On September 24 and October 18, 2018, we held our annual liaison meetings with the California Society of Enrolled Agents (CSEA) and the California Society of Certified Public Accountants (CalCPA).
Below are a few of the top questions from those meetings that may be of interest to you:
California’s statute of limitations for collection is 20 years (the federal statute is only 10 years.) When FTB assesses a collection fee while the statute is running on an original assessment, the 20-year state expiration date is extended by restarting the collection period using the date of the subsequent assessment for the collection fee as the new beginning date.
It seems this practice works to circumvent the 20-year statute. Please explain how this practice is supported by current California statute.
Our 20-year collection statute is Revenue and Taxation Code (R&TC) Section 19255.
Under subdivision (c)(1) of RT&C Section 19255, a “tax liability,” as those terms are used in Section 19255, includes both “tax” and “fees.”
Under subdivisions (a) and (c)(2) of RT&C Section 19255, where there is more than one liability for a tax year, the 20-year statute runs from the latest “due and payable” date for those liabilities. (RT&C Section 19255(a) (“after 20 years have lapsed from the date the latest tax liability for a taxable year . . . becomes ‘due and payable’ within the meaning of Section 19221”) and (c)(2) (“If more than one liability is ‘due and payable’ for a particular taxable year, . . . , the ‘due and payable’ date that is later in time shall be the date upon which the 20-year limitation of subdivision (a) commences.”).)
Thus, under RT&C Section 19255, in the case of a tax liability and a collection fee imposed with respect to that tax liability, the 20-year statute contained in Section 19255 will run from the due and payable date of the collection fee.
The following example illustrates how the statute is applied:
- A taxpayer files a 2014 return on April 15, 2015. The return has a liability that the taxpayer does not pay. The liability is established on FTB’s system on April 17, 2017.
- Approximately 1 year later, we impose a collection fee related to the 2014 tax liability, which is established on our system on April 20, 2018.
- Assuming that there are no other facts, the 20-year statute under Section 19255 will run 20 years after the collection fee was established on our system, because the collection fee has the later “due and payable” date.
Form 592 and 592-B problems
When a Form 592 is filed to report distributions of tax withheld from an entity/individual to other entities/individuals, the form has to be filed on paper and requires 8-12 weeks of processing time. In the meantime, the receiving entities/individuals e-file their returns claiming the withholding. The e-filed returns are always adjusted because the withholding hasn’t yet posted to the receiving taxpayer’s account. This is an inefficient use of FTB resources and causes angst for taxpayers and their representatives. Could a process for e-filing Form 592 be developed or could the FTB place a hold on returns coming in with 592-B withholding until processing is complete?
We currently do not provide an e-file solution similar to what we provide for Personal Income Tax (PIT) and Business Entity returns for non-wage withholding documents. However, we do allow withholding agents to bypass the United States Post Office as well as our internal receiving and data capture processes by submitting their documents via Secure Web Internet File Transfer (SWIFT). Documents received via SWIFT are usually processed within one week and have a higher probability of being matched to the correct taxpayer because the chance of a data capture error is eliminated. Currently, 450 withholding agents submit documents to us using SWIFT.
When a taxpayer’s non-wage withholding claim cannot be verified by our validation systems, the tax return is suspended for manual review. There are several system rules and employee procedures designed specifically to investigate the possibility that the discrepancy may be due to a withholding document stuck in processing.
While we don’t currently hold returns with a Resident and Nonresident Withholding (592-B), to allow for possible delays of the associated withholding documents, this concept is similar to steps we take to expedite the processing of wage-withholding claims (particularly around 3rd and 4th quarter employer reporting to the Employment Development Department) and is worth exploring by us.
Question #3: Assignment of protests
What is the FTB doing to speed up the assignment of protests? It is taking about 18 months from the date of filing the protest letter to get a protest hearing officer assigned. Is the time it takes to assign a protest hearing officer factored into the goal of making a final determination within 36 months or less?
On a related matter, why won’t the FTB allow cases in protest into settlement? The FTB is requiring taxpayers to wait until a protest is completed, notices are issued, an appeal is filed with the OTA, and the appeal is acknowledged by the OTA before the taxpayer can file a settlement application with the FTB. The taxpayer then has to request deferral of the proceedings with the OTA. These additional steps delay the process by an additional 6 months and cost the taxpayer more in accounting/legal fees.
To provide our best customer service, we assign protests on a first-in-first-out basis to appropriately skilled staff knowledgeable of the protested issues and tax law. Our main goals are accuracy and timeliness in the determination of the correct tax and to resolve the protest cases within 24-36 months from date the protest is filed.
For cases handled in the Audit Division Protest Section, we recognize there have been some delays with the assignment of protest cases. To help alleviate the delays and expedite the assignment of protest cases, we are cross training staff in different areas of the tax law in an effort to increase the number of cases assigned. Additionally, we are evaluating our internal processes and the root cause of the delays to more timely assign our protest cases. It is important to us and the taxpayer to have a consistent and timely resolution of our cases.
The Settlement Bureau does accept matters which are the subject of a protest when the case is factually developed and our staff has expressed its legal position on the merits. The Settlement Bureau’s role is not to establish our legal position or to undertake factual development of the case. It is to evaluate the cost of litigation, the hazards and risks of the legal position taken, and to recommend a settlement if this is in the best interests of the State of California. However, if a protest hearing has been held, the hearing officer has made a determination, and the matter is ready to be closed, the Settlement Bureau will wait until after the issuance of the Notice of Action and an appeal is filed. Allowing the closing of the protest in such cases establishes a clearer understanding of the case for purposes of evaluating a taxpayer’s settlement offer, and reduces our backlog of over-36 month protests.