Ask the Advocate
CalCPA Holds Annual Meeting
On October 27, we attended the California Society of Certified Public Accountants (CalCPA) Annual Liaison meeting. Our division chiefs gave updates on our filing season, audit matters, and collection policy information. We also participated in a question and answer session on emerging issues. The following are some of the questions and answers discussed at the meeting:
FTB Web Pay for Business Entities
Question: The Web Pay online payment option for individual taxpayers is very convenient. Are there plans to expand that program to business entities?
Answer: Yes. Web Pay for business entities became available in November 2010. Corporations, partnerships, and limited liability companies (LLCs) now have the ability to make payments online on FTB’s website. Businesses will need to create an online account (establish a user name and password) prior to making payments. Businesses will have the ability to schedule payments up to one year in advance.
Processing Large Refunds from Amended Returns
Question: Amended 2007 and 2008 tax returns were filed with FTB in late September or early October 2009. The tax practitioner called FTB on February 4, 2010, to follow up. They indicated that due to the size of their refund ($21,785) the matter has been referred to the audit department and it may take another six months to resolve. In another question submitted by a different tax practitioner he was told that it was FTB policy to hold refunds over $10,000 for six months from the date of the acceptance of the amended return. If this is the policy it would not seem to be in the best interest of the people of California since interest must be paid on these refunds.
The federal government has special procedures in place for large refunds in an effort to protect the interest of the government. From this question, it is apparent that FTB has similar procedures in place. Could you elaborate on what California considers to be large refunds, how they are processed, and the timeframe in which the taxpayer can reasonably expect these requests to be processed?
Answer: We do not have a policy in place to hold refunds over $10,000.
For Personal Income Tax (PIT) Amended Returns:
A review is performed on PIT amended returns to determine whether the claims need to be referred to the Audit Division depending on the reasons for the amendment. There is not a set dollar amount to refer PIT claims for refund to the Audit Division for review. PIT amended returns fall within a six-month return processing timeframe since our first priority is the processing of original returns. However, if we open an audit examination, the examination process may take up to 24 months to complete depending on the complexity of the issues on the claim.
For Business Entity Tax Amended Returns:
All business entity claims for refund are referred to the Audit Division for review regardless of the dollar amount or reason for the amendment. If the claim is allowed without audit, it is returned to our business entities validation section for processing within 30 to 60 days. If the claim is assigned to an auditor, the examination process may take up to 24 months to complete depending on the complexity of the issues on the claim.
Head of Household Questionnaires for e-filing
Question: Is a practitioner required to file a head of household questionnaire with a head of household return in order to e-file? The software support said they have been told the filing is mandatory and that if it is not there, the e-filed return will be rejected.
The Practitioner’s Hotline says it is absolutely not mandatory in order to file a head of household questionnaire with each e-filed head of household return and that the software company is wrong.
Could you please clarify the situation?
Answer: We do not require the Head of Household (HOH) questionnaire be submitted with HOH e-file returns, and we will not reject the return if the questionnaire is not included with the return. However, we cannot control whether a software company, within their software, requires the HOH questionnaire be completed and submitted with the e-file return. If the HOH questionnaire is submitted, it must be complete and meet certain edits (e.g., if a response to a question is required, and there is no response, the return would be rejected).
Although not required, we recommend the HOH questionnaire be completed when e-filing because it reduces the chance of the taxpayer being contacted later. Returns with the HOH questionnaire have no greater chance of being selected for HOH review by Audit. However, if the return was selected and the questionnaire was submitted with the necessary information to substantiate the HOH claim, then the taxpayer is not likely to be contacted by us.
Question: For Roth Individual Retirement Account (IRA) conversions in 2010 taxpayers can make a federal election to defer the recognition of income until 2011 and 2012. Since California conforms to federal we presume that this election is available to CA taxpayers. Is this a separate election that is made with the California tax return or do conversions have to be treated for California purposes the same as for federal? If the election to defer to 2011 and 2012 is made and the taxpayer leaves California in one of those years how is the conversion treated for California purposes? Does the FTB plan to track these deferrals to make sure they are properly reported?
Answer: Regarding deferral of income recognition, California automatically conforms under Revenue and Taxation Code (R&TC) Section 17501 to the new federal rule that defers income recognition of 2010 Roth IRA conversions to 2011 and 2012. Unless the taxpayer elects to include the income in 2010, any amount otherwise required to be included in gross income for the 2010 taxable year is not included in that taxable year but is instead included in gross income in equal amounts for the 2011 and 2012 taxable years.
Is this a separate election that is made with the California tax return or do conversions have to be treated for California purposes the same as for federal?
Under IRC Section 408A(d)(3)(A)(iii), a taxpayer must elect out of the deferral. Any election for federal purposes will apply for California purposes. But, if a taxpayer elects out of the deferral for federal purposes, California will allow a separate election to not opt-out of the deferral for California purposes and vice versa.
If the election to defer to 2011 and 2012 is made and the taxpayer leaves California in one of those years how is the conversion treated for California purposes?
The income from 2010 Roth conversions is deferred to 2011 and 2012, unless the taxpayer elects to include the income in 2010. In Legal Ruling 98-3 Taxation of IRA Distributions Rolled Over to a Roth IRA Followed by a Change of Residence Status, we provided guidance as to the tax treatment of California residents who converted a traditional IRA to Roth IRA in 1998 and then changed their residence status during the four-year period that the Roth conversion was ratably included in income, as well as the tax treatment of California nonresidents who converted an IRA to Roth IRA in 1998 and then become California residents during the four-year period that the Roth conversion was ratably included in income. The analysis in this ruling applies to the new deferral rules.
Outbound taxpayers must include in gross income only those portions of the taxable distribution reportable under the two year rule before they became nonresidents. Under R&TC Section 17952.5, the gross income of a nonresident does not include qualified retirement income including income from an IRA, received on or after January 1, 1996. R&TC Section 17952.5 prevents the imposition of California tax on the portions of the IRA distribution recognized after an individual becomes a nonresident.
California will prorate the taxpayer's income from the conversion based upon the number of days a taxpayer is within California during the two years of the proration. An individual who makes a rollover contribution from an IRA to a Roth IRA before January 1, 2011, and thereafter during the same taxable year changes residency, must include in California adjusted gross income one half of the taxable portion of the distribution multiplied by a fraction: the denominator of which is the number of days from the date of the distribution until the end of the taxable year in which the distribution occurs and the numerator of which is the number of days in the denominator in which the individual is a California resident.
If the taxpayer changes residency during the second year, the amount included in California adjusted gross income for the second year is one half of the taxable distribution multiplied by a fraction: the denominator of which is the total number of days in the taxable year and the numerator of which is the number of days the individual is a California resident.
Does the FTB plan to track these deferrals to make sure they are properly reported?
Taxpayers must maintain records that support all items reported on tax returns, including IRC section 408A(d)(3)(A)(iii) deferrals.
Steve Sims, EA
Taxpayers’ Rights Advocate
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