Appendices Taxpayers’ Bill of Rights Annual Report to the Legislature

Appendix 1 – Assessments

All tables in Appendix 1 reflect tax increase assessments only. The assessments became final in FY 2022/2023. We may have issued the assessments in prior years; however, due to cases in protest status, we did not resolve them until FY 2022/2023. Appendix 1 totals reflect rounded figures and may not compute exactly.

Data may not add up perfectly in the Tables throughout Appendix 1 due to rounding.

Table 1A Corporation Tax Law

NPAs Finalized in FY 2022/2023 Categorized by Primary Issue
Issue Number of
NPAs
% Tax Assessed
(Millions)
% Average Assessment
Per NPA
Allocation/Apportionment 566 29.9 $196.2 49.9 $346,575
Assess Minimum Tax 19 1.0 $0.0 0.0 $800
Revenue Agent Reports 1,113 58.9 $31.7 8.1 $28,456
State Adjustments 35 1.9 $5.2 1.3 $147,377
Other 158 8.3 $159.8 40.7 $1,011,482
Totals/Average 1,891 100 $392.8 100 $207,732

Explanation for Table 1A:

  • Allocation/Apportionment involves corporations doing business within and outside of California.
  • Revenue Agent Reports typically result when California conforms to federal law and a change to a taxpayer’s federal tax return applies to the taxpayer’s California tax return.
  • State Adjustments reflect the differences between the IRC and the R&TC.

Table 1B Personal Income Tax Law

NPAs Finalized in FY 2022/2023 Categorized by Primary Statute (Issue)
Issue Number of
NPAs
% Tax Assessed
(Thousands)
% Average Assessment
Per NPA
CP2000 64,877 15.5 $124,135 6.1 $1,913
Filing Enforcement 304,249 72.7 $1,463,396 71.8 $4,810
Filing Status 5 0.0 $6 0.0 $1,128
Revenue Agent Reports 16,540 4.0 $93,272 4.6 $5,639
Other 32,786 7.8 $358,080 17.5 $10,922
Totals/Average 418,457 100 $2,038,889 100 $4,872

Explanation for Table 1B:

  • The CP2000 category results from the IRS comparing information documents that report income paid to individuals by third parties against income reported on their tax returns.
  • Filing Enforcement refers to assessments issued to individuals who have not filed a state income tax return after we notified them of their filing requirement.
  • Filing Status primarily reflects notices issued due to head of household adjustments.

Table 2 Corporation Tax Law

Corporations by Industry with NPAs Finalized in FY 2022/2023
Industry All Corporations
2021 Tax Year
% Corporations with NPAs % Tax Assessed(Millions) %
F.I.R.E.* 182,172  14.4 117  10.8  $95.3 24.3
Manufacturing 47,519 3.8 97  9.0  $43.0 10.9
Services 494,379 39.1 219 20.3  $14.3 3.6
Trade 155,017 12.3 150  13.9  $31.9 8.1
Other** 383,977 30.4 498 46.1 $208.3 53.0
Totals 1,263,064 100 1,081 100 $392.8 100

* Finance, insurance, real estate, and holding companies.

** Includes agriculture, construction, utilities, transportation, communication, information, and other industries not classified in the sample.

For corporations not filing through a combined report, we base the industry designation on the corporation’s primary business activity in California. In the case of corporations filing through combined reports, we base the industry designation on the primary occupation of the group, not necessarily on the industry of the parent. If the parent is a holding company of a diverse group of subsidiary corporations, then we group it with finance, insurance, real estate, and holding companies.

Tables 3A, 3B, and 4, apply to either the taxable years for which we issued NPAs or the number of years for which a taxpayer receives NPAs because of multiple taxable year audits during the same audit cycle.

