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Tax Amnesty: Payments, Penalties, and Miscellaneous

Updated - March 30, 2005

Special notice: Since March 31, 2005, is a state holiday, for purposes of computing the amnesty penalty, payments received on the first business day after the due date (April 1, 2005) are treated as timely payments. EFT payments must settle into the state's bank account by the first banking day following this date( Monday April 4). If you initiate your EFT payments through your financial institution, you must check with them to determine when you should originate your payment so that it settles into the state's bank account on time. For questions about EFT payments, contact the EFT Help Desk at 916.845.4025.

Payments

  1. Can a taxpayer designate pre-amnesty payments to apply to tax or interest only?
  2. Does the 15-day grace period apply to the last installment payment?
  3. Can I post a cash bond deposit without applying for amnesty in order to protect myself from the amnesty penalties?

Amnesty Penalty

  1. Can I get a refund of the Amnesty Penalty if I did not choose amnesty, and I pay the tax and the amnesty penalty, I later file a refund claim for the associated tax, and the refund claim is allowed?
  2. Is the Amnesty Penalty an unconstitutional retroactive penalty?
  3. If a taxpayer has an overpayment for one year and a smaller underpayment for another year (i.e., a net overpayment), would FTB assess the 50% penalty under section 19777.5 for the year of the underpayment?
  4. Can a taxpayer direct pre-March 31, 2005 payments to apply to interest only and thereby reduce the amnesty penalty amount more than if payments were not applied to interest only?
  5. What does "due and payable" mean in section 19777.5(a)(2)? Can a taxpayer eliminate the amnesty penalty by paying a proposed deficiency before it becomes final or a self-assessed amount before a bill is sent?

Accuracy Related Penalty

  1. What are the changes to the Accuracy Related Penalty under Revenue and Taxation Code section 19164?
  2. When does the increased Accuracy Related Penalty not apply?
  3. What is the effective date of the increased Accuracy Related Penalty?
  4. If I am under an ongoing audit at the start of the amnesty period, will the increased Accuracy Related Penalty apply to assessment notices issued after March 31, 2005?

Miscellaneous

  1. What penalties or fees can be waived under Amnesty?
  2. Can I apply for amnesty if I am under criminal investigation by the Franchise Tax Board?
  3. Should I choose Voluntary Disclosure Program or tax amnesty?
  4. I have a transaction for an amnesty year that might be a tax shelter. Should I apply for amnesty?
  5. Can I claim a refund of amounts paid under the amnesty program?
  6. May a taxpayer who has received a discharge in bankruptcy, where the pre-petition lien survived the bankruptcy, participate in the amnesty program?
  7. Protective Claim - Individual: Can I pay and file a protective claim to avoid the amnesty penalty for my personal income tax liability?
  8. Protective Claim - Business: Can I pay and file a protective claim to avoid the amnesty penalty for my business liability?
  9. What taxpayers and/or amounts are not subject to the amnesty penalty under Revenue and Taxation Code section 19777.5?
  10. Payments made outside of amnesty - Individual: Can I pay a current or future income tax liability to avoid or reduce the post amnesty penalty for my personal liability?
  11. Payments made outside of amnesty - Business: Can I pay a current or future income tax liability to avoid or reduce the post amnesty penalty for my business liability?

Payments

  1. Can a taxpayer designate pre-amnesty payments to apply to tax or interest only?

    Yes. When sending the payment, include a separate written statement designating how you want it applied. If paying by electronic funds transfer, send the statement in time for us to have it in our records before we receive the payment. We require separate designations for each designated payment. (See Rev. Proc. 2002-26, sec. 3-01; FTB Notice 99-9). These payments will reduce the base amount on which the amnesty noncompliance penalty is computed, but a designation of payments to interest only will not reduce the amnesty noncompliance penalty any more than an undesignated payment.

  2. Does the 15-day grace period apply to the last installment payment?

    No. Under Revenue and Taxation Code section 19733(b)(1), amounts due under the amnesty installment agreement must be paid no later than June 30, 2006. Section 19733(a)(4) provides that if the Franchise Tax Board mails a notice of balance due to a taxpayer "resulting from the filing of an amnesty application", and the taxpayer pays the balance due within 15 days, then the payment is treated as paid during the amnesty period. A notice of balance due on an installment agreement is not a notice "resulting from the amnesty application.

  3. Can I post a cash bond deposit without applying for amnesty in order to protect myself from the amnesty penalties?

    No. In order to qualify as a timely payment for amnesty under Revenue and Taxation Code section 19733(a)(3)(B), the payment must be a payment of tax. As explained in Revenue and Taxation Code section 19041.5, when an amount is set aside as a cash bond, it is specifically not considered to be a payment of tax until the taxpayer voluntarily releases it or the associated deficiency becomes due and payable.

