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LEGAL RULING 96-4

July 3, 1996

SUBJECT: REVENUE AND TAXATION CODE SECTION 21015--RELIEF FROM PENALTY IMPOSED UNDER SECTION 19011 (ELECTRONIC FUNDS TRANSFER PENALTY

ISSUE

What are some examples of situations in which the Franchise Tax Board (FTB) will or will not use Revenue and Taxation Code section 21015 to refrain from imposing or waive the penalty imposed under Revenue and Taxation Code section 19011?

FACTS

Situation 1: Taxpayer has completed an Electronic Funds Transfer (EFT) authorization agreement (FTB form 3815), but fails to make the next payment thereafter using EFT.

Situation 2: Taxpayer has completed FTB form 3815 and has successfully remitted several EFT payments but fails to remit a subsequent payment by EFT. Taxpayer writes to FTB explaining that the reason the payment was not made by EFT was that the only individual who knew that payments had to be made by EFT was not working on the date the payment was due so "someone else" in the tax department just made the mistake of sending payment by check. Taxpayer also explains that everyone in the tax department has now been made aware of the EFT requirement and has been trained on the requirements of the bank so that future payments would be by EFT.

Situation 3: Taxpayer has completed FTB form 3815, but remits the next payment thereafter by check. The payment is received prior to the due date and deposited by FTB by the same date that an EFT payment would have been deposited. Taxpayer states that it intends to remit all future payments by EFT.

Situation 4: Taxpayer has failed to complete FTB form 3815, after FTB has sent repeated notifications to the taxpayer that it meets the requirements to pay by EFT and that it must complete FTB form 3815 and make all future payments by EFT. Taxpayer has continued to make payments by other than EFT means.

LAW AND ANALYSIS

Under Revenue and Taxation Code section 21015, the Franchise Tax Board has discretionary authority, effective January 1, 1996, to either refrain from imposing or to waive penalties required by section 19011 (penalty for failure to pay by Electronic Funds Transfer.) The determination must be made, "on a case-by-case basis, that the failure to comply did not jeopardize the best interests of the state and is not due to any willful neglect or any intent not to comply." This authority is limited to penalties that may be or were assessed or imposed on or after January 1, 1995.

Under Revenue and Taxation Code section 19011, any taxpayer required to remit payment by electronic funds transfer who makes payment by other means "shall pay a penalty of 10 percent of the amount paid, unless it is shown that the failure to make payment as required was for reasonable cause and was not the result of willful neglect."

Where reasonable cause is established, there is no need to look to section 21015 for relief from the penalty. Where reasonable cause is not established, the provisions of section 21015 will be considered and applied on a case-by-case basis. Below are some examples of the application of section 21015.

HOLDINGS

Revenue and Taxation Code section 21015 will be applied to the above factual situations as follows:

Situation 1: The EFT penalty is automatically imposed when a payment is received by other than EFT means. Because the FTB does not know why EFT was not used by the taxpayer, the penalty will not be waived. If the taxpayer provides information to FTB explaining the reason for the failure, the FTB may waive the penalty for reasonable cause or under the provisions of section 21015 if appropriate.

Situation 2: Because a reasonable course of action would have been that the taxpayer should have had more than one person trained to make payments by EFT prior to the due date of the payment, the penalty would not be waived for reasonable cause. However, because the taxpayer has demonstrated an intent to comply by remitting several payments by EFT and by taking steps to ensure the problem would not be repeated in the future, FTB would waive the penalty under section 21015.

Situation 3: This situation would neither constitute reasonable cause nor an appropriate situation for application of section 21015. An unexplained failure to make payments by EFT without an explanation of the method the taxpayer intends to follow to ensure future compliance with EFT requirements does not demonstrate an intent to comply with the statutory requirements. The taxpayer has a duty to comply with the statute.

Situation 4: This situation would neither constitute reasonable cause nor an appropriate situation for application of section 21015. An unexplained failure to return a completed FTB form 3815 and to make payments by EFT does not demonstrate an intent to comply with the statutory requirements. The taxpayer has a duty to comply with the statute.

DRAFTING INFORMATION

The principal author of this notice is Karen D. Smith of the Franchise Tax Board Legal Branch. For further information regarding this notice, contact Ms. Smith at the Franchise Tax Board Legal Branch, P.O. Box 1720, Rancho Cordova, CA 95721-1720.