Table 3A Corporation Tax Law

NPAs Finalized in FY 2022/2023 Issued by Taxable Year
Average Taxable Year Number of
NPAs
% Tax Assessed
(Millions)
% Average Assessment
Per NPA
2015 and prior 482 25.4 $247.9 63.1 $516,469
2016 327 17.3 $47.6 12.1 $145,581
2017 439 23.2 $48.8 12.4 $111,144
2018 393 20.8 $33.8 8.6 $85,998
2019 181 9.6 $10.1 2.6 $55,930
2020 56 3.0 $4.4 1.1 $78,129
2021 and later 13 0.7 $0.2 0.0 $13,618
Totals/Average 1,891 100 $392.8 100 $207,732

Table 3B Corporation Tax Law

Multiple NPAs Finalized in FY 2022/2023 for the Same Taxpayer
Corporations With… Number of Taxpayers Tax Assessed (Millions) Average Assessment Per Taxpayer
One NPA 541 $70.1 $130,601
Two NPAs 353 $100.3 $284,001
Three NPAs 136 $104.0 $765,031
Four or more NPAs 51 $117.9 $2,311,156
Totals/Average 1,081 $392.8 $363,386

Table 4 Personal Income Tax Law

NPAs Finalized in FY 2022/2023 Issued by Taxable Year
Taxable Year Number of NPAs % Assessment Amount (Thousands) % Average Assessment Amount
2016 and prior 2,449 0.6 $222,798 10.9 $90,975
2017 11,641 2.8 $87,411 4.3 $7,509
2018 134,588 32.2 $490,285 24.0 $3,643
2019 105,798 25.3 $521,756 25.6 $4,932
2020 163,851 39.2 $713,299 35.0 $4,353
2021 and later 130 0.0 $3,341 0.2 $25,700
Totals/Average 418,457 100 $2,038,889 100 $4,872

Table 5 Personal Income Tax Law

Individual Tax Return Preparation, Process Years 2021 and 2022
Preparer 2021 e-filed Tax Returns Processed (Thousands) % 2022 e-filed Tax Returns Processed (Thousands) % % Change
Professional 12,284 64.8 12,191 64.9 -0.76
Taxpayer 6,313 33.3 6,192 32.9 -1.92
VITA* 371 2.0 410 2.2 10.51
Totals 18,968 100 18,793 100  

*VITA is a program that provides tax return preparation assistance for seniors, disabled, non-English speaking, and those with limited or fixed incomes.

Appendix 2 – Filing Errors

Table 6A Top Errors by Tax Return Type

July 1, 2022, through June 30, 2023
Code Code Description Grand Total 540 2EZ 540 540 NR 540 X
EP Estimate Payment Revised 255,517 370 220,485 34,611 51
TT Error Calculating Total Credits or Tax Liability 244,679 4,123 187,356 41,259 0
GC Withholding Adjusted 187,895 0 182,178 5,717 0
WS Verify Withholding (Form 592-B and/or 593) 66,329 0 18,131 48,194 4
OC Verify Amt Applied To Next Yr Est Tax 49,657 0 36,750 12,907 0
FM Check Dependent SSN Allowed on Another RT 46,600 600 43,699 2,300 1
AC Check RPC Z - No Monetary Amounts 35,912 19 33,394 2,494 5
EK Verify Total Credits and Special Credits 34,966 52 34,220 694 0
SS Check Excess SDI 22,688 0 22,120 568 0
GF Verify Total Taxable Income, Tax, and CA Tax Rate 20,543 0 0 20,543 0
JF Verify Form 3532 Part I - Marital Status 20,521 18 19,671 832 0
JW Verify Penalty Amount 15,348 222 13,785 1,341 0
JX Check full year health care coverage or if 3853 attached 14,545 1,440 10,771 2,334 0
JC Verify Modified Adjusted Gross Income and Part II Line 1 13,726 49 12,144 1,533 0
BK Verify Standard/Itemized Deductions and Sch CA, Larger of Adj Itemized or Std Ded 12,772 0 11,188 1,584 0
JO Verify qualifying person's gross income (Form 3532 Part III) 12,493 34 11,849 0 3
BG Verify Federal AGI and Sch CA, Col A: Total (AGI) 11,033 0 11,033 0 0
EM Check if 3514 attached 10,883 829 9,970 0 3
GG Verify CA Taxable Income, CA Tax Rate, and CA Tax Before Exemptions 10,734 0 0 10,734 0
LC Verify ISR Penalty, Payments Balance, and Payments after ISR Penalty 10,034 958 7,452 1,624 0
Top Twenty 1,096,875 8,714 886,196 189,269 67
All Others 246,387 15,013 223,654 39,009 497
Grand Total 1,343,262 23,727 1,109,850 228,278 564

