Tax News
July 2006

California's Tax Gap

Much of what we do at FTB is aimed at shrinking the tax gap. In this issue of Tax News we shine a spotlight on some of our efforts to close the tax gap, through our filing, audit, and collection programs, and some new initiatives. / more+

New audit unit to check into abusive tax shelter promoters

While not all promoted transactions are abusive, many that have been marketed and sold since the mid-1990s are abusive. Promoters and organizers of abusive tax shelters should take heed - FTB has established a new audit unit whose primary purpose is to examine abusive tax shelter promoters and organizers and determine if the promoter penalty applies. / more+

Contingent attorney fees + non-compliance = audit

An audit study of noncompliance associated with attorney contingency fees resulting from lawsuits is revealing a high ratio of noncompliance. FTB expects to conduct more of this type of audit. / more+

Clamping down on businesses that haven't filed returns

FTB will notify 30,000 businesses that earned income but did not pay taxes, to file their 2004 tax returns and pay what they owe, or face the consequences. / more+

Focusing on business income underreporting

A lot of attention is focused on the underground economy and nonfilers. However, the largest component of the tax gap is underreporting, which includes understated income and overstated deductions. FTB and IRS have recently begun focusing in on sole proprietors, who are associated with the highest percentage of underreported personal income tax. / more+

Avoid costly mistakes when withholding tax on real estate transactions

Pre-paying taxes on real estate transactions is a way to increase compliance and help close the tax gap. Many of you have clients who will be subject to real estate withholding during the upcoming calendar year. Check out our list of the most common errors on real estate documents (forms FTB 593 and FTB 593B) to avoid misapplied payments, incorrect withholding amounts, or delayed refunds. / more+

Longer statutes of limitation are applicable when FTB's assessment is based on federal changes

The California Supreme Court unanimously reversed the appellate court decision in the case of
Bayard M. Ordlock et al. v. Franchise Tax Board (Case No. S127649), clarifying the relationship between FTB's four-year statute of limitations, and the longer statute of limitations applicable to federal changes. / more+

Report use tax and the "nanny tax" on the individual income tax return

Use tax and the "nanny tax" are two taxes that often go unreported and unpaid. Both should be reported and paid when filing personal income taxes with FTB - and tax professionals can make all the difference in making sure that they are. / more+

Head of household audit questionnaires arrive in July

We look closely at HOH filing status every year, since it is often claimed incorrectly. New questions on the audit questionnaire for 2005 reflect changes in federal and state law. The new "uniform definition of a child" may mean that some of your clients no longer qualify for HOH status. / more+

Criminal corner

Our monthly summary on bringing tax criminals to justice, and closing the tax gap one case at a time. / more+