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Second DRAFT - Large Corporate Understatement Penalty FAQs (2) additions & revisions, as of March 27, 2009

Previously, we invited you to comment on this draft second set of FAQs relating to the implementation and administration of the cure provision of the large corporate understatement penalty pursuant to Revenue and Taxation Code section 19138(b).

These draft FAQs prescribe procedures on the following subjects:

  1. Filing of amended returns for pre-2008 taxable years.
  2. Payment of amount shown on such amended returns.
  3. Method to alleviate burden of filing such amended returns in the following situations:
    • Pending proposed assessments.
    • Disputed proposed assessments.
    • Final proposed assessments.

After the end of the comment period on March 12, 2009, and the Interested Parties Meeting held on March 23, 2009, we considered the comments and recommendations received and revised or added to the FAQs accordingly. We invite further comments or recommendations on the following draft. Additions are shown in underscore, and deletions in strikethrough. FAQs for which no comments were received are now final FAQs.

Send your comments and recommendations to Ting Lee at ting.lee@ftb.ca.gov by April 10, 2009.

If you have any questions, you may call the Large Corporate Understatement Penalty Hotline at 916.845.3030.

First set of FAQs

Amended returns and tax payments for the 2003 – 2007 tax years

  1. How can I increase the amount of tax treated as shown on the original return for the 2003 – 2007 tax years?

    For tax years beginning on or after January 1, 2003, and prior to January 1, 2008, if you file an amended return on or before May 31, 2009, that self-assesses additional tax, and you pay the tax shown on the amended return on or before May 31, 2009, then the tax shown on the amended return will be treated as the tax shown on the original return for purposes of computing this penalty for any subsequent adjustments to the tax for that tax year. The amount of additional tax that you self-assess on such an amended return will reduce, but not necessarily eliminate, the potential for subsequent assessment of the penalty.

  2. How should I file these amended returns?

    If you are filing an amended return by May 31, 2009, for a tax year beginning before January 1, 2008, write in red on top of the Form 100X “Amended under R&TC section 19138(b)”. You should prepare the amended return in the same manner as you would for any amended return, including providing a detailed explanation of any adjustment to taxable income or loss, or credit items, and providing supporting documentation using the best information available at the time the return is filed. Supporting documentation should be retained and made available to FTB upon request. An amended return that does not satisfy this standard for completeness will not be treated as an amended return under R&TC section 19138(b). “Tax deposits” without a complete amended return will not serve to increase the base amount against which future understatements of tax are measured under R&TC section 19138.

  3. I am currently under federal examination, but I don’t know what adjustments the IRS will make. Can I just make a payment for the impacted year and file a "blank" amended return without an explanation of the adjustments to satisfy the requirements under R&TC section 19138(b) to increase the base amount against which future understatements of tax are measured?

    No. Any amended return without a detailed explanation of adjustments will not be accepted as an amended return that satisfies the requirements under R&TC section 19138(b) to increase the base amount against which future understatements of tax are measured. A blank amended return without an explanation of the adjustments or an amended return using an explanation similar to “protective adjustment to avoid R&TC section 19138 penalty” will not satisfy the requirements under R&TC section 19138(b). Upon receipt of incomplete amended returns, FTB will notify the taxpayer of the incomplete status of the amended return and allow the taxpayer an opportunity to perfect the amended return by providing a detailed explanation of the adjustments. If the taxpayer does not submit a complete amended return, FTB will treat the payment as a tax deposit and will not treat the taxpayer as having satisfied the requirements of R&TC section 19138(b) for purposes of increasing the tax base.

  4. What is the deadline to file these amended returns?

    The amended return and full payment of the amount of tax shown on the amended return must be filed mailed and paid on or before May 31, 2009. Because May 31, 2009 is a Sunday, amended returns for taxable years 2003-2007 may be filed and payments may be made on the next business day, June 1, 2009. (See Government Code section 6707.)

  5. How do I make the payment?

    If you are required to make payment by electronic funds transfer (EFT), then follow the normal process for making an EFT payment. If not, include your check or money order payable to the Franchise Tax Board with the amended return. Write the taxpayer's full name, tax account number, and the tax year on the check or money order. When making payments through EFT, please use the same code (02512) as for a “Notice of Proposed Assessment” or “NPA” payment type.

  6. When I filed my 2007 return, I designated the overpayment for 2007 to apply to the 2008 estimate payment. Can I re-designate that payment to satisfy the R&TC section 19138(b) requirement to pay the tax shown on an amended return for a pre-2008 taxable year?

    No. Based on R&TC section 19364 and Rev. Rul. 77-339, once that overpayment has been applied as a credit against estimated tax for the succeeding year, the payment cannot be claimed as a credit for other than the estimated tax year. However, if the 2008 return is filed and an overpayment is allowed prior to May 31, 2009, for the 2008 tax year, that overpayment can be claimed as a payment towards to the amended return filed under R&TC section 19138(b) on or before May 31, 2009. To elect that this 2008 overpayment be applied as a payment for a prior year, indicate at the bottom of side 1 of your 2008 original return “overpayment to be applied to TYE MM/DD/YY”.