Table 6B Top Errors by Filing Method

July 1, 2022, through June 30, 2023
Code Code Description Grand Total Electronic Paper
EP Estimate Payment Revised 280,531 246,964 33,567
GC Withholding Adjusted 244,888 220,230 24,658
TT Error Calculating Total Credits or Tax Liability 191,664 188,346 3,318
WS Verify Withholding (Form 592-B and/or 593) 75,577 65,910 9,667
OF Verify Overpaid Tax On Original or Adjusted 65,297 35,464 29,815
OC Verify Amt Applied to Next Yr Est Tax 58,922 46,702 12,220
JS Filing Status Adjusted from HOH to Single 48,533 30,333 18,200
OM Verified Tax Paid On Original Plus Addl 40,092 22,827 17,265
AC Check RPC Z-No Monetary Amounts 36,168 35,911 257
FM Check Dependent SSN Allowed on Another RT 35,326 19,944 15,352
Top Ten 1,076,998 912,631 164,319
All Others 497,933 273,304 224,629
Grand Total 1,574,931 1,185,935 388,948

Appendix 3 – Regulations

Regulation Sections 17951-5 and 17951-8 — Market-Based Rules — Personal Income Tax Sourcing

When California adopted market-based sourcing rules pursuant to Proposition 39 as codified in R&TC Section 25136, these rules impacted the Personal Income Tax law. Title 18, of the California Code of Regulations (CCR) in Section 17951-4 directly incorporates R&TC Sections 25120 through 25139 and the regulations thereunder. Therefore, owners of pass-through entities and disregarded entities (such as, sole proprietorships) are also subject to market-based sourcing rules.

The purpose of this regulation project is to clarify the regulations concerning sourcing of income subject to market-based sourcing. The project also will clarify which sourcing rules remain unchanged.

The three-member Board approved staff's request to begin the informal regulatory process on December 3, 2019. On October 8, 2020, staff held an interested parties meeting and received comments from the public. Staff anticipates requesting permission from the three-member Board to proceed to the formal regulatory process in spring of 2024.

Regulation Sections 17951-7 and 25137(e) — Tax Deferred Exchanges

On June 27, 2013, the California Legislature enacted AB 92. (Stats. 2013, Ch. 26.) Under AB 92, for tax years beginning on or after January 1, 2014, taxpayers who perform IRC Section 1031 exchanges of property located in California for property located outside of California are required to file an annual information return with FTB for each year in which the gain or loss from that exchange has not been recognized. (Refer to R&TC Sections 18032 and 24953.) AB 92 reflects existing California law requiring taxpayers to recognize deferred gains/losses associated with IRC Section 1031 exchanges of property located in California as California source income; however, as a result of the new reporting requirement, FTB has received numerous requests for clarification of the determination of California source income in such exchanges.

For personal income tax, R&TC Section 17954 specifically authorizes FTB to issue regulations for allocating and apportioning gross income from sources within and without California for the purposes of computing taxable income of nonresidents and part-year residents under paragraph (1) of subdivision (i) of R&TC Section 17041.

The purpose of this regulation project is to clarify the sourcing of deferred gains/losses from IRC Section 1031 exchanges of property located in California.

Staff held an interested parties meeting on February 3, 2016, to discuss multiple scenarios regarding the sourcing and factors for 1031 exchanges. On March 30, 2021, staff held a second interested parties meeting and received comments from the public. Staff continues to develop this regulatory concept and is finalizing the necessary economic conclusions.

