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 2019/2020. We may have issued the assessments in prior years; however, due to cases in protest status, we did not resolve them until FY 2019/2020. Appendix 1 totals reflect rounded figures and may not compute exactly. If a single NPA included multiple issues, we categorized the NPA under the issue that provided the majority of the tax change. We categorized the NPA as “Other” when there was no distinct primary issue.

Note: No NPAs were finalized in April-June of FY 2019/2020 due to relief granted to all taxpayers as a result of the COVID-19 pandemic.

Table 1A Corporation Tax Law

NPAs Finalized in FY 2019/2020 Categorized by Primary Issue
Issue Number of
NPAs
% Tax Assessed
(Millions)
% Average Assessment
Per NPA
Allocation/Apportionment 468 21.4 $238.3 81.6 $509,231
Assess Minimum Tax 103 4.7 $0.2 0.1 $2,293
Revenue Agent Reports 1,373 62.6 $28.0 9.6 $20,388
State Adjustments 52 2.4 $8.0 2.7 $153,552
Other 196 8.9 $17.4 6.0 $88,718
Totals/Average 2,192 100 $ 291.9 100 $133,176

Explanation for Table 1A issues:

  • 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 Internal Revenue Code (IRC) and the R&TC.

Table 1B Personal Income Tax Law

NPAs Finalized in FY 2019/2020 Categorized by Primary Issue
Issue Number of
NPAs
% Tax Assessed
(Thousands)
% Average Assessment
Per NPA
CP2000 91,788 15.2 $117,374 6.3 $1,279
Filing Enforcement 436,490 72.2 $1,406,583 76.0 $3,222
Filing Status 33,791 5.6 $29,738 1.6 $880
Revenue Agent Reports 10,554 1.7 $66,747 3.6 $6,324
Other 31,567 5.3 $230,194 12.5 $7,292
Totals/Average 604,190 100 $1,850,636 100 $3,063

Explanation for Table 1B issues:

  • 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 2019/2020
Industry All Corporations
2018 Tax Year
% Corporations with NPAs % Tax Assessed(Millions) %
F.I.R.E.* 152,550 15.6 0 0.0 $0.0 0.0
Manufacturing 49,252 5.1 0 0.0 $0.0 0.0
Services 525,395 53.9 4 0.3 $0.0 0.0
Trade 121,898 12.5 1 0.0 $0.0 0.0
Other** 125,558 12.9 1,341 99.6 $291.9 100
Totals 974,653 100 1,346 100 $291.9 100

* 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 2019/2020 Issued by Taxable Year
Average Taxable Year Number of
NPAs
% Tax Assessed
(Millions)
% Average Assessment
Per NPA
2012 and prior 353 16.1 $165.1 56.6 $467,736
2013 255 11.6 $29.9 10.2 $117,155
2014 585 26.7 $54.5 18.7 $93,151
2015 603 27.5 $27.4 9.4 $45,450
2016 338 15.4 $13.4 4.6 $39,583
2017 50 2.3 $1.6 0.5 $32,462
2018 and later 8 0.4 $0.0 0.0 $4,410
Totals/Average 2,192 100 $291.9 100 $133,176

Because the statute of limitations for assessing additional tax has passed, the earlier years reflect final figures.

Table 3B Corporation Tax Law

Multiple NPAs Finalized in FY 2019/2020 for the Same Taxpayer
Corporations With… Number of Taxpayers Tax Assessed (Millions) Average Assessment Per Taxpayer
One NPA 762 $30.9 $40,638
Two NPAs 405 $83.6 $206,304
Three NPAs 129 $91.3 $707,976
Four or more NPAs 50 $86.1 $1,721,480
Totals/Average 1,346 $291.9 $216,882

Table 4 Personal Income Tax Law

NPAs Finalized in FY 2019/2020 Issued by Taxable Year
Taxable Year Number of NPAs % Assessment Amount (Thousands) % Average Assessment Amount
2013 and prior 1,933 0.3 $114,908 6.2 $59,446
2014 3,445 0.6 $47,499 2.6 $13,788
2015 105,442 17.5 $220,777 11.9 $2,094
2016 109,431 18.1 $295,056 15.9 $2,696
2017 349,961 57.9 $1,138,227 61.5 $3,252
2018 and later 33,978 5.6 $34,169 1.9 $1,006
Totals/Average 604,190 100 $1,850,636 100 $3,063

Table 5 Personal Income Tax Law

Resident Tax Return Preparation, Process Years 2018 and 2019
Preparer 2018 Tax Returns Processed (Thousands) % 2019 Tax Returns Processed (Thousands) % % Change
Professional 10,482 62.1 10,484 61.3 -0.8
Taxpayer 6,078 36.0 6,281 36.8 0.8
VITA* 319 1.9 320 1.9 0.0
Totals 16,879 100 17,085 100  