Amnesty Penalty

  1. Can I get a refund of the Amnesty Penalty if I did not choose amnesty, and I pay the tax and the amnesty penalty, I later file a refund claim for the associated tax, and the refund claim is allowed?

    Yes. The amnesty penalty is computed by reference to the underpayment interest due (Revenue and Taxation Code section 19775.5(a)(1)) or computed (Revenue and Taxation Code section 19777.5 (a)(2)) from the original due date of the return to March 31, 2005. If that amount changes due to a redetermination of the correct tax liability for the year, the penalty will necessarily be recomputed to reflect the change. The phrase "in connection with the penalty imposed in subdivision (a)" in section 19777.5(e) limits refund claims to amounts paid in excess of the proper amount of penalty computed under section 19777.5(a). No refund claims are allowed for amounts computed in accordance with section 19777.5(a). In other words, a taxpayer can claim a refund of amounts paid in excess of the proper penalty, but cannot claim a refund of the penalty itself.

  2. Is the Amnesty Penalty an unconstitutional retroactive penalty?

    No. The Amnesty Penalty is not retroactive. It is imposed prospectively in an amount equal to interest from the original due date of the return. Taxpayers have an opportunity to avoid the penalty by paying all amounts due for amnesty years before March 31, 2005. See United States v. Carlton (1994) 512 U.S. 26.

  3. If a taxpayer has an overpayment for one year and a smaller underpayment for another year (i.e., a net overpayment), would FTB assess the 50% penalty under section 19777.5 for the year of the underpayment?

    It depends when the overpayment is finally determined and the credit is made. The general rule is that a credit of an overpayment from one year to satisfy the liability of another year is effective on the date the credit is actually made by the government agency (United States v. Swift & Co. (1931) 282 U.S. 468, 476). Therefore, if the overpayment is credited before March 31, 2005, it will reduce the final balance upon which the penalty is based. However, if the credit is made after that date, then the penalty is first computed on the final assessment amount and the payment is applied to the resulting tax and penalty.

  4. Can a taxpayer direct pre-March 31, 2005 payments to apply to interest only and thereby reduce the amnesty penalty amount more than if payments were not applied to interest only?

    No. The penalty is not computed on the "unpaid interest amount," but is instead computed on the unpaid final amount. The phrase "accrued interest payable under Section 19101" in section 19777.5(a)(1) means the amount of underpayment interest computed on the full balance due as of March 31, 2005, at the adjusted annual rate under 19521 from the original due date of the return to March 31, 2005. Since interest compounds daily, it makes no difference if a prepayment was designated to be applied to interest or not. The penalty is computed on the interest accrued on the entire unpaid balance as of March 31, 2005.

  5. What does "due and payable" mean in section 19777.5(a)(2)? Can a taxpayer eliminate the amnesty penalty by paying a proposed deficiency before it becomes final or a self-assessed amount before a bill is sent?

    The phrase "due and payable" is not a condition for assessing a penalty, but an indication of the time that the penalty is computed. In this context, it means "assessed."

    As opposed to the penalties imposed by section 19777.5(a)(1) which arise on final balances due as of March 31, 2005, where an amount is not yet final as of March 31, 2005, the penalty under section 19777.5(a)(2) will be assessed when additional tax amounts are determined and assessed to the taxpayer's account. Any payments made before March 31, 2005, are first applied, and then the penalty is computed on the remaining balance. Finally, payments made after March 31, 2005, are applied, and any remaining balance is billed. Section 19777.5(a)(2) specifically applies to deficiencies that become final after the amnesty period and to self-assessed amounts assessed after the amnesty period. These amounts become "due and payable" when they are final and assessed to the taxpayer's account. (See Appeal of Michael and Sonia Kishner, 99-SBE-007, September 29, 1999 [deficiency assessments]; Schatz v. FTB (1999) 69 Cal. App 4th 595 [self-assessed amounts].)

Accuracy Related Penalty

  1. What are the changes to the Accuracy Related Penalty under Revenue and Taxation Code section 19164?

    The new law provides for an increase to the existing accuracy related penalty for an amnesty-eligible tax year from twenty (20) percent to forty (40) percent, for any proposed assessment issued after the end of the amnesty period (March 31, 2005).

  2. When does the increased Accuracy Related Penalty not apply?

    The increased penalty does not apply to understatements related to tax shelter items. The increased penalty also does not apply to any understatement that is the subject of an audit, protest, appeal, settlement or litigation as of the start of the amnesty period. (Revenue and Taxation Code section 19164(a)(1)(B)(i) and (ii).)

  3. What is the effective date of the increased Accuracy Related Penalty?

    This penalty applies to taxable years 2002 and earlier, and only to notices of proposed assessment issued after March 31, 2005.