  7. Where should I mail these amended returns?

    Franchise Tax Board
    PO Box 942587 942857
    Sacramento, CA 94257-0500

  8. What if I don’t agree with, or have disputes pending on, the items adjusted on any of these amended returns? What should I do?

    After filing any amended return as described above, if you are not in full agreement with the adjustments, then you should file a claim for refund after May 31, 2009. If you do so, please write in red on top of the Form 100X “Claim filed after R&TC section 19138(b) amended return”. You should prepare the amended return in the same manner as you would for any amended return, including providing a detailed explanation of any adjustment to taxable income or loss, or credit items, using the best information available at the time the return is filed. Specify the grounds for filing the claim for refund and provide supporting documentation. Supporting documentation should be retained and made available to FTB upon request.

  9. If the claim for refund is allowed in part or in full, what is the interest rate on the overpayment?

    The interest rate on the overpayment will be the same as the normal refund interest rate, which is based on R&TC section 19521 and IRC section 6621 and determined by the 13-week U.S. Treasury bill rate.

  10. Where should I mail my claim for refund?

    Franchise Tax Board
    PO Box 942587 942857
    Sacramento, CA 94257-0502

  11. Can I mail both the amended return and claim for refund in the same package to the FTB?

    Yes, you can include both returns in the same package. Please make sure the signature date on the claim for refund is later than the signature date on the amended return that reports additional tax. FTB will process that amended return self-assessing additional tax before processing the claim for refund. You may use the mailing address specified under FAQ #28.

  12. I just received an NPA for a pre-2008 tax year. I agree with the assessment and plan to pay in full soon. Am I still subject to the penalty? Should I file an amended return to reflect the changes on the NPA to avoid the penalty?

    For the limited purpose of administering this penalty, FTB will agree to treat a taxpayer’s agreement with and payment of a final deficiency assessment on or before May 31, 2009, as a self-assessment and will not require the filing of a formal amended return showing only the previously agreed change where the taxpayer makes an election to treat that final deficiency assessment as a self-assessment of tax shown on an amended return. This election may be made on a form to be released soon by FTB form FTB 650. Please mail this election and submit the deficiency payment no later than May 31, 2009. If a taxpayer satisfies both of these requirements, then FTB will treat the election and payment as filing an amended return and paying the amount shown on that return for purposes of computing the base amount against which future understatements will be measured under R&TC section 19138.

  13. Where should I mail this election form to be released by FTB?

    Franchise Tax Board
    PO Box 942867
    Sacramento, CA 94267-2222

  14. I just received an NPA. I disagree with all of the adjustments and plan to protest soon. How can I avoid the penalty? Do I have to file an amended return and file a claim for refund later?

    Please follow the steps in FAQ # 33. In addition, you must provide the grounds for your dispute with the election form (FTB 650) to be released by FTB in order to treat the election as a claim for refund.

  15. I just received an NPA, and I only want to self-assess a portion of the adjustments on the NPA. How can I avoid the penalty? Do I have to file an amended return or can I make the election on the FTB 650 form to be released later?

    The taxpayer must file an amended return to self-assess some, but not all, of the adjustments shown on the NPA. The taxpayer cannot make the election on the form to be released later FTB 650 with respect to only a portion of the tax shown on an NPA.

  16. I received an NPA for a pre-2008 tax year and currently the NPA is under protest. Am I subject to the penalty when the notice finalizes? If I want to reduce my exposure to the penalty, do I have to file an amended return by May 31, 2009?

    If the $1 million threshold is met, the penalty will apply to the understatement of tax when the notice finalizes. If you wish to reduce your exposure to the penalty on the protested amount, you can elect to have the protested tax amount be treated as tax shown on an amended return by filing the election form (FTB 650) to be released later by FTB. This form must be mailed and the deficiency payment remitted to FTB by May 31, 2009. FTB will treat the amount of tax on the NPA as the tax shown on an amended return.

    If you do not want FTB to treat all of the NPA adjustments as the adjustments shown on the amended return or you would like to include other adjustments not reflected on the NPA as the adjustments shown on the amended return, you CANNOT make the election on the form to be released later by FTB FTB 650 but must instead file an amended return and pay the tax shown on the amended return by May 31, 2009, to avoid the penalty on the additional tax on the included adjustments. Any portion of the NPA adjustments NOT included in the amended return may be subject to this penalty if those adjustments are ultimately sustained, because those excluded adjustments would not increase the base amount shown on the original return.

  17. If I am currently under state or federal examination for a pre-2008 tax year, how can I reduce my exposure to the penalty?

    For federal audit activity, if FTB has not issued an NPA on the tax year for the applicable federal adjustments, you should consider filing an amended return that reflects the anticipated applicable federal adjustments and pay the tax shown on the amended return on or before May 31, 2009, in order to satisfy R&TC section 19138(b) to increase the base amount shown on the original return.

