Improve Compliance and Uniform Administration Taxpayers’ Bill of Rights Annual Report to the Legislature
Legislative Proposals and Regulations
Changes in Statutes — Legislative Proposal Summary
In accordance with reporting requirements outlined in California Revenue and Taxation Code (R&TC) Section 21006(c)(1), the following are legislative proposals that have been approved by the three-member Board.
Legislative Proposals That Were Enacted Into Law:
One-time Abatement of Timeliness Penalties Proposed to establish penalty abatement authority similar to the federal first-time abatement procedure, except that it would only apply to individuals subject to the PIT Law and would be a one-time abatement.
This proposal was introduced as part of AB 194 (2021/2022) and chaptered into law on June 30, 2022. The provisions apply to requests for abatement made by eligible taxpayers for taxable years beginning on or after January 1, 2022.
Legislative Proposals That Were Not Introduced Into Bills:
Proposes to change FTB’s installment agreement (IA) authority by increasing the current dollar threshold and specified periods, and to allow for the modification of IAs in certain circumstances.
California Research Credit: Modified Conformity to the Federal Alternative Simplified Credit (ASC) and Elimination of the Alternative Incremental Research Credit (AIRC)
For purposes of the California Research Credit, proposes to bring California into modified conformity with the federal ASC and would eliminate the AIRC.
Taxation of Income from an Incomplete Gift Non-Grantor (ING) Trust
Proposes to treat grantors (who transfer assets into an ING trust) in the same manner as grantors of a grantor trust, eliminating the ability to reduce personal income tax by moving income to a state with more favorable tax treatment.
Legislative Proposal in Progress
Conditional Revivor Provisions to Include Limited Liability Companies (LLCs)
Proposes to amend conditional revivor provisions to include LLCs in the application of reviving to “good standing without full payment of taxes, penalties, and interest” if the prospects for collection of the full amount due is improved by the revivor.
Changes in Regulations
The laws administered by FTB broadly authorize the adoption of rules and regulations necessary for their enforcement. Occasionally, specific statutory provisions require us to adopt regulations. (For a list of regulations in progress, please refer to Appendix 3 — Regulations.)
Training of FTB Staff
FTB develops knowledgeable and engaged employees to improve the customer experience and accomplish FTB’s mission. Our goal is to provide the services and information taxpayers need to file accurate and timely tax returns and to only pay the proper amount of tax owed. Training begins with employees’ first day on the job and continues throughout their FTB careers.
All FTB staff receive accessibility training, while public-facing staff in our contact centers, public service counters, and collection programs receive extensive initial training (in a classroom or, since COVID-19, virtually), on-the-job training, and ongoing training, with programs tailored to the specific needs of each business area.
With the pandemic came the need to adjust the way we provide much of our training. This change included converting some historically “in-person” training to virtual or hybrid options. We also saw an increased demand for self-paced online training that we offer through FTB’s internal learning management system. We are currently in the process of updating our online training content to expand options as well as provide a better overall experience for our employee users.
In 2022, the Accounts Receivable Management (ARM) Division leadership has focused on preparing the next generation of leaders. Because about 40 percent of FTB's key leadership is eligible to retire within the next five years, ARM has prioritized its succession planning efforts. We are providing opportunities for leaders to strengthen their skills by taking on more complex leadership tasks with guidance from our senior leaders. This training provides our leaders with the experience necessary to be more competitive for promotional opportunities and assists FTB with retaining our seasoned talent.
ARM has also prioritized our commitment to staff development and service by requiring all staff to complete Customer Service Certification Training annually. The training’s objective is to develop and strengthen skills to consistently deliver excellent customer service. The training is scenario-based and provides examples of different customer interactions and experiences that exist within the department. It also examines our skillsets and improves customer interaction through clear communication and active listening.
Audit Division staff also receive extensive training (classroom or virtual) and on-the-job training. Audit Division staff must have the knowledge needed to analyze tax returns, research complex issues, and effectively communicate their findings to taxpayers and authorized representatives. Having well-trained auditors reduces the burden audits place on taxpayers by shortening the completion time and improving the accuracy of the outcome.
