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California Franchise Tax Board - Tax News September/October 2002

Online installment agreement tool simplifies application process

Beginning in October, we will have an online electronic installment agreement application on our Website, ftb.ca.gov, that can simplify and speed up the process of applying for an installment agreement with us.

The electronic installment agreement also provides taxpayers the convenience of applying for an installment agreement at any time. Taxpayers are required to use their customer service number for authentication. Confidential information is protected through the use of Secure Sockets Layer encryption. Here's how it works: The taxpayer completes and submits an application for approval to pay an amount due in installments. We instantly send the taxpayer confirmation that we received the application. Later, the taxpayer goes online to check the status of the request. To qualify for an installment agreement the maximum balance owed cannot exceed $10,000, and the total balance must be paid within 36 monthly installments. Currently, our electronic installment agreement is for taxpayers' use only. We are looking at expanding it to allow you to submit an installment agreement request on your clients' behalf. In the meantime, let your clients know about our new paperless service.

Legislative update:

New laws affect taxpayers in military, limited liability companies, Lupus Foundation contributors

Several legislative measures were recently enacted into law. Here are summaries of each. If you want to learn more about any of the new laws, go to our Law and Legislation Webpage located on our Website at http://www.ftb.ca.gov/law/. You also can find comprehensive information about all legislative measures on the Internet at http://www.leginfo.ca.gov/ the Official California Legislation Information Website. AB 957 (Papan, Stats. 2002, Ch. 135) This act makes clarifying changes to the law that allows individuals to make voluntary contributions to the Lupus Foundation of America on their tax returns. This act clarifies that contributions shall be used by the California-based operating chapters of the Lupus Foundation for lupus professionals, awareness, and for research grants. The Lupus Foundation first appeared on the 2001 tax return and will appear for five years, as long as it meets a minimum contribution amount. AB 1433 (Horton, Stats. 2002, Ch. 60) This act provides various civil protections and relief to military service members who are ordered to active federal or state military duty by codifying provisions that are generally similar to the Federal Soldiers' and Sailors' Civil Relief Act. With respect to income taxes and administration, this act requires: We exclude the period of military service when computing any statute period limited by law for bringing actions or proceedings in any court, board, bureau, commission, department, or other agency of the government. We assess an interest rate of no more than six percent on any liability incurred by the service member prior to their entry into active service, unless a court concludes that the service member's ability to pay a higher interest rate is not materially affected by their service. We will defer the collection of any income tax that is due prior to or during the period of military service for a period of up to six months after the termination of active military service. Interest and penalties for nonpayment of the tax will not accrue during the time we defer the liability. Further, the running of the statute of limitations against the collection of any tax will be suspended for the period of military service and for an additional nine months after the end of active service. Further, this act allows a court to grant the following relief (after notice and hearing) if a service member applies for the relief of any tax or assessment that is due prior to or during the period of military service: A stay of the enforcement of the tax during the period of military service. The service member may pay the balance of any unpaid liability and interest in equal periodic installments for a period beginning on either the date of the termination of service or the date of application for relief. The time period will be equal to the period the member spent in military service. When a court has granted the stay, no fines or penalties can accrue during the period of the relief outlined above. Finally, this act states that the Legislature's intent is to allow service members to qualify for the benefits and protections under this act retroactive to September 11, 2001. However, it is also the Legislature's intent that the actual benefits and protections to service members will only apply on a prospective basis after January 1, 2003, which is the act's operative date. Therefore, service members that are in active service as of September 11, 2001, will qualify for the income tax collection deferral, but the deferral will be effective only on or after January 1, 2003. AB 1752 (Migden, Stats. 2002, Ch. 156) This act makes changes to the Bagley-Keene Open Meeting Act as it applies to the Board of Equalization. This act generally requires that certain disclosable public records pertaining to an item on an agenda for a meeting of the Board of Equalization that are prepared and distributed by either a Board of Equalization member or Board of Equalization staff to Board of Equalization members prior to or during a Board of Equalization meeting must be disseminated in three ways before the Board of Equalization takes any final action on that item to which the writing pertains. The public records must be: (1) made available for public inspection at the meeting, (2) distributed to all persons requesting copies of such writings, and (3) made available on the Internet. These requirements do not apply to writings pertaining to any item that involves a named tax or fee payer. This act is similar to Senate Bill 445 (Burton, Stats. 2001, Ch. 670), which applies to the three-member Franchise Tax Board. AB 2791 (Migden, Stats. 2002, Ch. 169) This act requires that: The Secretary of State notify certain business entities about their obligation to pay an annual tax at the time the entity is created or registered in this state, and We notify certain business entities about their obligation to pay an annual tax until the existence of the business entity is properly ended or the business entity's registration is properly cancelled This act applies to domestic and foreign limited partnerships, limited liability partnerships, and limited liability companies. Correction to tax form Please note the following correction to the distributed 2001, California tax forms, instructions, and booklets. Should you have any questions about this clarification, contact our Tax Forms Development and Distribution Section at (916) 845-3442.