Regulation Section 18001 — Other State Tax Credit

Pursuant to R&TC Section 18001, California allows a credit against the net tax for net income taxes imposed by and paid to another state on specified income. Under R&TC Section 18001, the payment of tax to a sister state is generally eligible for an Other State Tax Credit (OSTC) only where the other state's tax is a net income tax.

The purpose of this regulation project is to elicit public input on the potential adoption of a regulation which would clarify the statutory term "net income taxes paid to another state" for purposes of the OSTC.

On December 10, 2018, the three-member Board approved staff's request to begin the informal regulatory process. Staff held interested parties meetings on August 7, 2019, and July 30, 2020, to receive public input on the issue and present draft amendments. On June 3, 2021, staff received permission from the three-member Board to proceed to the formal regulatory process. Staff published the Notice of Proposed Rulemaking on March 31, 2023. The Office of Administrative Law approved the project, and it was filed with the Secretary of State’s office on November 16, 2023. The effective date of the regulatory amendments will be January 1, 2024.

Regulation Sections 18662-4 through 18662-8 — Withholding on Domestic Pass-Through Entities

The purpose of this project is to revise existing withholding on pass-through entities to reflect current statutory requirements under R&TC Section 18662. In particular, the purpose of the proposed new regulation at CCR Section 18662-7 is to modify the withholding on pass-through entities to consider withholding on the “distributive share” of income.

There are two reasons supporting this modification. First, R&TC Section 18662, subdivisions (a) and (b), authorize FTB to require a pass-through entity to withhold on “items of income,” including “partnership income or gains.” Requiring a pass-through entity to withhold on a nonresident partner or member’s “distributive share” of the pass-through entity’s income is consistent with Section 18662, subdivisions (a) and (b), because the withholding amount is determined by the pass-through entity’s income rather than distributions made. Second, FTB staff has found that a vast majority of the states have switched to requiring pass-through entities to withhold on “distributive share” of income. Modifying California’s pass-through entity withholding to be consistent with the rest of the states will lessen the burden on out-of-state pass-through entities that are required to comply with multiple state withholding schemes.

A secondary purpose behind this proposed regulation is to adopt a withholding scheme that best resolves the issues arising from the allocation of withholding. Specifically, pass-through entities have difficulty in filing timely forms to allocate withholding through multiple tiers. This results in the ultimate individual partners or members being denied a claimed withholding credit because the withholding has not been properly allocated.

The project also makes corresponding additional amendments to other withholding regulations to be consistent with the proposed new regulation at CCR Section 18662-7.

Staff held interested parties meetings on December 12, 2014, and September 8, 2017. Staff noticed amended proposed regulation draft language in a 90-day notice on March 15, 2019. On June 25, 2020, staff noticed additional amendments to the proposed regulation draft language in a 30-day notice. On June 8, 2021, staff noticed further amendments to the proposed regulatory language in a 45-day notice. On September 9, 2021, staff received permission from the three-member Board to proceed to the formal regulatory process. Thereafter, staff discovered additional necessary edits to the draft language and issued another 30-day notice on December 30, 2022. On December 6, 2023, staff received permission from the three-member Board to proceed to the formal regulatory process with updated regulatory language. Staff anticipates publishing the Notice of Proposed Rulemaking in early 2024.

Regulation Sections 23701, 23772, and 23775 through 23778 — Exemption from Taxation

The purpose of this regulatory project is to evaluate possible amendments to the regulations implementing the statutes relating to exemption from taxation. Given statutory amendments to Revenue and Taxation Code sections 23701, 23772, 23776, and 23777, contained in SB 1229 (1999), SB 401 (2010), AB 1677 (2012), AB 1173 (2013), AB 94 (2017), and SB 934 (2020), and the repeal and addition of Revenue and Taxation Code section 23778, contained in SB 934 (2020), California Code of Regulations, title 18, sections 23701, 23772, 23776, 23777, and 23778 appears to no longer accurately reflect the current versions of the statutes they implement. In addition, California Code of Regulations, title 18, section 23775 contains language that conflicts with Revenue and Taxation Code section 23302. Therefore, this regulation project was added to the rulemaking calendar to allow staff to begin the process of identifying necessary updates to the relevant regulations to reflect the current version of the corresponding statutes.

