Taxable Talk

If you’re a tax professional in California, the Franchise Tax Board is asking for some help to improve their website.

We need tax professionals’ help to test webpages and online applications (such as MyFTB Account) and provide feedback to us. If you elect to help us, here’s what to expect:
• Testing generally takes 15 to 30 minutes.
• Sessions vary based on what we test.
• We contact you by email or phone and provide you information about the test.
• We plan to contact you only once or twice a year.
• We will not contact you during April or October.
If you would like to participate or have additional questions, respond to Donna Freeman with the following information at Donna [dot] Freeman [at] ftb.ca.gov:

Your name
Your email address
Your daytime phone
Your city

We appreciate your help!

It’s too every tax professional’s benefit to have the FTB website work well, so those of you who have a little extra time (and remember, the FTB will not contact you during April or October) should send Ms. Freeman an email.

Who is Halsey Minor? He happens to top the California Franchise Tax Board’s semi-annual listing of tax delinquents. I may not have heard of Mr. Minor, but many others have; he is the founder of CNET. Mr. Minor told c-ville.com that the tax debt owed to California–$13,120,479.39–is accurate. Mr. Minor blames Merrill Lynch for his problems. “I am not sure how many people have made $130 million over the last several years. It also proves the difficulties Merrill has created, all of which will be tried in front of a jury in California [on] January 25, 2011.”

There are other interesting names on the list. Coming in at #6 with a tax debt of $5,184,641.51 is former major league baseball player Kevin Mitchell. And then well down the list with a tax debt of $493,144.68 is Pamela Anderson. Yes, that Pamela Anderson.

I must report, though, that OJ Simpson is no longer on the list. Apparently, being in prison in Nevada is a good excuse for not paying the FTB.

It took a tax debt of $290,964.78 to make the list.

Many taxpayers, especially those with income streams that are inconsistent, use the Annualization Method to make their estimated tax payments. For federal tax purposes, it’s relatively easy. You take the year-to-date income through the period end (March 31st, May 31st, August 31st, or December 31st), annualize it, compute the annual tax, and then pro-rate it for the tax payment that’s due. But how do you work the Annuzliation Method in California, when the first payment (due April 15th) is for 30% of the tax?

The Franchise Tax Board has come out with an article with the answer. For those who do not use the Annualization Method, 30% of the tax is due on April 15th, 40% is due on June 15th, nothing is due on September 15th, and 30% is due on January 18, 2011. For taxpayers using the Annualization Method, 27% is due on April 15th, 63% is due on June 15th, 63% is due on September 15th, and 90% is due on January 18, 2011.

The Franchise Tax Board also had good news for taxpayers who made estimated payments using the old 25% rule for the first three estimated payments of 2009.

The good news is R&TC Section 19136(g) prevents the imposition of a penalty for underpayment of estimated tax if the underpayment was created or increased by a law chaptered during and operative for the same taxable year. Since the amendments to R&TC Section 19136.1 by ABX4 17 with respect to the percentages for the annualized method were enacted in 2009 and operative for the 2009 taxable year, no penalty for underpayment of estimated tax can be imposed if the underpayment was created or increased by the changes made by ABX4 17…If an underpayment of estimated tax exists due to the changes to the annualized percentages for the first three estimated tax payments, you may request a waiver or reduction of the underpayment of estimated tax penalty by completing Part I of Form 5805.

Do note that this exception, in existence for 2009, will not work for 2010. The law changing California’s estimated tax payments to 30%-40%-0%-30% passed in 2009. At the rate the Bronze Golden State is going, we’ll soon be required to pay 100% of our estimated tax in April.

Spidell is reporting that California’s Franchise Tax Board (FTB) has sent notices to 1,400 tax preparers who are not registered, and threatened each with a $2,500 fine. Only one problem: EAs, CPAs, and attorneys aren’t required to be registered (all hold other professional licenses). The FTB has lists of CPAs & attorneys (they must register with other state agencies) but has no list of EAs, so many EAs likely got the notices.

Any EA “lucky” enough to get one of these notices should reply back to the FTB with their license information and the FTB shouldn’t continue with the fine.

And let me end this with a plug for Spidell. Spidell has excellent continuing education offerings, and provides a lot of quality materials.

I’ve criticized California’s Franchise Tax Board on several occasions. However, I am going to praise them when they deserve it, and this is one of those times.

The FTB, in the past, has assessed late payment penalties when payments on some e-filed returns were not remitted with the return (on returns with a balance due). The FTB will be sending out refunds for some taxpayers, for tax years 2002-2005, where:

• The return [was] e-filed
• At least 90 percent of the tax due [was] paid by the original return due date.
• The remaining amount due [was] paid within 21 days after we accept the return.

The FTB correctly notes that you are supposed to fully pay your taxes by the due date of your return (not 90% of your taxes). But the FTB has realized that the payment won’t always accompany the return, and is rectifying a problem.

As far as we can tell, none of our clients are impacted by this issue. However, if you think you are, please contact our office so we can review your situation.

FTB Notice

California currently has a four-year statute of limitations on income taxes, but no statute of limitations on collections of tax monies. As we previously noted, the Franchise Tax Board earlier this year sent out notices to taxpayers—asking for payments on returns as old as from the 1960s. I prepared a 1974 tax return for a client just to show the FTB that there was no money due to the FTB.

Needless to say, the people complained to their legislators. In an usual display of bipartisanship (especially in Sacramento), the legislature passed a law that goes into effect on January 1, 2006 limiting collection efforts by the FTB to 20 years. (The IRS is limited to 10 years.)

So, can you, on January 1, 2006, finally shred your 1980 tax returns?

No.

Unfortunately, nothing prevents the FTB from saying you never filed your return and still go after you. If you haven’t filed, there is no statute of limitations. But, you say, I did file back in [fill in the date]. The FTB says prove it. In order to do so, you’ll need either your electronic receipt (if you filed electronically), or your return receipt (if you filed using certified mail, return receipt requested).

Isn’t this ridiculous, you ask, because there’s no way the FTB would stoop so low as this?

I’m sorry, I do not trust the FTB on this issue. The bureaucrats within the FTB are not exactly known for their benevolance when it comes to collections. The FTB is the same agency that went dumpster diving (and was rebuked by the US Supreme Court) to prove that an ex-Californian didn’t really move to Nevada (he did). The only thing that works in dealing with the FTB is evidential proof. Until the culture of the FTB changes, save your returns forever.