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Tax Deposits, Interest Netting, and Informal Claims (March 2, 2006)

Background:

Tax Deposits: FTB Notice 2005-6 explained that California has now conformed to the federal "tax deposit" procedures for payments made after a return has been filed but before a final tax liability is assessed, and that FTB would follow federal procedures as outlined in Rev. Proc. 2005-18. Under the new rules, amounts remitted or credited when there is no final liability for the tax year are "deposits" that become "payments" when they are applied to a final liability or the taxpayer requests in writing that they be applied or refunded.

Informal Claims: FTB Notice 2003-5 explained the procedure for informal claims as added by Revenue and Taxation Code section (RTC §) 19322.1. Where a taxpayer has made a tax payment (not a deposit) and filed a refund claim, the claim remains as an informal claim until it is perfected by full payment of all amounts due for the year. There is no corresponding federal statute to §19322.1.

Interest Netting: AB 911 (Stats. 2005, Ch. 398) amended RTC §19777.5 to allow interest netting to apply in the computation of the post-amnesty penalty. Interest netting allows an overpayment amount that would have received interest if it had been refunded, to instead be applied to an unpaid deficiency or due and payable amount. Underpayment interest is reduced for the amount period of time that overpayment interest would have been paid.

FTB staff is in the process of developing forms and procedures to implement the tax deposit process, and to clarify how these various provisions interrelate.

  1. How do I make a tax deposit?
  2. Can I make a tax deposit for more than one tax year?
  3. Can I make more than one tax deposit per tax year?
  4. How do I request a return (refund) of a tax deposit?
  5. If I request a refund of my tax deposit, will California offset it against any other balances due?
  6. How is the post-amnesty penalty computed?
  7. I made a "protective claim" tax deposit for my corporation before the end of the amnesty period (3/31/05). I paid the full amount of the proposed deficiency, including proposed interest on that deficiency amount. Can I now request a return of the portion of my tax deposit equal to the interest amount and still avoid the post-amnesty penalty?
  8. Does my tax deposit automatically convert my protest to a refund claim or my deficiency appeal to a claim appeal?

  1. How do I make a tax deposit?

    FTB is developing a voucher similar to the estimated tax and extension payment vouchers that will contain boxes for the information needed to identify a payment as a tax deposit. Until that form is available, taxpayers should identify the payment in writing as a tax deposit, indicating which tax year the deposit is for, the type of tax (Personal Income Tax or Corporation Franchise tax) and the amount of and basis for the deposit.

    An unidentified payment or undesignated remittance will generally be applied according to the guidelines of Rev. Proc. 2005-18: If there is no proposed or final liability or assessment for the tax year, it will be treated as a payment of tax and be refunded to the taxpayer (assuming there are no statutorily-required offsets for child support, or other tax year final liabilities). If there is a proposed assessment, generally the payment will be treated as a tax deposit and applied to satisfy the proposed assessment when the assessment becomes final, and the balance refunded.

  2. Can I make a tax deposit for more than one tax year?

    You should deposit separate amounts for each tax year. However, you may request that a deposit originally made for one tax year instead be applied to a different tax year by making the request in writing in the same manner as specified in Section 4.02(3) of Rev. Proc. 2005-18.

    Where tax deposits have been made for multiple tax years in the same audit cycle, when closing the case and applying the deposits to final liabilities, FTB will normally apply the deposit amounts in the manner most advantageous to the taxpayer.

  3. Can I make more than one tax deposit per tax year?

    Yes. FTB will follow federal ordering rules as set forth in IRC section 6603(e). Normally, deposits will be treated as used for the payment of tax in the order deposited, and returned to the taxpayer on a last-in, first-out basis.

  4. How do I request a return (refund) of a tax deposit?

    FTB is currently developing a form for returns of tax deposits. Until this form is available, follow the directions in FTB Notice 2005-6 and Section 6 of Rev. Proc. 2005-18, showing the date(s) and amount(s) of the original deposits, the type of tax (Personal Income Tax or Corporation Tax) to which the deposit was intended to be applied, and the tax year(s) to which the deposit(s) were intended to be applied.

    Taxpayers should be aware that while refunded tax deposit amounts will be paid with overpayment interest, any balance due that is later determined for the tax year will be charged underpayment interest and potentially be subject to the post-amnesty penalty.

  5. If I request a refund of my tax deposit, will California offset it against any other balances due?

    Assuming that the deposit was made for a disputable tax item, the deposit becomes a payment of tax upon request for return. At that point if there is no outstanding liability for the year, it is an overpayment and overpayment interest is computed and paid with the refund amount.

    As with other refunds, California law requires that the overpayment first be applied against any other balances due, including unpaid child support, tax balances for other tax years, and other state offsets.

  6. How is the post-amnesty penalty computed?

    The post-amnesty penalty is an amount equal to 50% of the interest due on any final amount, computed from the original due date of the return and ending on the last day of the amnesty period. The term "final amount" includes final deficiencies and self-assessed amounts, but does not include interest on those final amounts.

  7. I made a "protective claim" tax deposit for my corporation before the end of the amnesty period (3/31/05). I paid the full amount of the proposed deficiency, including proposed interest on that deficiency amount. Can I now request a return of the portion of my tax deposit equal to the interest amount and still avoid the post-amnesty penalty?

    Yes, since, as FAQ number 6 explains, the post-amnesty penalty is only imposed on the "final amount" (which includes final deficiencies and self-assessed tax and penalty amounts as of 3/31/05). If you request a refund of the interest portion that was previously paid, it will be returned to you with interest computed at the statutory overpayment rate from the date of payment (3% per year for corporations and 6% for individuals as of 1/1/06). If the full amount of the deficiency is sustained and becomes final, however, underpayment interest will be charged from the original due date of the return (6% per year for corporations and individuals as of 1/1/06, with an additional 2% for certain large corporate underpayments).

  8. Does my tax deposit automatically convert my protest to a refund claim or my deficiency appeal to a claim appeal?

    No. A tax deposit remains a tax deposit until the taxpayer directs in writing that it be applied to a final liability. If you want to convert a deficiency administrative action to a claim action, you must specify in writing that you agree to allow the deficiency to become final and then have the payment applied. At finalization, interest and any amnesty penalty will be assessed to the account, and the tax deposit payment will be applied to the resulting balance. If the tax deposit amount exceeds the full balance, the protest will be treated as a claim under RTC § 19335 or the appeal will be converted to an appeal from the denial of a refund claim. If the tax deposit amount is insufficient to pay the full amount of tax, penalty and interest due for the year, the claim will be treated as an informal claim under RTC § 19322.1 until it is perfected by full payment. See FTB Notice 2003-5.