The Audit Division continues to update the Pathways to Excellence portal, which is a knowledge transfer and training resource for staff. In simplistic terms, this portal maps out different “pathways” for staff development that combine technical education with other value-added learning experiences and collaboration opportunities. The portal is designed with one-stop shopping in mind and functions as a useful reference tool for the entire FTB organization.
Over this last year, the Filing Division provided training to over 600 new hire employees, including classes about Personal Income and Business Entity tax law, account resolution procedures, and improving our customer experience. Employees attend various formal and informal training to refresh their skills, learn new workloads, and remain informed of changing laws and procedures. Sessions like these allow staff to understand the importance of addressing the taxpayer’s immediate need while also educating them to reduce future questions or confusion.
The Filing Division also develops the training concepts and materials to train free tax preparation site coordinators and volunteers through the state on California tax law and return preparation as part of our Volunteer Income Tax Assistance (VITA) program, which assists lower-income individuals, senior citizens, and military personnel, throughout the state of California, in filing personal income tax returns. FTB VITA trainers come from throughout the department, including field offices. The Filing Division also facilitates the central office VITA site, which provides federal and state income tax help and electronic filing support for FTB employees and their families.
The Legal Division continues to focus on its knowledge transfer programs to increase the sharing of knowledge and ensure a highly trained workforce. This effort includes providing cross-training opportunities among the bureaus of the Legal Division, mentoring new staff, and expanding and marketing the information libraries maintained by the Legal Division. The Legal Division has a Professional Development Program which provides regularly reoccurring trainings by subject matter experts on different tax issues. The Legal Division also offers a collaborative program with Audit called “Lunch n’ Learn” where speakers present on tax issues at lunchtime in a more informal setting. Legal staff is also encouraged to participate in other training opportunities offered throughout the enterprise such as Job Knowledge Transfer presentations and online training, as well as continuing to participate in speaking engagements and webinars.
Across FTB, management and a new DEI Team are taking steps to ensure FTB continues to be a workplace where employees from all backgrounds, cultures, and personal experiences are welcome and thrive in support of FTB's mission, values, and goals. We believe a strong commitment to DEI – where all staff feel a sense of belonging and respect – helps foster innovation, improves productivity, and continues to attract top talent by making us an employer of choice. A commitment to DEI also helps ensure FTB can meet the needs of our highly-diverse state. FTB plans to roll out a training suite by early 2023 that includes dozens of new DEI-focused microvideo courses for staff. Our DEI team plans to continue posting articles and videos on an array of DEI topics to our new DEI intranet page. The team also plans and supports events that bring DEI awareness to our workplace, and it maintains a DEI calendar of events and DEI resources toolkit available to all staff.
Finally, all FTB personnel who are classified in FTB’s conflict-of-interest code are required to take Ethics training provided by the Department of Justice within six months of appointment to a classified position and once every two years thereafter. Additionally, all FTB staff are required to take an annual Privacy, Security, and Disclosure training.
Evaluating FTB Employees
FTB is committed to evaluating and providing feedback to our employees with the goal of helping them to perform at the highest level in their current positions and to advance professionally when promotional or developmental opportunities arise. Our goal is not only to provide all eligible employees with a written performance evaluation annually, but to also ensure the evaluation and feedback they receive is valuable. The most important part of the evaluation process is sincere, respectful, and open conversations with employees regarding expectations and performance.
Customer service has always been one of FTB’s highest priorities. In recognition of this priority, FTB continues its practice of evaluating employees during annual reviews based on how well they communicate with taxpayers, tax professionals, and other stakeholders, and the overall quality of the customer service they provide. That includes assessing whether employees have provided customers with accurate, timely, and complete assistance. Our goal is for every employee to exceed each customer’s expectations. Importantly, we do not evaluate employees based on revenue that is produced through additional tax assessments or collections, and FTB does not impose or suggest revenue production quotas or goals. (Please refer to Appendix 4 — Certification Letter.)