CA Targeted Tax Area Business Booklet, Form FTB 3809 (instructions)

The error appears on page 4 of the instructions, third column, under the heading Credit Limitations. The third bullet should be deleted. The bullet reads:

The business must reduce any deduction for wages by the amount of the TTA credit. The error appears in the 2001 Package X and in the above-mentioned booklet. The Internet version is correct.

Ask the Advocate

Q: My client wants to dissolve a corporation. How do I compute the tax for the final year?

A: I would need to know more about your client's account before I could answer your question definitively. However, there has been a noticeable change in the law that affects final year returns for dissolving corporations. If you're not careful when completing the dissolution, your client could wind up paying additional taxes, penalties, and interest. Let me explain:

In 2000, California enacted Assembly Bill 1843, replacing the term income year with taxable year. This law change made it easier for corporations to calculate their tax liability for their final year.

AB 1843 replaced income year with taxable year in all provisions of the Bank and Corporation Tax Law, the Administration of the Franchise and Income Tax Law, and the Personal Income Tax Law. Revenue and Taxation Code Section 23151(f)(1)(A) and (B) states:

With respect to taxable years beginning on or after January 1, 2000 (other than the first taxable year beginning on or after that date), the tax for the taxable year (including the taxable year of commencement and the taxable year of cessation) shall be according to or measured by its net income for the taxable year to be computed at the rate prescribed in Section 23151 {Emphasis added}.

As a result of AB 1843, corporations now calculate their franchise tax using their net income from the taxable year instead of using the net income of the preceding income year, which no longer exists. To make the change from income year to taxable year, California made statutory changes to the treatment of estimate payments.

Beginning with tax year 2000, we do not treat an estimate payment made in a current taxable year as payment for the franchise tax in the following taxable year, but we regard it as payment for the taxable year in which the payment is made.

The current law requires dissolving corporations to pay a measured tax amount that is based on their net income, but not less than the minimum tax ($800) in their final year. Note: Regarding prepayments made upon incorporation, there is no provision in the tax law to apply prepayments made upon incorporation to the computation of the final year tax (applies to entities incorporated prior to January 1, 2000).

Nowadays, many corporations wait until the end of their normal year, to file for dissolution, withdrawal, or merger with the Secretary of State.

More than ever before, it is critical that you carefully follow the procedures for the proper dissolution of a corporation (located in the California Corporations Code).

Pay particular attention to the timing of the filing, otherwise, under the current laws, your client may be required to file another tax return, and pay additional taxes, penalties, and interest. Here's an example:

Corporation A, filing on an annual basis, submits documents to the Secretary of State with the intention of dissolving on December 12, 2002. It mails the documents to the Secretary of State on December 15, 2002. The Secretary of State determines the documents are incomplete and informs the corporation that it must file additional forms.

Corporation A delays in filing the additional documents and as a result, the documents do not reach the Secretary of State until February 5, 2003. The Secretary of State completes the dissolution process and informs us that the dissolution date is February 5, 2003.

Corporation A is now required to file an additional tax return, even though it did not conduct business or earn income, for the short period ending February 5, 2003, and it must pay at least the minimum tax (We would also assess penalties and interest for a late return, if applicable).

October 15 -- Last day to e-file state returns

Remember, you can still e-file your clients' refund and balance due California tax returns during the extension period through October 15, 2002.

If you are not yet an approved e-file provider, and you want to e-file your clients' tax returns during the extension period, complete our fillable application at /professionals/efile/proinfo.shtml or call our e-file Help Desk at (916) 845-0353. Once you've completed the application, you can fax a signed copy to us for processing at (916) 845-0287.

While at our Website, check out the many benefits of e-file and the other electronic services available. We also offer a new free e-file option that allows you or your clients to prepare returns offline and then submit these returns directly to us over the Internet through our Direct Filing Portal. Find out more about this option at /professionals/efile/proinfo.shtml

Your suggestions lead to better FTB e-file program

Many of the improvements we make to the e-file program come from your suggestions.

Here are some improvements we've made since 2001:

We added seven new forms, including: FTB 3506-Child and Dependent Care Expenses Credit (New for California) Schedule R-Apportionment and Allocation of Income Schedule S-Other State Tax Credit We also added five credit forms and the married filing separate filing status. We now accept decedent returns. We added enhancements to our up-front error checking process for e-file returns to ensure accuracy and to reduce notices to your clients. We made it easier for you to participate in our program by reducing the need for original signatures. We now accept faxed copies of e-file applications (form FTB 8633 -California Application to Participate in the e-file Program). You can now also accept a fax copy of your client's signed form FTB 8453- Signature Document. We now accept electronic postmarks, which mark a return with the actual time you sent it to your transmitter. (Ask your software provider.) We made our e-file participant application (FTB 8633) fillable on our Website. As we move toward 2003 and a new e-file season, look to Tax News and our Website, for the latest e-file program improvements and changes in store for next year. And keep those suggestions coming!

