Tax News
Ask the Advocate

Steve Sims, Taxpayers' Rights Advocate.

2013 CSEA Meeting

On September 20, 2012, we held our annual liaison meeting with the California Society of Enrolled Agents (CSEA). This year, like every year, they had some really great questions for FTB staff. I’ve decided to share a few of questions I thought our Tax News readers would find most interesting in my Ask the Advocate column this month.

Limited Liability Companies (LLCs) Cancellation/Corporation Dissolution Simplification

Question #1

The whole situation with entity suspensions and associated penalties as well as the revivor process has become unworkable and untenable. The problem is so rampant, it is perceived as a California “gotcha.” Taxpayers form entities that never get off the ground (sometimes by attending seminars), then the letters start coming and they barely remember forming the entities, and definitely do not have the funds to address the revivor process requirements in order to properly close. There isn’t even a caution of any kind when they form the entities with the SOS as to the seriousness of their actions, and the ramifications of not closing the entity should their plans change. This is just one of the many reasons California is not viewed as a “pro-business” state. Would the Franchise Tax Board (FTB) consider a legislative proposal (LP) to simplify the process by coordinating with Secretary of State (SOS) for an automatic closure for resolution of inactive, “never-started” corporations and LLCs that are only formed with the Secretary of State but never become operational?

Response #1

Our staff is aware of this issue, and is prepared to work with interested parties to come up with a workable legislative solution. A similar proposal has been considered by the State Bar Tax section, with discussions about whether a one-time amnesty program or an ongoing process would be advisable to let inactive or suspended business entities dissolve either without going through the revivor process or abating some or all the minimum tax for periods of inactivity. The idea of automatic dissolution after a period of suspension was also considered. It should be pointed out that the annual minimum tax is imposed in part to address the administrative costs of the state of maintaining records concerning a business entity, and any legislative proposal may need to address these administrative costs as well as the perceived revenue loss involved in abating the minimum tax in order for the proposal to be successful.

A large percentage of corporations and LLC's that are suspended never take the steps needed to revive and dissolve, creating administrative problems for both us and SOS, including the expense of sending notices and letters as well as the necessity of recordkeeping and reporting on these inactive or defunct entities. We continue to educate taxpayers about the annual minimum tax requirement, including information on our forms and website, as well as the inclusion of a caution on SOS formation documents (LP-1, LLC-1, ARTS-GS, etc.) about the ongoing liability for the annual minimum tax.

Wage/Pension Withholding

Question #2:

There have been a number of cases of Form 540 refunds being held with no notification by FTB until personal contact is made by either the client or the practitioner. When FTB is contacted regarding the missing refund, after allowing for more than an appropriate refund processing period, FTB says there is further documentation or substantiation needed for withholding on Forms W-2 or 1099-R in order to process the refund. In each case FTB did not reach out in any way to notify the taxpayer that their refund was held, pending further substantiation. FTB also said they were seriously behind. Additionally, we had previously understood that EDD verified wage withholding for FTB. Please provide understanding for the increased amount of taxpayer withholding substantiation requests that are only communicated once contact is made regarding a refund that has not processed. 

Response #2

We strive to balance the issuance of timely refunds while protecting the interest of taxpayers and California. In order to do this, we employ a variety of checks to ensure filing compliance and to validate information furnished by the taxpayer, including withholding claimed. We pride ourselves on being able to maintain this balance; however, we cannot avoid affecting some taxpayers in the validation process. We use all available tools to minimize this impact, including using the records provided to us daily by the Employment Development Department (EDD).

Overall, we processed 10.2 million refund due returns for the 2012 tax year. On average, we processed these returns within seven days. For the 2012 tax year, we implemented enhanced withholding validation measures in order to protect taxpayers from identity theft and refund fraud related issues. This requires some
manual processes.

The manual processes undertaken can include contact to the taxpayer, their employer, or both. We receive wage and withholding data from EDD on a daily basis. Unfortunately, this information does not always match what the taxpayer provides us on their return. There are a variety of reasons for these discrepancies, including clerical errors or non-reporting by the employer. When the information received from EDD does not match the taxpayer’s information, additional processing is required[1] .

Currently, we do not notify taxpayers in all cases during this additional processing time. However, we are always looking for ways to improve our processing timeframes and customer service. We recently updated our website’s refund status application with language to provide taxpayers and their representatives with a more accurate refund timeframe in the event a return needs further validation. Additionally, we currently evaluate options for potentially notifying taxpayers when their return will be
significantly delayed.

Power of Attorney and Correspondence Copies

Question #3

Can we expect any further modifications, through the Enterprise Data to Revenue (EDR) project upgrades, to the FTB power of attorney program, so that the representative can receive copies of FTB correspondence (similar to IRS)?

Response #3

When this phase of EDR becomes operational, we will notify POAs by email when their client is sent a notice that coincides with the privilege and tax year(s) on their Declaration. The email will direct the authorized representative to access their client’s MyFTB Account to view the notice. Providing notification by email is a more efficient and less costly alternative to paper.

As we move closer towards implementing this phase of EDR, we will be providing education and outreach to the tax practitioner community.

Single Sales Factor (SSF)/Market-Based Sourcing

Question #4

Since SSF accompanied with new market-based sourcing rules are mandatory in 2013 and will impact all businesses filing in California (small sole-proprietors to large multi-state corporations), what outreach or instructional guidance will be made available by FTB?

Response #4

We are updating the appropriate tax forms and instructions to include information on the new requirements. We plan to write a series of Tax News articles; the first one was published in the September issue. We are developing Frequently Asked Questions for our website and plan to publish before the end of this year.

Steve Sims, EA
Taxpayers' Rights Advocate

[1]Our procedures do not include asking the taxpayer to verify the employer paid the withholding to EDD. Our staff may ask the taxpayer/representative for copies of the W-2, yearend paystubs, and/or proof of identity. In the event EDD has no record of the employer/employee relationship and/or withholding, we may contact the employer to validate employment and the amount of withholding deducted from the taxpayer’s pay.

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