We provide our supervisors with tools to assist in writing, online routing, and storing employee performance evaluations. These tools help us reach our goal of every eligible employee receiving a timely evaluation. In addition, we provide tools to assist supervisors in having effective one-on-one conversations with their employees, and we continue to reinforce the expectation that every supervisor will have regular one-on-one meetings with each of their employees.
A key component of employee and supervisor meetings is to have continuing discussions on performance expectations and to identify training and development needs. Discussing employee development opportunities is especially critical in today’s environment due to the rising number of employees who are eligible for retirement. It is an important part of our efforts related to workforce and succession planning.
Taxpayer Communication and Education
We strive to provide taxpayers, tax professionals, and external stakeholders with the information they need to file state tax returns completely, accurately, and timely. The department continues to focus on education and outreach efforts, creating useful tools and resources, and improving services.
FTB uses mainstream, trade, and social media to communicate important information to taxpayers and tax professionals. We post information on social media platforms, respond to news media inquiries, create video clips and webinars, and provide public service announcements to educate taxpayers. We constantly look for ways to improve our website, such as by adding self-service options for taxpayers and by ensuring the information they need is available.
New ftb.ca.gov Webpages and Updates
This year, our Digital Services Section created new informational webpages and provided many ftb.ca.gov updates for our customers on a variety of topics, including changes to state and federal tax laws, the Middle Class Tax Refund, and California’s Golden State Stimulus (GSS).
Historically, users registering for a MyFTB account need a Personal Identification Number (PIN) to activate their online account. For increased security, FTB mails the PIN to the address of record and the users enter it as the final step in the registration process. As of February 4, 2022, individuals and tax professionals have the ability to choose how they want to activate their MyFTB account. They can continue to have a PIN letter mailed or they can try to be verified through a third-party credit agency and answer personal questions for instant access through our new Real-Time Identity Proofing and Enrollment (RIPE) process.
As of June 30, over 140,000 users registered in 2022, including over 2,400 tax professionals. Our individual taxpayer registrants increased by 80 percent compared to the same period in 2021, largely attributable to the implementation of RIPE.
We have over one million total registrants for MyFTB, including over 49,000 tax professionals. MyFTB continues to provide additional information and functionality. In addition to other activities, taxpayers can view notices and previously filed tax returns, chat about their account or send a message with attachments, protest assessments, and get detailed account information.
Better for Families Act, Publicly Known as the Middle Class Tax Refund (MCTR)
This year, FTB partnered with the State Controller's Office and Money Network Financial, LLC, a Fiserv Inc. company, and other stakeholders to deliver MCTR payments to millions of eligible recipients. These payments provide financial relief for lower- and middle-income Californians due to global inflation.
Eligibility for this program required California taxpayers to file a timely 2020 tax return amongst meeting other income and residency qualifications. FTB utilized its robust return processing services to verify taxpayer eligibility, proper identity of taxpayers, and their most current addresses to accurately deliver MCTR payments.
To speed up delivery of the MCTR payments, payments are delivered by direct deposit and by debit card when the direct deposit option is not available.
The MCTR payment program includes the use of sophisticated fraud preventative services implemented by both FTB and Money Network to protect California and its taxpayers.
To enhance customer service, the program included the implementation of several customer service channels utilizing our self-service tools, as well as live customer service agents and chat. These tools include a robust website with user-friendly information and resources for MCTR, an online, easy-to-use tool that asks questions relating to eligibility and provides an estimated payment amount, and an intelligent Interactive Voice Response (IVR) System to provide quick answers to questions about the MCTR program and activation of the debit card.
Delivery of MCTR payments began with direct deposit payments being issued the first week of October. The first debit card payments began being mailed out the last week of October. FTB anticipates that over 90 percent of payments will be delivered by the end of December with the bulk of the remaining payments getting delivered during January of 2023.
