FTB/CSEA Liaison Meeting a Success
On September 25, we attended the California Society of Enrolled Agents (CSEA) Annual Liaison meeting. To kick off this meeting, our Executive Officer Selvi Stanislaus was honored to receive their President’s Award for excellence. Our division chiefs gave updates on legislation, our filing season, and audit matters. We also participated in a question and answer session on emerging issues. The following are some of the questions and answers discussed at the meeting:
1. In recent months, our employees in the “Collection Resolution/Installment Agreement” and “Complex Account Resolution” units have increasingly disallowed expenses claimed on Form 3561 (Financial Statement) used to determine hardship, stating that the taxpayer has an “extravagant lifestyle,” but will not be specific as to which expenses seem excessive. The form has an “FTB use only” column, but agency personnel are unwilling to divulge what amounts/limits are being used for any of the claimed line items. Without guidance on maximum allowable living expenses, the process of obtaining a Withholding Order modification is extremely arbitrary. What are the current policies for analysis of Form 3561?
Financial Statements (Form 3561) are used to evaluate the taxpayer’s ability to pay and offer payment options based on their true and complete financial condition. Analysis focuses on determining those expenses necessary to maintain the health, welfare and living expenses of the taxpayer and paying the debt within the most reasonable period of time.
Analysis of a taxpayer's financial condition provides us with a basis to make one or more of the following decisions:
- Approve an installment agreement.
- Allow an extension of time to pay.
- Require partial or full payment from available assets.
To assist in determining allowable expenses, FTB staff uses the Internal Revenue Service’s expense allowance tables as a general guide. If an expense is not allowed or is reduced to an allowable amount, the taxpayer or representative is informed of the change and given the opportunity to justify the higher expense.
Given that installment agreement information is now entered online, the “FTB Use Only” column on the Form 3561 is no longer a required field to be used by the collector. In the past, this column was used for administrative purposes to make notes.
2. It is our understanding that the alternative withholding on real estate sales increased .25 percent with the increase in the maximum personal income tax rate. It was previously 9.3 percent, and now is 9.55 percent. Did the withholding rate on distributions to nonresident partners and shareholders increase from 7 percent?
The withholding rate for real estate, nonresidents, nonresident partners, members, and shareholders remains the same. What changed due to the increase in the personal income tax rate are the rates based on the maximum personal income tax rate such as:
- Partnership or limited liability company (LLC) income or gain allocable to foreign (non-U.S.) partners or members. For foreign partners or members, the withholding rate is the maximum California tax rate applicable to the partner (corporations 8.84 percent, banks 10.84 percent, and foreign partners 9.55 percent that are not corporations or banks).
- The alternative optional gain on sale of California real estate withholding rate for individuals, partners, members and S corporation shareholders is based on the maximum personal income tax rate.
3. Now that responsibility for collecting child support obligations has transferred to the Department of Child Support Services as authorized by 2008 legislation, it is our understanding that you will resume collection of delinquent income tax from taxpayers who owe both child support and tax. We frequently encounter taxpayers who are behind on both with no resolution in sight, and are concerned that this change will make it more difficult to work out arrangements when two agencies of state government are involved, especially in the current economy. How should we approach these cases?
We will continue to collect accounts as we have in the past. We expect each taxpayer to file all missing tax returns and pay the balance they owe. We are aware it may be more difficult to collect cases with a liability from both Department of Child Support Services (DCSS) and us, and many of the cases may be considered hardship cases.
If the taxpayer indicates they are unable to pay in full because they have a financial hardship, they should contact us to make an arrangement to enter into an installment agreement to pay their liability or request a delay in our actions to collect their debt. We will evaluate the case, taking into account the priority of their child support debt, and act accordingly in establishing an appropriate resolution to their situation.
4. It is our understanding that you will begin imposing the frivolous submission penalties authorized by R&TC Section 19179(d). The penalty is $5000. How many of these penalties have been imposed in 2009, and what is your anticipated number of penalties for 2009, based on your statistics on the average number of frivolous submissions received per year? In other words, how frequently do you receive a return considered to be frivolous?
We notified the public on our website that we would begin to impose the frivolous submission penalty on or after July 20, 2009. In addition, we will notify the taxpayer in writing of the frivolous submission determination and allow the taxpayer 30 days to withdraw that submission. No frivolous submission penalties have been imposed as of yet.
We do not have statistics on the number of “frivolous submissions” to use as a basis for an estimate of the anticipated number of frivolous submission penalties that may be imposed in 2009. However, we do not expect to issue many penalties. The purpose of the penalty is to discourage taxpayers from submitting frivolous information. We hope to bring taxpayers into compliance by notifying them of the frivolous submission and allowing a 30-day period to withdraw their submission.
Identified frivolous returns for fiscal year 2008/2009 totaled 278. The frivolous submission penalty is not intended for frivolous returns. We impose a $500 frivolous return penalty for frivolous returns, as authorized under Revenue and Taxation Code Section 19179.
5. In our June 2009 Tax News, there was a long article that included examples as to how a single member LLC (SMLLC) should calculate California business credits when the SMLLC’s owner is either a C corporation or an S corporation. Many of our members work with SMLLCs, but more often in the individual context, rather than the corporate context. In other words, the owner of the SMLLC is an individual rather than a corporation, and as a disregarded entity, the income, losses, deductions, and credits of the SMLLC are reported on the individual’s state tax return, Form 540. Should the method illustrated in the article, which was demonstrating that business credits are limited to the actual portion of the owner’s income that is reflective of the income of the SMLLC, be utilized in the individual context as well?
Yes. If the owner of the disregarded entity is an individual and is, therefore, treated as a sole proprietor, the amount of credit attributable to the disregarded entity that the owner may claim for the taxable year is limited to the increase in the owner's regular tax (tax before reduction by any credits) that results from including the income and expenses attributable to the disregarded entity.
6. CSEA applauds the new Systemic Issue Management System (SIMS) program for resolution of various issues encountered in tax administration and that an issue can be reported on your website. Will you include your responses and progress on issues on the website as well?
At this time, we do not plan to update responses and progress on the website, because it was designed as a reporting system only. We modeled our SIMS after the IRS’ Systemic Advocacy Management System (SAMS). However, we are using Tax News, which is our free online publication designed to inform tax professionals about state income tax laws, our regulations, policies, and procedures. Periodically, we will feature reported systemic issues and their outcomes in the “Ask the Advocate” section. If you do not currently subscribe to Tax News, visit ftb.ca.gov and click the “Tax Professionals” tab for a link to Tax News.
7. Please update us on the implementation of the External Authentication for Secure e-file (EASE) application? Will practitioners have updated authentication and resources that the present “MyFTB Account” has for the 2010 tax filing season?
EASE is an authentication method that will allow customers and their representatives to register and establish a self-managed user ID and password, which they will use to access secure online services. Due to the budget crisis, the hardware/software purchase was delayed, and EASE will not be available until after the 2010 primary filing season. Prior to viewing their clients’ accounts, practitioners will need to establish an online account. While practitioners will not have any additional access rights or functionality upon the initial implementation of EASE, the enhanced authentication will provide taxpayers who establish an account with an online change of address feature. Also, with the implementation of EASE, we plan to implement a new business entity online payment application. The online payment application is similar to our current personal income tax Web Pay application, and will allow corporations, partnerships, or LLCs to make payments online.