    If you are currently under state examination and you have not received an NPA, you should consider filing an amended return that reflects the anticipated adjustments and pay the tax shown on the amended return on or before May 31, 2009, in order to satisfy R&TC section 19138(b) to increase the base amount shown on the original return.

  18. I received an NPA for a pre-2008 tax year that is currently under protest. There is only one adjustment on the NPA, which resulted in additional tax of $3,000,000. If I want to reduce my exposure to the penalty with respect to a portion of the NPA adjustment, can I use the election form (FTB 650) and pay only $2,000,100?

    No, you cannot use the election form (FTB 650) to report only a portion of the NPA adjustment. If you make the election with respect to the protested NPA, we will treat it as a self-assessment of the full amount of proposed additional tax (i.e., as if the entire NPA adjustment was reported on an amended return). If you make a payment that is less than the full amount, the unpaid balance will become due and payable under R&TC section 19221. Only the amount that is both paid on or before May 31, 2009, and shown on an amended return or the election form (FTB 650) filed on or before May 31, 2009, will be treated as an amount "shown on an original return" for purposes of R&TC section 19138(b).

  19. After FTB initially assesses the large corporate understatement penalty, if the correct tax liability is subsequently reduced by an audit determination or a claim for refund that is allowed, will the penalty be reduced and refunded automatically, or do I have to file a separate claim for refund requesting that the penalty be reduced and refunded?

    Every time there is a new final tax liability for the tax year, FTB will recompute the penalty to determine the correct amount of the penalty, whether the penalty increases or decreases. As a result, FTB will send an additional bill for any increased penalty amount or will refund any reduced penalty amount. Taxpayers do not have to file a separate refund request for any reduced penalty. If you disagree with FTB's computation of the amount of the penalty, you can file a claim for refund under R&TC section 19138(e).

  20. If amended returns are filed under R&TC section 19138(b) that increase the tax shown on the original return, thereby creating an underpayment, does the underpayment of estimated tax penalty apply?

    No, even though the underpayment amount used in the computation of the estimated tax penalty is based on the amount shown as tax on an original return, the amount of tax shown on an amended return filed under R&TC section 19138(b) for tax years 2003-2007 will be treated as tax shown on the original return only for purposes of R&TC section 19138. Therefore, any underpayment created by an increase in self-assessed tax from an amended return will not be treated as an underpayment for purposes of computing the penalty under R&TC section 19142.

  21. Will a payment of only tax, and not interest, with an amended return or with the election form (FTB 650) satisfy the payment requirement under R&TC section 19138(b)?

    Yes. R&TC section 19138(b) provides that the taxpayer must file an amended return and pay the tax shown on the amended return on or before May 31, 2009. As the taxpayer is self-assessing and paying the tax shown on the amended return or election form (FTB 650), the requirements of R&TC section 19138(b) are satisfied and the base amount for measuring a future understatement will be increased by the amount of tax paid.

    Underpayment interest will be computed automatically by FTB when the amended return is processed and the taxpayer may receive a bill for any unpaid interest.

  22. I currently have a case in the Settlement Bureau involving one or more tax years of 2003-2007. Am I subject to the penalty? How can I reduce my exposure to the penalty?

    If your case will not be settled by May 31, 2009, and the $1 million threshold is met, the penalty will apply to the understatement of tax when the case is finalized. To reduce your exposure to the penalty you need to file an election form or amended return pursuant to the process described in FAQ #37.

    Similarly, if you do not settle your case, and the $1 million threshold is met, the penalty will apply to the understatement of tax when the assessment is finalized. To reduce your exposure to the penalty you need to file an election form or amended return pursuant to the process described in FAQ #37.

    If your case is settled and pending final approval, and the taxpayer signs a Settlement Agreement and pays the agreed settlement amount on or before May 31, 2009, the Settlement Agreement will serve as an amended return solely for purposes of computing the penalty, and the amount of tax paid pursuant to the Settlement Agreement will be treated as a self assessment of tax for purposes of the penalty. If the settlement does not receive all necessary approvals, the portion of the assessment not paid as part of the settlement may be subject to the penalty if adjustments associated with such amounts are ultimately sustained.

    Further questions about the interaction of the penalty and FTB's Settlement Program can be directed to:

    Patrick J. Bittner, Director
    Settlement Bureau, Mail Stop A270
    Franchise Tax Board
    P.O. Box 3070
    Rancho Cordova, CA 95741-3070
    Telephone: 916.845.5624
    Fax: 916.843.5408
    Email: Patrick.Bittner@ftb.ca.gov

    Howard (Buzz) Van Volkinburg, Administrator III
    Settlement Bureau, Mail Stop A270
    Franchise Tax Board
    P.O. Box 3070
    Rancho Cordova, CA 95741-3070
    Telephone: 916.845.4933
    Fax: 916.843.2202