As of December 16, 2022, 15 million MCTR payments have been received by eligible recipients, benefiting more than 28 million Californians. Specifically, the program has provided the following services:
- 7 million Direct Deposits delivered equaling $3.8 billion.
- 8 million Debit Cards delivered equaling $4.3 billion.
- 10 million customers served using the FTB and MCTR website.
- 10 million customers served using the MCTR IVR, live agent, and Chat Services.
Golden State Stimulus – Webpages and Stakeholder Outreach
FTB continued to work with the State Controller's Office over the past year to issue the last of about 13 million GSS payments, worth more than $6 billion, issued to eligible recipients this year and last year. These payments provide financial relief to lower- and middle-income Californians due to the negative impacts from the COVID-19 emergency.
Throughout the administration of GSS I and GSS II, FTB continually updated information for taxpayers on its GSS webpages, and we assisted about 400,000 individuals directly through our call centers and live chat service.
Additional Taxpayers Eligible for Refunds
In March 2021, President Biden signed the American Rescue Plan Act into law. This bill allowed taxpayers to exclude a portion of their unemployment income for the 2020 tax year on their federal tax return, thereby reducing their federal adjusted gross income. As California already excludes unemployment income from taxable income, this item’s impact was felt in the area of tax credits that use the federal AGI as a criteria to determine eligibility. Specifically impacted were taxpayers eligible for the earned income tax credit (CalEITC), the Young Child Tax Credit, and the Golden State Stimulus (GSS) program.
In addition to our internal work to begin addressing these items, we quickly created targeted and specific web content for taxpayers to educate them on all the changes and how they may be impacted, as well as how to proceed, depending on their individual facts and circumstances as they related to this federal change.
FTB identified over 600,000 taxpayers who submitted their 2020 tax return prior to the federal bill's signing and who were eligible to exclude a portion of their unemployment income from their federal AGI. In the summer of 2021, FTB proactively adjusted those tax returns without any further action on the part of the taxpayers and issued refunds as appropriate.
Additionally, we identified over 400,000 taxpayers who did not initially claim CalEITC on their 2020 tax return but may have been eligible to receive the credit. We sent a letter to each of these taxpayers explaining the federal changes and providing instructions for a streamlined process to claim CalEITC if they were now eligible. As of July 2022, 9,000 taxpayers have taken advantage of this streamlined process and have received CalEITC.
All of this is beneficial to lower-income Californians, and we were excited to be able to assist these individuals.
Field Office Appointments
The Franchise Tax Board’s field and public counter staff provide tax filing and payment assistance to taxpayers and their authorized representatives concerning PIT and BE Income Tax and Nontax Debt.
FTB field offices continue to serve customers by appointment, and our customers have the option to schedule an in-person appointment online or with the aid of a contact center agent. FTB’s automated appointment system also sends text message updates to our customers as their appointment time nears. We found appointments provide an improved customer experience and minimized wait times. As a result, we have maintained a 94 percent approval rating from our public counter customers.
California Earned Income Tax Credit (CalEITC)
To be consistent with legislation, we updated content on our CalEITC webpages (both the CalEITC landing page and CalEITC eligibility and credit information page). We also adjusted our Earned Income Tax Credit calculator to allow the state and federal credits for those using the filing status “married/registered domestic partner filing separately” if certain specific federal requirements for that status are met and the user meets all credit requirements.
Homeless Hiring Tax Credit (HHTC) Webpage
FTB created an HHTC webpage explaining what employers need to know to claim the credit, which is available for tax years 2022 through 2026 and can be worth up to $10,000 per employee (up to $30,000 per tax year). The webpage allows employers to make a necessary credit reservation for each eligible employee. We updated the webpage this summer to reflect a new law that clarified the time frame for an employee to meet the qualifications for certification, and that allows an employee to receive a new certification and get a new reservation if the employee continues to meet the qualifications for certification.
