider and do not consider reasonable cause:
- Reasonable Cause
- In some cases, illness or personal injury
- Relying on improper advice from a tax professional as to a matter of tax law
- In some cases, for the late payment penalty, the taxpayer’s financial inability to pay the taxes (case by case determinations)
- Not Reasonable Cause
- Ignorance of a filing requirement or due date
- Reliance on an agent, such as a tax attorney or CPA, to file a return or sent in payment on the taxpayer’s behalf, or to reply to a request for information
- Generally, lack of necessary information or documents, whether or not lost, lacking, inaccurate, or cumbersome to obtain
- Stress from business affairs or work pressures
- The complexity of the tax law
In all circumstances, the FTB maintains a presumption of correctness when assessing penalties. Therefore, the burden of proof is on the taxpayer to show that reasonable cause exists for their specific set of facts. As a result, the taxpayer must provide credible and competent evidence to support their claim of reasonable cause and to overcome the presumption of correctness of the penalties.
Address to Request Penalty Abatement
The taxpayer should submit the completed and signed penalty request form to:
Franchise Tax Board
PO Box 942840
Sacramento, CA 94240-0040.
The FTB will usually make a determination within six weeks. The taxpayer cannot appeal penalty abatement request determinations.
California law permits interest abatement in specific situations. It is not to be confused with reasonable cause relief, which is available for penalty abatements. Reasonable cause relief is not available for an interest abatement request. For a taxpayer to be granted interest abatement by the FTB one of the following circumstances must exist:
- Financial hardship
- Erroneous refund
- Reliance on formal written advice
- Disaster Loss
- Military personnel
- FTB/IRS error or delay
Taxpayers can request interest abatement for both paid and unpaid interest. However, if the taxpayer has already paid the interest, the taxpayer must submit the request before the applicable statute of limitations period (as discussed above for penalty abatement).
Each of the specific circumstances outlined above requires different forms and supporting documentation going to a variety of offices. Taxpayers can find more information regarding each of these circumstances at https://www.ftb.ca.gov/individuals/faq/interestabatement.shtml.
Disclaimer: Reading this article does not create an attorney-client relationship. This article should not be used as a substitute for the advice of a competent attorney or tax professional admitted or authorized to practice in your jurisdiction.