Audit Branch Procedure Statement: 99-4
|ISSUE||FTB has the authority to determine what constitutes a "notice of proposed overpayment" ("NPO") within the meaning of California Revenue & Taxation Code (R&TC) 19306. The purpose of this procedure statement is to establish consistency in treating a "notice of proposed assessment" ("NPA") that contains income-reducing stand-alone adjustments as an NPO with respect to those adjustments.|
|CURRENT AUDIT PROCEDURE||The Audit Branch has not issued specific procedure guidelines on the treatment of overpayments arising from withdrawing positive (increasing income) adjustments and sustaining negative (decreasing income) adjustments for which an NPA has been issued (NPA previously recognized a net deficiency existed after considering all adjustments).|
both positive (increasing income) and negative (decreasing income) adjustments
result in the issuance of an NPA, and the NPA is subsequently withdrawn and the
negative adjustments are sustained and result in an overpayment of tax, the NPA
will be treated as an NPO.
A condition precedent for treating the NPA as an NPO is that the NPA be issued prior to the statute of limitations expiring for issuing an NPO as defined in R&TC 19306. If an NPA is issued after the expiration of the statute of limitations for issuing an NPO, the negative adjustments noted on the NPA can only offset the deficiency related to the positive adjustments.
It is important to emphasize that all statutes, policies, and procedures apply to the NPO as if the NPO was issued on the date of the NPA. For example, new issues may not be introduced into the computation of the overpayment that increase the overpayment unless the statute of limitations is open for filing a claim for refund or issuing an additional NPO. Also, negative income adjustments raised by the taxpayer during audit but not included in the income adjustments resulting in the NPA, if subsequently allowed, may not increase the overpayment unless a timely claim for refund had been filed with respect to those issues.
An overpayment arising from an NPO may be increased only in the same circumstances that allow for the increase in an overpayment arising from a claim for refund. That is, the amount of the additional overpayment identified after the statute of limitations for filing a claim or issuing an NPO has expired, must be directly related to the respective issue(s) resulting in the NPO.
The statute of limitations apply separately for each taxpayer in a combined report. That is, for the time that deficiency and claim for refund/NPO statutes were different, an NPA subsequently treated as an NPO, may not offset other combined report member's tax liability if the statute of limitations had expired for issuing an NPO at the time that the NPA was issued.
As with overpayments arising from claims for refund, new issues may be raised by FTB to reduce or eliminate the overpayment. New issues should raised in accordance with the guidelines for raising new issues at protest, reflected in ABPS 99-3.
|CONVERSION OF NPA TO A CLAIM FOR REFUND||If
the taxpayer pays the NPA additional tax, and penalty if any, the protest or appeal
is converted to a claim for refund under R&TC 19335. Administratively, the
NPA is treated as a protest and the additional tax is not finalized until action
on the claim for refund is final. |
When final action is taken on the claim for refund, if the NPA additional tax is canceled and the negative adjustment(s) on the NPA would have resulted in an NPO under this ABPS, this ABPS will apply as if the NPA had not been converted to a claim for refund.
|APPEAL RIGHTS ON AN NPO||Taxpayers do not have appeal rights regarding our final action on an NPO that was initiated by the department, i.e. not initiated by a claim for refund. There is no provision in the R&TC that allows a taxpayer to protest an NPO. See TAM 97-0741 for further discussion on appeal rights on NPOs.|
of Income Adjustments
|CONTACT PERSONS|| |
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