Taxpayer Advocate Services
We redesigned and implemented a suite of FTB webpages – Taxpayer Advocate Services, Education and outreach, Disagree or resolve an issue, Report an issue, and Tax Professionals – to support an evolving collection of Taxpayers’ Rights Advocate’s Office services.
Small Business Liaison
The structure and content of FTB’s small business webpage was refreshed to make it more user friendly, including access to more information, as well as to reduce communication strain on the liaison.
The monthly Tax News newsletter was streamlined from a multi-page collection to a single-page configuration. This makes for easier user navigation and a smaller site footprint.
We updated 1,000 of our public webpages – more than one-third of all live pages – including online tax forms to ensure we provide the most current and accurate information.
Ongoing Accessibility Remediation and Testing
We added more than 500 documents to our website after revisions to meet state accessibility standards.
Google Translate Installation
Our public website users can now translate content into their preferred language.
FTB Website Visits
New online resources launched in 2022 helped draw a total of nearly 35 million visits to ftb.ca.gov during the first 11 months of this year. Our website was visited by more than 16 million mobile users this year through November.
FTB Cannabis Team
Our department-wide cannabis team annually sends educational Cannabis Business Outreach Letters to newly-licensed California cannabis businesses. The letters direct cannabis businesses to our online resources and provide a dedicated FTB cannabis email address where they can send questions about meeting their tax obligations. Included with the letter is an informational insert that provides additional cannabis-related information.
We updated and maintained a variety of resources providing information relating to licensing and tax compliance for cannabis-related activities, including:
- Dedicated “Cannabis Tax Law and Legislation” webpage on ftb.ca.gov.
- Guide explaining how to find cannabis-related tax information (FTB 4020 C).
- No Cash Policy exemption request video.
- Instructional video for businesses making cash payments.
- A Tax News article on FTB’s website (February 2022 edition).
FTB has participated in over 30 in-person and virtual cannabis-related presentations and workshops since 2019, including the National Cannabis Industry Association’s Cannabis Business Caucus and Summit, state and local permitting workshops, and various government panels.
We also continue to monitor cannabis legislation pending before Congress and the state Legislature that can potentially affect our programs.
Taxpayers’ Rights Advocate's Office Education and Outreach
During FY 2021/2022, our Taxpayers’ Rights Advocate’s Office participated in 69 presentations to tax practitioners and taxpayers. The presentations outlined information on California tax updates, forms of business ownership, and small businesses tax matters. Throughout the COVID-19 pandemic, we have offered virtual presentations in place of in-person events, including outreach to taxpayers and tax professionals in English and Spanish. We look forward to transitioning back to in-person events in the coming year, if possible.
This year, FTB completed significant modernization efforts affecting our collective Taxpayer advocate services and Tax professionals webpages. Utilizing web analytics and direct customer feedback, we streamlined our communication channels and refined our online content to support taxpayer needs in real time. Using this data allowed us to reorganize, relocate, and generate new content based on user behavior, and it allowed our customers to self-serve and further understand the services we provide. As a result of these efforts, we marketed our Report an issue webpage to encourage tax professionals to offer feedback directly. Visitors can submit their questions or concerns when a systemic trend has been identified impacting multiple taxpayers through our Systemic Issue Management System.
We responded to numerous inquiries and requests for assistance from taxpayers and tax professionals. With the redirection last year from phone to email, our Small Business Liaison responded to nearly 2,000 email requests for assistance – double the prior year’s total. The liaison continues to provide answers to general tax questions and advice on business-specific issues. Additionally, since the reorganization of our small business webpage, we are seeing fewer inquiries.
Tax News, our award-winning monthly technical publication, continues to be a valuable resource for the tax professional community with nearly 35,000 subscribers. The content remains relevant, timely, and informative, thanks to the support of employees in FTB’s business area units, who have taken a proactive approach to writing articles on relevant topics. We continue to partner with other tax agencies and external stakeholders to share information about educational opportunities. We periodically send Tax News Flashes to inform taxpayers and tax professionals of time-sensitive changes to tax law, new programs, current issues of interest, and COVID-19-related information.
