Tax News July 2022
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Tax News is a monthly online publication to inform tax professionals, taxpayers, and business owners about state income tax laws, FTB regulations, policies and procedures, as well as events that may impact or provide valuable information for the tax professional community.
FTB also periodically releases Tax News Flashes to quickly notify subscribers of urgent time-sensitive information. Tax News Flashes are posted in the Newsroom with a Tax News Flash label.
In this edition July 2022
- Changes to MyFTB password expiration date
- FTB 4197 – Information on Tax Expenditure Items
- Notice of Tax Return Change
- Protecting you and your clients from data theft
- Voluntary administrative dissolution program
- Use tax and pass-through entity elective tax
- Capital account reporting
- Criminal Investigation Bureau
- Ask the advocate
- Tax News Flash links
- Education and outreach
Changes to MyFTB password expiration date
Effective June 22, 2022, your MyFTB password will expire every 120 days instead of every 365 days
You will continue to receive an email 30 days prior to the password expiration date that your current password will expire. If your password expires as a result of this change, the next time you log in you will be prompted to change your password.
Consistent with our foundational principle to protect the privacy and security of data entrusted to us, we implemented this change to better protect your and your clients’ information.
FTB 4197 – Information on Tax Expenditure Items
Clients claiming gross income exclusions or credits and deductions
Under Revenue and Taxation Code Section 41, FTB is required to report on specified deductions, credits, and exclusions to the California Legislature, thereby allowing them to evaluate the performance of the following programs:
- Paycheck Protection Program (PPP)
- Other Loan Forgiveness (OLF)
- Economic Injury Disaster Loan (EIDL)
- Restaurant Revitalization Grant (RRG)
- Shuttered Venue Operator Grant (SVOG)
- Commercial Cannabis Activity (CBIS)
For each new program, the legislature specifies what metrics should be used to evaluate a program’s performance. Occasionally, they require metrics that are not currently reported to FTB on a filed tax return. To meet the requirement of the law, FTB created the information reporting FTB 4197 to capture these metrics. Filing this form is in addition to any other credit forms or expense schedules that are required to be filed with your client’s tax return. Refer to FTB 4197 instructions for more information.
Failure to file this form for clients who have participated in these programs could cause inadequate information to be available. If the required information is not provided the program may appear ineffective and the legislature may allow the program to sunset or discontinue.
Tax year 2021 form and instructions
Form: 2021 California FTB 4197 Information on Tax Expenditure Items
Instructions: 2021 California FTB 4197 Instructions
Visit our Data, reports, and plans page to see how this information is being used and to see prior published reports.
Notice of Tax Return Change
Reason for notice
When errors are identified on a return during the return validation process, an FTB 5818 Notice of Tax Return Change is sent to the taxpayer. The adjustments may increase, reduce, or disallow an overpayment, or create an additional balance due on the account. The tax return change information is only for the tax year printed at the top of the notice.
Each tax return change includes one or more paragraph codes that corresponds to an explanation of the adjustment made on the return. The codes are printed with the explanatory paragraph on the notice. You can search for the explanations of paragraph codes and get information on what to do next at ftb.ca.gov.
Gather and review all relevant tax documents to check for errors. For withholding verification, supporting documents may include; W-2, W-2G, W-2C, 1099-Misc, 1099-R, 592-B, 593, or K-1. To save time, certain supporting documents can be uploaded to a MyFTB account for resolution.
Penalties and interest
When an FTB 5818 Notice of Tax Return Change results in an additional balance due, the taxpayer has until the due date on the notice to pay without incurring penalties and interest.
Protecting you and your clients from data theft
Highly sophisticated, well-funded, and technologically adept cybercriminals around the world continue to search out IT vulnerabilities and exploit those weaknesses to steal valuable personal and business information
Tax professionals possess data rich environments that criminals actively seek out. Whether you are an owner or member of a large firm, or a one-person shop, criminals are phishing for your clients’ information. The following steps may assist to better protect yourself and your clients from becoming victims.
FTB advises tax professionals to use IRS Publication 4557, Safeguarding Taxpayer Data, as a guide for conducting a review of your current security measures, and to create or update your security plan. It is critical you assess your current security precautions and address any weaknesses in a timely manner.
FTB recommends you:
- Install anti-malware/anti-virus security software on all devices (laptops, desktops, routers, tablets, and phones) and keep software set to automatically update.
- Perform frequent routine deep scans of your network and computers to identify any malware/virus infections.
- Use strong passwords to access computers and client files. Strong passwords typically include a combination of letters, numbers and symbols.