On December 8, 2022, the three-member Board approved staff's request to begin the informal regulatory process. Staff anticipates holding an interested parties meeting in 2024.

Regulation Section 25136-2 — Market-Based Rules for Sales Other Than Sales of Tangible Personal Property

For tax years beginning on or after January 1, 2011, R&TC Section 25136 provides the sales factor numerator assignment rules for all sales other than sales of tangible personal property. R&TC Section 25136, subdivision (b), provides the market-based rules for assignment of sales of other than sales of tangible personal property where taxpayers have made a single-sales factor election.

CCR, Title 18, Section 25136-2 (which became effective on March 27, 2012, and operative for tax years beginning on or after January 1, 2011) provides rules for sales of services and sales of intangible property. In those rules, there are specific provisions for assignment of sales of stock or interests in a pass-through entity and for the incorporation of the special industry rules under CCR Section 25137, including those for mutual fund providers under CCR Section 25137-14.

Staff held an interested parties meeting on January 20, 2017, to elicit public input on further amendments to Section 25136-2, regarding benefit of the service received, asset management fees, government contracts, reasonable approximation, dividends, freight forwarding, and other issues. Staff held additional interested parties meetings on June 16, 2017, May 18, 2018, July 19, 2019, July 21, 2020, and June 4, 2021, to present draft amendments. On September 9, 2021, staff received permission from the three-member Board to proceed to the formal regulatory process. Staff is working with its oversight agencies to finalize the necessary Standardized Regulatory Impact Analysis. Once that is complete, staff will publish the Notice of Proposed Rulemaking, which is anticipated to occur in early 2024.

Regulation Section 25137 – Alternative Apportionment Method Petition Procedures

R&TC Section 25137 states that when the standard allocation and apportionment provisions of UDITPA (R&TC Sections 25120-25139) do not fairly represent the extent of a taxpayer’s business activity in California, the taxpayer may petition for the use of an alternative method to accomplish an equitable allocation or apportionment of income to this state. In recent years, the number of taxpayers seeking to utilize alternative allocation or apportionment methodologies under the authority of R&TC Section 25137 has increased. This proposed rulemaking project would provide guidance to assist taxpayers with submitting petitions for relief under R&TC Section 25137.

On July 12, 2016, the three-member Board gave permission for staff to move forward with the informal regulatory process. Staff held interested parties meetings on June 30, 2017, November 28, 2018, December 4, 2019, and August 11, 2020, to present draft amendments. Staff received permission to proceed to the formal regulatory process from the three-member Board on March 4, 2021. Staff published the Notice of Proposed Rulemaking on January 20, 2023. The Office of Administrative Law approved the project, and it was filed with the Secretary of State’s office and became effective on November 3, 2023.

Regulation Section 25137-14 — Mutual Fund Service Providers and Asset Management Service Providers

This regulatory project is to explore adding a definition of “beneficial owner” to clarify the application of the existing regulation to asset managers that provide services to Regulated Investment Companies (RICs).

Regulation section 25137-14 was promulgated to provide taxpayers in the mutual fund industry an apportionment methodology. Pursuant to the existing regulation at section 25137-14, receipts from management, administrative, and distribution services to or on behalf of a RIC are sourced by reference to each RIC's shareholders' domicile. When a shareholder's domicile is unknown, Regulation section 25137-14 uses a reasonable basis to determine the proper location for the assignment of these shares. If a reasonable basis cannot be developed, then all the shares held by the shareholder of record are disregarded in computing the shareholder ratio for the fund in issue. Regulation section 25137-14 also sources receipts from "asset management services" to California to the extent the domicile of the assets' beneficial owner is in California. However, the term "beneficial owner" is not defined in the Regulation.

On December 2, 2021, the three-member Board approved staff's request to begin the informal regulatory process. Staff held an interested parties meeting on November 8, 2023, to allow public discussion of whether a revision to Regulation 25137-14 is necessary, and if necessary, what should be revised.

Appendix 4 – Certification Letter