We continually educate our employees about our Taxpayers’ Rights Advocate’s Office and promote the services we provide during monthly New Employee Orientation trainings. We also periodically publish new information and articles on our internal website to keep our teams aligned with our business partners to provide excellent products and services.
Public Affairs Education and Outreach
FTB’s Public Affairs Office educates taxpayers about filing requirements, eligibility for tax credits, and other important tax issues through interviews with TV, radio, and print media outlets, as well as through FTB’s website, social media campaigns, videos, printed brochures, press releases, and webinars. FTB’s Public Affairs efforts align with the entire department to help communicate information to the news media, taxpayers, tax representatives, and other stakeholders. Over the past year, some of the most common media and taxpayer inquiries Public Affairs received dealt with the Middle Class Tax Refund and Golden State Stimulus.
From early 2021 through spring 2022, Public Affairs handled more than 300 GSS-related inquiries and interviews, in English and Spanish. Demand from the Spanish-language news media remained strong this year, given intense GSS and MCTR interest, especially because certain Individual Taxpayer Identification Number (ITIN) holders could file their tax year 2020 returns as late as February 15, 2022, (as opposed to the October 15, 2021, deadline for most Californians) and still qualify for payments.
Given the pandemic, Public Affairs distributed CalEITC/Young Child Tax Credit (YCTC) outreach materials – flyers, posters, brochures, and social media toolkits – digitally again this year and made them available for download on our website. Most of the materials were available in seven languages: English, Spanish, Mandarin, Vietnamese, Korean, Hmong, and Russian. FTB distributed these materials directly to CalEITC outreach partners, including nonprofits, such as United Ways of California, as well as state legislative offices, and a host of state and local social service agencies that could deliver the information directly to lower-income Californians likely to qualify for CalEITC. FTB also worked with the Office of State Publishing and CalFresh to include about 600,000 English-Spanish CalEITC informational flyers in state-funded, emergency food boxes that CalFresh distributed early this year to families statewide.
FTB Public Affairs continues to be part of, and work closely with, the State Interagency Team (SIT) Reducing Poverty Workgroup to stay abreast of CalEITC/YCTC outreach challenges and successes and to help inform SIT members of, among other things, CalEITC statistical trends and pertinent new tax laws and other matters.
Translation for Limited English Proficient Taxpayers
Translations of CalEITC and other materials into multiple languages is handled by FTB's Multilingual Communications Program. Our program provides vital services to our Limited English Proficient (LEP) taxpayers, as well as to our bilingual customer service representatives, and the tax preparers who serve LEP taxpayers.
Our goal is to ensure LEP taxpayers have equal access to the tools and resources available in order to file tax returns timely, accurately, and pay the correct amount without experiencing delays due to a language barrier. FTB's website offers 295 webpages in Spanish and three web applications in Spanish, including one application in additional languages:
- Middle Class Tax Refund Estimator in Spanish.
- Check Your Refund Status application in Spanish.
- EITC calculator in Spanish, Chinese, Vietnamese, Korean, and Russian.
Over the past year, we translated into Spanish new or updated FTB public webpages, including:
- Middle Class Tax Refund webpage.
- Middle Class Tax Refund Estimator webpage.
- Health Care Mandate webpage.
- Golden State Stimulus II webpage.
- Golden State Stimulus II Estimator webpage.
- Golden State Stimulus Help webpage.
- Paycheck Protection Program Loan Forgiveness webpage.
We made other translations over the past year, including:
- FTB 3514, 2021 CalEITC form and instructions, in Spanish.
- FTB 854, CalEITC brochure, in Spanish, Chinese, Korean, Vietnamese, Russian, and Hmong.
- FTB 856 A EN-SP, CalEITC poster (regular size), with Spanish on opposite side of English.
- FTB 856 SP, CalEITC large poster, in Spanish.
- FTB 3568 SP, Alternative Identifying Information for the Dependent Exemption Credit, in Spanish.