- Learn to recognize and avoid phishing email schemes.
- Check IRS e-Services account weekly for number of returns filed with your Electronic Filing Identification Number (EFIN).
Though FTB has a sophisticated ID theft program working daily to detect and prevent fraud, we still need your help to stop these criminals. Additionally, the sooner we are aware of an issue, the faster we can act in order to protect clients’ accounts.
Potential signs your clients might be victims of a data breach
- Client e-filed returns begin to reject, this is often due to returns with matching social security numbers having already been filed
- Larger than normal amount of rejected returns
- Larger than normal amount of confirmation notices
- Larger than normal amount of Notices of Tax Return Change
- The number of returns filed with tax practitioner’s EFIN exceeds number of clients
- Clients who haven’t filed tax returns receive refunds
If you believe your clients’ data may have been compromised by cybercriminals, theft, or accident, contact FTB immediately and provide the following information:
- Tax professional’s name and title
- Name of business
- Number of clients affected
- Whether you actively use MyFTB, and if so, when was your last log in
In addition to alerting FTB, you may also want to contact:
- Internal Revenue Service, to report client data theft to your local stakeholder liaison. Liaisons will notify IRS Criminal Investigation and others within the agency on your behalf. Remember, speed is critical. If reported quickly, the IRS can take steps to block fraudulent returns in your clients’ names.
- Federal Trade Commission provides useful identity theft information and recovery plans.
- Local police, to file a police report on the data breach. You, and your client, may need this report for potential issues that arise.
It is up to all of us working together in order to help fight crime and protect those that we serve.
Voluntary administrative dissolution program
Beginning January 1, 2019, a qualified domestic corporation or qualified domestic limited liability company can request for voluntary administrative dissolution/cancellation
This program authorizes FTB to abate, upon written request by a qualified entity, unpaid qualified taxes, penalties, and interest for the taxable years in which the entity certifies under penalty of perjury it has ceased doing business, or never conducted business, and has no remaining assets in the business name. It does require the entity to file and pay in full for the tax years in which it conducted business.
The entity must submit a request form to FTB by mail or fax. Only an officer, owner, member, director, or FTB approved Power of Attorney (POA) is authorized to request voluntary administrative dissolution/cancellation. The request forms to submit by entity are:
- Corporations: FTB 3715 PC, Domestic Corporation Request for Voluntary Administrative Dissolution
- Limited liability companies (LLC): FTB 3716 PC, Domestic Limited Liability Company Request for Voluntary Administrative Cancellation
Applying for voluntary administrative dissolution will not legally terminate a business. The entity is still required to submit the proper dissolution/cancellation forms to the Secretary of State to close their business entity.
The business entity may qualify if it:
- Is a domestic corporation or domestic LLC registered for more than 12 months with the SOS.
- Is not actively engaging in any transaction for the purpose of financial or monetary gain or profit.
- Has stopped doing business or never did business.
- Has no assets.
Find additional information on our Voluntary administrative dissolution/cancellation page.
Use and pass-through entity (PTE) elective tax
Assembly Bill 150 passed in July 2021, allows partnerships and S corporations to pay an entity-level elective tax
For taxpayers who include use tax on their income tax return, it is important to note that payments and credits are applied to use tax first, then towards other taxes, such as: franchise or income tax, PTE elective tax, interest, and penalties.
When use tax and PTE elective tax are reflected on the return and all liabilities are not paid, payments received by FTB will be applied following the existing rules.Once use tax due is satisfied, any remaining balance will be applied to franchise, income, or PTE elective tax.
Capital account reporting
Changes in capital account reporting
For tax years 2022 and thereafter, FTB will require taxpayers who file Form 565 or Form 568 to report their partners' or members' capital accounts on Schedule K-1 using the tax basis method as determined under California law.
Beginning in taxable year 2020, partnerships were required to use the tax basis method for reporting its partners' capital accounts on federal Schedule K-1 for federal income tax purposes. A tax basis capital account is an important tool for determining to what extent annual losses can be claimed and for calculating gain or loss from the disposition of a partnership interest. It is important to note that the partner's tax basis is distinct from the partner's capital account reported using the tax basis method.
California tax law generally conforms to the Internal Revenue Code in the area of partnerships. However, there are several differences between California and federal tax law in this area. FTB has followed the federal changes in Schedule K-1 reporting requirements requiring the capital account to be reported on the tax basis method, however, this method must be computed using California law.
Although this change is effective for tax years beginning on or after January 1, 2021, for California purposes, FTB issued Notice 2022-01 on March 3, 2022, giving taxpayers, taxed as partnerships, the option to use federal capital account tax basis for the 2021 tax year.