  4. If I am under an ongoing audit at the start of the amnesty period, will the increased Accuracy Related Penalty apply to assessment notices issued after March 31, 2005?

    No. If you are under audit for a tax year at the beginning of the amnesty period, any Accuracy Related penalty that might be assessed for that tax year will be at the 20 percent rate instead of the new 40 percent rate.

Miscellaneous

  1. What penalties or fees can be waived under Amnesty?

    Under Revenue and Taxation Code section 19732, the penalty or fee must be due to the previous underreporting or underpayment of tax liabilities or prior nonpayment of any taxes previously assessed or proposed to be assessed for that taxable year. Also, the penalty or fee must be imposed under Part 10.2 of the Revenue and Taxation Code. See penalties and fees that can be waived by amnesty for Individuals or Business entities.

  2. Can I apply for amnesty if I am under criminal investigation by the Franchise Tax Board?

    You may not apply for amnesty if, as of February 1, 2005, you are on notice of a tax-related criminal investigation or a court prosecution on tax-related matters has been initiated.

  3. Should I choose Voluntary Disclosure Program or tax amnesty?

    The Voluntary Disclosure program (VDP) is an ongoing non-amnesty program that allows qualified entities that are not in filing compliance to correct that omission if they meet the statutory criteria. In exchange for coming forward, the Franchise Tax Board has the discretion to waive most statutory penalties and to limit the look-back period for which tax, interest and fees are owed to six years.

    The first step is to ascertain if the applicant satisfies the VDP statute's qualifying criteria. If not, then tax amnesty is the only option. Get more information on who is eligible for VDP.

    If the entity is eligible for VDP, refer to the chart for a comparison of VDP and amnesty.

    While an applicant to VDP may transfer to the general amnesty program, an applicant to general amnesty may not transfer to VDP because the amnesty application process requires that tax returns be filed and eligibility for VDP requires that tax returns have not been previously filed by the applicant or any predecessor.

  4. I have a transaction for an amnesty year that might be a tax shelter. Should I apply for amnesty?

    Amnesty is not available for adjustments that could have been made under the VCI or federal OVCI programs. (Revenue and Taxation Code section 19732(c).) However, if a taxpayer is unsure about whether the transaction qualifies as a tax shelter, the taxpayer should consult a tax professional to determine if an amnesty application should be filed. Note of caution: If the transaction is later determined to be a tax shelter, appropriate penalties will apply.

  5. Can I claim a refund of amounts paid under the amnesty program?

    No. Any amount paid in connection with the tax amnesty program may not be refunded. (See Revenue and Taxation Code section 19732(e).) The term "in connection with" in this context means "paid or applied to" the amount required to be paid for the full payment requirement of amnesty to be satisfied under Revenue and Taxation Code section 19733(a)(3)(B).

  6. May a taxpayer who has received a discharge in bankruptcy, where the pre-petition lien survived the bankruptcy, participate in the amnesty program?

    No. Since the surviving lien is an "in rem" obligation (i.e., an obligation of the property, and not the taxpayer), the taxpayer has no remaining personal liability for the tax, and thus may not participate in the amnesty program. Similarly, the amnesty penalty will not be imposed on these "in rem" obligations since "amnesty could [not] have been requested" under Revenue and Taxation Code section 19777.5(a).

  7. Protective Claim - Individual: Can I pay and file a protective claim to avoid the amnesty penalty for my personal income tax liability?

    Yes. To ensure correct processing of your claims and payments, estimate the amount you expect to owe for each amnesty year. Then, by March 31, 2005 send a separate payment of your estimated amount along with your amended return (Form 540X) for each year. Be sure to write "Protective Claim" in red, at the top of each amended return and fill in the tax year at the top of each amended return. Enter the protective claim payment amount for that year on Part I, lines 2 and 3 and indicate in the explanation section (Part II item 5) of the Form 540X that it is a "Protective claim to reduce potential amnesty penalty."

    You can obtain an amended return form from the FTB website at www.ftb.ca.gov/forms/04_forms/04_540x.pdf

    For further detail, refer to Form 540X, "General Information" instructions on "Protective Claim".

    Franchise Tax Board
    389AMN - Protective Claim
    PO Box 942867
    Sacramento CA 94267-8888

  8. Protective Claim - Business: Can I pay and file a protective claim to avoid the amnesty penalty for my business liability?

    Yes. To ensure correct processing of your claims and payments, estimate the amount you expect to owe for each amnesty year. Then, by March 31, 2005 send a separate payment of your estimated amount along with the related amended return (Form 100X) for each year. Be sure to write "Protective Claim" in red, at the top of each amended return, fill in the tax year at the top of each amended return, and check box "G" on each amended return to indicate that it is a protective claim. Enter the protective claim payment amount for that year on line 24 and indicate in the explanation section (Part V, item 2) of the Form 100X that it is a "Protective claim to reduce potential amnesty penalty."