We provide access to our programs, services, and facilities in accordance with Title II of the Americans with Disabilities Act (ADA) of 1990. At taxpayers' request, we provide reasonable accommodations in alternative formats.
We regularly translate major news releases into Spanish. We offer bilingual Facebook Live videos about tax issues in English-Spanish and English-Russian, and we often translate key social media posts into Spanish and other languages as appropriate.
Withholding-Real Estate Community Outreach and Education
Our Filing Division’s Withholding Services and Compliance Section (WSCS) continued its communication and outreach efforts with external stakeholder groups throughout 2021 and 2022. They delivered virtual presentations on real estate withholding requirements as well as how to correctly complete the Form 593 to various escrow associations and title companies. WSCS also delivered virtual presentations on nonresident withholding requirements to National Association of Real Property Managers – Sacramento, CAL National Association of Real Property Managers Conference, CA Society of Tax Consultants, and California Association of Realtors Property Management Conference. To continue to assist with education and compliance, they created a new page for Pass-Through Entity Withholding Requirements on our public website.
Exempt Organizations Education and Outreach
FTB’s Exempt Organizations Unit participated in an outreach event sponsored by the California Lawyers Association. FTB’s representatives engaged with the public virtually due to the COVID-19 pandemic, discussing various aspects of exempt organizations, including:
- The exemption process, including FTB’s time frames for processing exemption applications.
- Maintaining compliance with exempt organization filing requirements.
- FTB efforts to assist nonprofits seeking to dissolve.
- California conformity with recent federal tax law changes.
- Various current issues identified by FTB auditors.
- Other items by audience request.
Increased Enforcement Capabilities
Although FTB encourages voluntary compliance by providing taxpayer education as well as pre-filing assistance and information, FTB continues to identify ways to improve its enforcement and collection capabilities.
The Audit Division staff works with taxpayers and their representatives to administer and enforce the law effectively to ensure all taxpayers meet their obligations to file correctly and pay the proper amount of tax owed. We use innovative methods to promote these objectives through customer service, education, self-compliance letters, initiatives, and partnerships with federal and state agencies. In performing these activities, we consider the effects of audit activities on taxpayers as well as the increases in timeliness and effectiveness of enforcement actions. All of our work focuses on adherence to the regulations under California R&TC Section 19032, Audit Procedures, to complete audits in a timely manner.
We collaborate with subject matter experts to operate our programs in an efficient manner and to also seek better use of technology and data. We continue to seek new opportunities to form partnerships with taxpayers, their representatives, and other agencies to continue to promote best audit practices.
Addressing California’s Tax Gap
The tax gap is the difference between what is properly owed to the state and what is voluntarily reported and paid timely.
The three components of the tax gap are:
- Underreporting, which is under-reporting of income or revenue or the over-reporting of expenses on a timely filed return.
- Underpaying, which is the amount of tax reported on a timely filed return that is not timely paid.
- Nonfiling, which is the tax not timely paid by those who do not timely file a return.
This year, we estimated California’s tax gap to be approximately $24 billion. We based this amount on the IRS's most recent study, released in 2019, with adjustments for California and the California economy. The dollar amount of the tax gap has increased because the economy has expanded, but the percentage of compliance has remained steady.
Addressing the tax gap remains a top priority and we are fully committed to ensuring a fair tax system for all California taxpayers. We address the tax gap, starting with the collection of data, which then drives taxpayer education and outreach to encourage self-compliance, followed by campaigns to identify tax gaps and solutions, followed by compliance efforts.
This year, FTB began the EDR2 project, which will modernize our compliance programs and help FTB to further address the tax gap. This modernization will capture more data and provide new technology that will enable us to identify potential compliance issues earlier and assist taxpayers with resolving these issues using self-service options. The new data and current data, coupled with the new EDR2 analytic capabilities, has helped FTB expand education and compliance efforts in targeted areas. In January of 2022, FTB began mailing Schedule C Self-Correct Letters and Schedule A Itemized Deduction Review Letters to selected taxpayers. These efforts are part of FTB’s focus on using the enhanced data to close the existing tax gap and improve self-compliance options for more taxpayers.