*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, 2019, through June 30, 2020
Code Code Description Grand Total 540 2EZ 540 540 NR 540 X
EP Estimate Payment Revised 191,516 2 164,523 25,240 1,751
GC Withholding Adjusted 156,814 4,903 120,863 30,341 707
WS Withhold at Source Revised 50,717 0 12,762 37,724 231
OC Estimated Tax Transfer Revised: Error Affected the Available Transfer Amount 47,229 2 36,834 10,393 0
OF Refund Reported on Amended Tax Return Does Not Match Original Tax Return 44,305 564 31,886 2,669 9,186
TT Error Calculating Total Credits or Tax Liability 43,327 779 40,759 1,549 240
FM Dependent Exemption Disallowed Because Dependent’s ID Number Used On Another Tax Return 35,045 342 34,112 590 1
JS Filing Status Revised from Head of Household to Single 34,760 1,519 32,188 1,038 15
OM Amount Paid With Original Tax Return Plus Payments Made After Tax Return Filed Does Not Match Amount Claimed on Amended Tax Return 27,404 105 19,343 1,922 6,034
KC Error Subtracting Total Special Credits From Net Tax 25,900 0 23,478 2,422 0
EB Dependent Exemption Credit Disallowed Because No Dependent Names Listed On Return 17,807 761 16,576 470 0
GF CA Tax Rate Incorrectly Calculated 17,602 0 0 17,602 0
SS State Disability Insurance Revised 17,423 0 16,817 413 193
JO Head of Household Filing Status Disallowed: Gross Income for Qualifying Person is blank or exceeds allowed amount 16,895 226 16,317 348 4
BK Error Transferring Deductions To Tax Return 13,976 0 12,535 1,314 127
EM Earned Income Tax Credit: Form Issue 13,454 1,454 11,725 137 138
AC Incomplete Tax Return 12,891 673 10,873 1,335 10
GH Error Calculating CA Exemption Credit Percentage 11,783 0 0 11,783 0
JA Head of Household Filing Status Disallowed: HOH Filing Status Schedule not attached 10,739 793 9,654 246 46
EK Error Calculating Earned Income Tax Credit 10,597 368 10,022 193 14
Top Twenty 800,184 12,491 621,267 147,729 18,697
All Others 250,527 19,552 197,513 29,760 3,702
Grand Total 1,050,711 32,043 818,780 177,489 22,399

Table 6B Top Errors by Filing Method

July 1, 2019, through June 30, 2020
Code Code Description Grand Total Electronic Paper
EP Estimate Payment Revised 191,516 155,162 36,354
GC Withholding Adjusted 156,814 128,446 28,368
WS Withhold at Source Revised 50,717 41,028 9,689
OC Estimated Tax Transfer Revised: Error Affected the Available Transfer Amount 47,229 33,018 14,211
OF Refund Reported on Amended Tax Return Does Not Match Original Tax Return 44,305 4,504 39,801
TT Error Calculating Total Credits or Tax Liability 43,327 39,338 3,989
FM Dependent Exemption Disallowed Because Dependent’s ID Number Used On Another Tax Return 35,045 17,787 17,258
JS Filing Status Revised from Head of Household to Single 34,760 14,664 20,096
OM Amount Paid With Original Tax Return Plus Payments Made After Tax Return Filed Does Not Match Amount Claimed on Amended Tax Return 27,404 2,304 25,100
KC Error Subtracting Total Special Credits From Net Tax 25,900 18,069 7,831
Top Ten 657,017 454,320 202,697
All Others 393,694 199,674 194,020
Grand Total 1,050,711 653,994 396,717

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) at 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 regulation 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.

Regulation Section 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.

FTB also has authority for corporate franchise and income tax taxpayers to require alternative apportionment formulas where the standard allocation and apportionment provisions of the Uniform Division of Income for Tax Purposes Act (UDITPA) do not fairly represent the extent of the taxpayer’s business activity in this state. (R&TC Section 25137.)

The purpose of this regulation project is to: (1) clarify the sourcing of deferred gains/losses from IRC Section 1031 exchanges of property located in California; and (2) determine which year’s apportionment factor(s) should be applied to deferred gains/losses from IRC Section 1031 exchanges for apportioning taxpayers.

Staff held an interested parties meeting on February 3, 2016, to discuss multiple scenarios regarding the sourcing and factors for 1031 exchanges. Staff anticipates drafting language and holding another interested parties meeting in 2021.

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.