    You can obtain an amended return form 100X from the FTB website at www.ftb.ca.gov/forms/04_forms/04_100x.pdf

    For further detail, refer to Form 100X, Instruction "G".

    Address amended returns and payments [non-EFT taxpayers] to:

    Franchise Tax Board
    389AMN - Protective Claim
    PO Box 942867
    Sacramento CA 94267-8888

    Attention Mandatory EFT taxpayers:
    Remit the EFT payment using the Notice of Proposed Assessment tax type code (code number 02512; a water's-edge taxpayer uses 03572).

    Special Notice: Since March 31, 2005, is a state holiday, for purposes of computing the amnesty penalty, payments received on the first business day after the due date (April 1, 2005) are treated as timely payments. EFT payments must settle into the state's bank account by the first banking day following this date( Monday April 4). If you initiate your EFT payments through your financial institution, you must check with them to determine when you should originate your payment so that it settles into the state's bank account on time. For questions about EFT payments, contact the EFT Help Desk at (916)845-4025.

  9. What taxpayers and/or amounts are not subject to the amnesty penalty under Revenue and Taxation Code section 19777.5?

    The amnesty penalty is imposed on amounts "for which amnesty could have been requested." (RTC section 19777.5(a).) Section 19732(b) expressly precludes from participation in the amnesty program those taxpayers that are under criminal investigation, on notice of a criminal investigation as a result of a criminal complaint being filed, or for which a criminal court proceeding has been initiated. For more information, see question 2 under miscellaneous on this page and question 3 on the tax professional common questions page.

    Section 19732(c) provides that the amnesty program is not available for any nonreported or underreported tax liability amounts attributable to tax shelter items that could have been reported under either the voluntary compliance initiative under Chapter 9.5 or the Internal Revenue Service's Offshore Voluntary Compliance Initiative described in Revenue Procedure 2003-11. For more information, see question 1 under eligibility on the who's eligible, how to apply page.

    As a result of the above exclusions, those taxpayers precluded from participating in amnesty under section 19732(b) are not subject to the amnesty penalty under section 19777.5. With respect to those taxpayers with tax liability amounts not eligible for amnesty under section 19732(c), the amnesty penalty under section 19777.5 will not apply to those amounts described in section 19732(c), but would apply to other tax liability amounts of the same taxpayer, without regard to whether the other tax liability amounts arise within the same taxable year, or a different taxable year, as the amounts ineligible for amnesty under section 19732(c).

    Finally, section 19738 excludes from the amnesty penalty under section 19777.5 any amounts covered by an installment payment agreement between individuals or fiduciaries and the Franchise Tax Board that exists as of February 1, 2005. See question 1 on the installment agreement page.

  10. Payments made outside of amnesty - Individual: Can I pay a current or future income tax liability to avoid or reduce the post amnesty penalty for my personal liability?

    Yes. To ensure correct processing of your payments, a written statement is needed as to why the payments are being made. Estimate the amount you expect to owe for each tax year. Then, by March 31, 2005, send a separate written statement and payment for each tax year. Be sure to write "Pre-Payment" and the tax year in red, at the top of each written statement and each check or money order. At the top of the check or money order, also write your taxpayer identification number.

    Please send your written statement and payment to:

    Franchise Tax Board
    389AMN - Pre-Payment
    PO Box 942867
    Sacramento CA 94267-8888

  11. Payments made outside of amnesty - Business: Can I pay a current or future income tax liability to avoid or reduce the post amnesty penalty for my business liability?

    Yes. To ensure correct processing of your payments, a written statement is needed as to why the payments are being made. Estimate the amount you expect to owe for each tax year. Then, by March 31, 2005, send a separate written statement and payment for each tax year. Be sure to write "Pre-Payment" and the tax year in red, at the top of each written statement and each check or money order. At the top of the check or money order, also write the entity's California corporation number.

    Please send your written statement and payment (non-EFT taxpayers) to:

    Franchise Tax Board
    389AMN - Pre-Payment
    PO Box 942867
    Sacramento CA 94267-8888

    Mandatory EFT taxpayers:
    You must direct your written statement to the above PO Box before you remit your EFT. Please remit your EFT payment using the Notice of Proposed Assessment tax type code (code number 02512; a water's-edge taxpayer uses 03572).

    Special Notice: Since March 31, 2005, is a state holiday, for purposes of computing the amnesty penalty, payments received on the first business day after the due date (April 1, 2005) are treated as timely payments. EFT payments must settle into the state's bank account by the first banking day following this date (Monday April 4). If you initiate your EFT payments through your financial institution, you must check with them to determine when you should originate your payment so that it settles into the state's bank account on time. For questions about EFT payments, contact the EFT Help Desk at (916) 845-4025.

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