We also work to address the tax gap by conducting audits on recognized abusive and listed transactions such as the Micro-Captive Insurance Deduction and the Syndicated Conservation Easement transactions. These two federally listed transactions have become widespread across the nation and are being purchased by California taxpayers to over-inflate deductions and thereby reduce their California taxable income.
FTB's ability to close the tax gap involves enforcement action through our Criminal Investigation Bureau (CIB). FTB special agents in CIB are sworn peace officers charged with the investigation of individuals and entities suspected of committing income tax evasion, income tax fraud, and the concealment of assets to evade the collection of tax. Special agents also conduct investigations of related crimes such as money laundering and fraud schemes, including refund fraud and preparer fraud, in which the state of California is a victim.
In the course of investigating suspected violations, FTB special agents gather evidence, interview witnesses, interrogate suspects, and plan and effect search and arrest warrants. CIB works collaboratively with FTB’s Audit, Collections, and Fraud programs, as well as local, state, and federal law enforcement agencies. Once criminal charges are filed, FTB special agents serve as expert witnesses and assist prosecuting attorneys in the preparation and prosecution of their cases.
Accounts Receivable Management (Collections)
The ARM Division is responsible for managing delinquent debts entrusted to FTB, such as personal income tax and franchise and corporate income tax. We also collect various nontax debts, including debts owed to California’s courts and local jurisdictions, delinquent vehicle registration, CalSavers employer penalties, and victim’s restitution orders and fines.
We collect on tax accounts receivable that are established by self-assessment or audit, settlement, and filing enforcement actions. An automated billing system, combined with central and field office collection staff, administers collection activities.
Our collection approach is founded on the principle that we use the least intrusive action first to gain compliance. Our collection strategy is to encourage taxpayers to resolve their debts as quickly as possible through the method best suited for their situation to help them achieve long-term compliance.
The collection staff performs manual collection efforts to ensure that noncompliant taxpayers contribute their fair share to the General Fund. The following are the revenues collected in FY 2021/2022 through FTB’s collection programs.
FY 2021/2022 Revenues Collected from Tax Programs
|Personal Income Tax
|Business Entity Tax
FY 2021/2022 Revenues Collected from Nontax Debt Programs
|Nontax Debt Program
|Interagency Intercept Collections
FTB implemented the Administrative Dissolution Program on January 1, 2019, after being given authority, under AB 2503, to administer the program for business entities seeking relief, and with the objective to improve compliance. Domestic corporations and domestic limited liability companies (LLCs) who ceased doing business and have no assets can now request a Voluntary Administrative Dissolution or Cancellation (taxpayer initiated). To date, we have received 23,770 requests for dissolution or cancellation. Of those resolved thus far, 6,959 business entities were approved for administrative dissolution.
On January 1, 2020, FTB implemented a second phase of the program and began evaluating business entities for Administrative Dissolution or Cancellation (FTB initiated), provided they ceased doing business, show suspended for 60 or more consecutive months, and met other established criteria. As to whether this program is a “cure” for suspended corporations, overall, the program is doing what it was intended to do: assist domestic corporations and domestic LLCs registered with the Secretary of State for more than 12 months that have stopped doing business, never did business, and have no assets to dissolve or cancel their business. FTB is pleased with the program and progress in processing 20,150 requests to date to help businesses save money, making it easier to dissolve a business and educate business owners and their representatives.
FTB’s Legal Division supports enforcement efforts by providing consultation and litigation support for positions developed in cooperation with FTB’s enforcement programs. Support activities include providing representation in protest hearings, appeal proceedings before the Office of Tax Appeals (OTA), settlement of cases, supporting Attorney General staff in tax litigation proceedings, and representation in out-of-state bankruptcy and collection proceedings.