Regulation Section 18567 - Automatic Extension of Time for Filing Tax Returns by Partnerships

CCR, Title 18, Section 18567 (Automatic Extension Regulation) was adopted on October 12, 2001, to provide an automatic paperless extension for a tax return required to be filed by an individual, fiduciary, or partnership, if the tax return is filed within the extension period. Subsequent to its adoption, FTB staff determined that the Automatic Extension Regulation required updating, to provide consistency with the authority granted by the California Legislature in 2017, to extend the automatic extension period to seven months for a tax return filed by a partnership, or by an LLC that is classified as a partnership for California tax purposes. Accordingly, the purpose of this regulation project is to provide consistency with the statutory authority granted by the Legislature and provide clarity to taxpayers and tax preparers that the automatic extension period is seven months for a tax return filed by a partnership or an LLC that is classified as a partnership for California tax purposes, for taxable years beginning on or after January 1, 2017, while the extension period for an individual or fiduciary tax return remains six months.

Staff received permission to proceed to the formal regulatory process from the three-member Board at the FTB meeting on December 7, 2017. Staff anticipates publishing the Notice of Proposed Rulemaking in early 2021.

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 in order 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 ninety-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. Staff anticipates requesting permission from the three-member Board to proceed to the formal regulatory process in Spring 2021.

Regulation Section 19133 - Penalty for Failure to File Return Upon Notice and Demand

R&TC Section 19133 states if any taxpayer fails to file a tax return upon notice and demand by FTB, the department may add a penalty of 25 percent of the amount of tax. The existing regulation at CCR Section 19133, became operative on December 23, 2004, to provide a framework for FTB to impose the notice and demand penalty on individual taxpayers pursuant to authority provided in R&TC Section 19133. This regulation project was commenced to provide an opportunity for staff to explore whether clarifying updates should be made to the existing regulation, to allow for ease of administration, and to avoid confusion regarding the FTB's imposition of the notice and demand penalty.

Staff received permission to begin the informal regulatory process from the three-member Board at the FTB meeting on September 12, 2019. Staff held an interested parties meeting on November 13, 2019. Staff received permission to proceed to the formal regulatory process from the three-member Board at the FTB meeting on December 3, 2019. Staff published the Notice of Proposed Rulemaking on October 9, 2020.

Regulation Section 23663-6 – Assignment of Credits to Combined Group Members

R&TC Section 23663 permits the assignment of credits among affiliated members of the same combined reporting group. To receive a valid assignment of credits, the assignee must be an "eligible assignee" as defined in R&TC Section 23663(b)(3). Among the requirements to be an "eligible assignee" is that the assignee must have been in the same combined reporting group as the assignor on certain key dates. However, when the assignor or assignee of credits has been involved in a corporate reorganization or other corporate restructuring, taxpayers can be uncertain regarding whether the assignor and assignee meet the requirement of being in the same combined reporting group on the required dates. The purpose of the proposed regulation at CCR Section 23663-6 is to provide taxpayers clarity regarding when credits can be assigned after a corporate reorganization or other corporate restructuring.

On June 12, 2014, the same date that staff held the third interested parties meeting for a completed project for CCR Sections 23663-1 through 23663-5, staff also held the first interested parties meeting for this project, during which general structural issues for the regulation were discussed. Staff held a second interested parties meeting on June 12, 2018, to present draft regulatory language for public comment. Staff received permission to proceed to the formal regulatory process from the three-member Board at the FTB meeting on September 21, 2018. Staff published the Notice of Proposed Rulemaking on October 9, 2020.

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, and July 21, 2020, to present draft amendments.

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 this state, 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.

Regulation Section 30000 – Architectural and Engineering Services

Under California Government Code (GC) Section 4526, state agencies are required to adopt regulations before contracting for private architectural, landscape architectural, engineering, environmental, land surveying, or construction project management services. The GC imposes certain requirements on the selection of these services, including the demonstrated competence and qualifications of the firms involved. The purpose of this regulation project is to adopt the necessary regulations so that FTB can hire independent vendors for architectural and engineering drawings.

On December 3, 2019, the three-member Board approved staff's request to begin the informal regulatory process. Staff anticipates publishing a notice and seeking public input on draft language by early 2021.

Regulation Sections 61000, 61020, 61023, 61025, 61030, 61035, 61040, and 61045 – Individual Shared Responsibility Penalty (SB 78)

On June 27, 2019, the California Legislature enacted SB 78 (Stats. 2019, Ch. 38), which requires Californians to have qualifying health insurance beginning January 1, 2020, and imposes a penalty for failure to comply. SB 78 also includes a subsidy program to assist with the purchase of health insurance through Covered California. This new law gave FTB responsibility for administering the penalty and validating the reconciliation of subsidies. This project would develop the necessary regulations.

On December 3, 2019, the three-member Board approved staff's request to begin the informal regulatory process. On September 30, 2020, staff held an interested parties meeting and received comments from the public.

Appendix 4 – Certification Letter