Taxpayers will be allowed to use the federal capital account tax basis for the 2021 tax year only and are not allowed to use the federal tax basis for any other purpose, including reporting or determining their California tax liability.
Criminal Investigation Bureau
Tax Recovery in the Underground Economy (TRUE)
Assembly Bill (AB) 1296 established the TRUE criminal enforcement program on January 1, 2020. The mission of the TRUE program includes significantly diminishing tax-related crimes, such as tax evasion and tax fraud occurring in the underground economy, and to recover lost revenue for the State of California. Special Agents from FTB's Criminal Investigation Bureau (CIB), along with their counterparts from agencies such as California Department of Justice, California Department of Tax and Fee Administration, and the California Employment Development Department, play a major role in accomplishing this mission.
Through their investigations, TRUE team members identify trends or schemes common in certain industries which result in businesses avoiding income tax, sales tax and payroll tax. One example of this is when a business maintains two separate sets of books and records to attempt to conceal their actual total sales. One set of books shows the actual total sales the business earned, while the second set shows a reduced sales total. The second set of books and records is then provided to the businesses' tax preparer to deliberately underreport the businesses' sales and evade paying the correct amount of taxes due.
The following link is to a press release issued by the California Attorney General's Office regarding a case in which the subject was sentenced to prison and ordered to pay millions of dollars in restitution for committing tax evasion by maintaining two sets of books and records as we provided an example for:
Attorney General Becerra Secures Over $2.3 Million in Restitution for Los Angeles-Area Tax and Insurance Fraud Scheme | State of California - Department of Justice - Office of the Attorney General
As tax preparers, you can assist your clients by helping them to avoid committing this type of fraud. Some ways you can do this include, but are not limited to, the following:
- Discuss the issue with your client and counsel them on the consequences
- Ask the right questions of your client to ensure they provide you with complete and accurate records for their taxable income
- Ask your client for all sources of income
Ask the advocate
Brenda Voet, EA
Taxpayers’ Rights Advocate
Tax Pros, Small Business Liaison, and Tax Appeals Assistance Program (TAAP) webpages
We unveiled our new Tax News format last month. This month, I am excited to share that we have also remodeled our Tax Pros, Small Business Liaison, and TAAP webpages. But wait, there is more! We have also added a new Education and Outreach webpage to better assist and inform you.
We implemented these changes after thoroughly analyzing the journey our visitors take to navigate our webpages. Based on what we learned from your travels, we made changes that should more efficiently lead you and taxpayers, to available services, information, and communication channels more easily. We will continue to monitor the traffic, and request feedback during our presentations to make needed changes as we learn what works best for everyone.
Here are some of the highlights:
- Taxpayer Advocate Services – Significantly reduced the page size to minimize scrolling to find useful information.
- Comprehensive list of all Advocate services
- Question and Answers added to assist our customers to know if their issue meets Advocate criteria
- Tax Pros
- Report an issue is now at the top of the page for ease of access
- MyFTB short-cut is now at the top of the page for ease of access
- Education and outreach
- Comprehensive list of all education and outreach services
- Small Business Liaison
- Informative and useful content added in one easily accessible location
- Relocated TAAP information to the Help/Tax Appeals webpage for a more intuitive journey
We hope you enjoy perusing our newly remodeled Taxpayer Advocate Services and Tax Pros webpages and find them helpful in getting you to the information you want when you need it.
Finally, I am once again using this platform to introduce our newest team member, Victoria Ramirez.
Victoria began her career with FTB when she applied as a new Auditor in August 2018 in our Audit Division. In June 2020, she promoted to Public Affairs where she quickly became a subject matter expert for Health Care Mandate, gig economy, Golden State Stimulus, CalEITC, and more. She also successfully managed a cross-functional team to ensure quarterly board meetings ran smoothly.
We look forward to putting her technical, organizational, and communication skills to work as we prepare for our annual meetings and work to solve complex and sensitive inquiries and requests from taxpayers and tax professionals for personal income tax and business entity tax issues. We trust Victoria will have a tremendous impact to our team in delivering outstanding service.
Welcome to the team!
Tax News Flash links
Tax News Flashes are real-time FTB news releases which inform taxpayers of the latest breaking tax-related events. These articles are published separately from our monthly Tax News edition.
There were no Tax News Flashes sent for the month of June.
Education and outreach
We provide education and outreach to our tax professional community by providing presentations on tax-related issues and small business.
If interested, see our education and outreach page to request a speaker.
View our calendar for presentations and events that may interest you.