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Let us deliver Tax News right to your computer's electronic mailbox, free of charge. The service is called Tax News e-mail Service and it provides you with the same information found in our printed, bimonthly newsletter, only it's free. Here's how it works:

Before we put the hardcopy of Tax News in the mail, we'll send you an email with a hyperlink to our Webpage. One click of the mouse and you're now reading the most current issue of Tax News. You can print a hardcopy or forward it (or specific articles) to your colleagues and customers.

Tax e-News

When you sign up for Tax News by email, you can also sign up to receive Tax e-News, our early warning system for tax professionals. When we have late-breaking news, you'll get it first with a click of the mouse. Tax News Online Tax News Online (www.ftb.ca.gov/professionals/taxnews/index.shtml) is our official Webpage for tax professionals. Keep your browser pointed to Tax News Online for news and information about the Franchise Tax Board and events affecting state income taxes. Some of the Webpage features include the Tax News Archives (/professionals/taxnews/tn_arc.shtml) and the Tax Practitioner Services Directory.

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Need more time? Make request online

Here's the scenario. It's 5 p.m. and a client walks into your office, hands you one of our notices, and says by the way, I got this in the mail a few weeks ago. The notice says we want your client to file a missing tax return, and we want a response tomorrow!

What are your options? Do you stay until midnight going through shoeboxes full of receipts so you can get the return done? Do you send the return late and hope no one notices? Or do you put a "gone fishing" sign on your door and call it a day?

If none of those options seem like good ones, here's one you might not know about, but can save you lots of stress in these situations.

You can request additional time to file via the web. All you need is an Internet connection and the Franchise Tax Board notice number. Go to our Webpage at (www.ftb.ca.gov/inc/index.asp) enter the notice number in the space provided and click Submit.

Next, click on the option that says I Need More Time To Reply. Follow the instructions on the page and once we approve the 30-day deferral, you'll have the option of printing a confirmation page (for your client's records).

In most cases we will automatically approve your request, however there are some situations where we will not automatically approve a request for additional time (such as if the maximum time has already been exceeded).

It's as easy as that. PS. Since you just got 30 more days, you can still take off and go fishing if you want!

Paperless Schedules K-1 Program expands

Our Paperless Schedules K-1 (565) Program is the most efficient way to submit Schedule K-1 information for partnerships. You can now submit paperless Schedules K-1 (568) for limited liability companies as well.

Beginning with taxable year 2001, any limited liability company that is required to file a Form 568 can send us paperless Schedules K-1 (568), by CD, diskette, or tape cartridge instead of sending paper schedules. It's a very efficient filing option because it significantly reduces the resources you use to produce and file schedules, and, it reduces the resources we use to process and store them.

Best of all, the process is virtually flawless because we provide you, free of charge, software called TestWare to help you prepare error-free Schedules K-1 (568) files. Our Pub. 1062-Guide for Filing Paperless Schedules K-1 (565 or 568) contains detailed information on the media we can accept and how to send it in. If you want to know more about our paperless Schedules K-1 Program, go to our Electronic Services Webpage at /businesses/k1/index.shtml.

FTB/IRS e-file seminars

Plans are underway to conduct the annual FTB/IRS e-file seminars this fall. The seminars will be held in selected cities throughout California. We will post the details about the seminars as soon as they are finalized, so we encourage you to visit our Website, periodically to find out the dates and locations of the seminars.

State of Missouri offers tax amnesty program

Beginning August 1, 2002, and ending October 31, 2002, individual and business taxpayers who owe the state of Missouri back taxes will have a one-time opportunity to pay their back taxes and have interest and penalties waived.

During this three-month tax amnesty program, all interest and penalties on taxes owed for eligible periods will be waived, provided full payment of tax due, lien fees, and bad check charges is made and postmarked by October 31, 2002.

Several types of taxes are eligible for inclusion in the tax amnesty. To be eligible for the program, taxes must have been due on or before December 31, 2001, and cannot be pending in a civil, criminal, or bankruptcy court. Lien fees and bad check charges are not eligible for tax amnesty.

Taxpayers who participate in tax amnesty must agree to comply with state tax laws for the next three years from the date of agreement.

Taxpayers who owe the state of Missouri money and do not participate in the Tax Amnesty Program will be required to pay the full amount of taxes owed, interest, and penalties and will be subject to all criminal and civil actions provided by law. If you or a client may have an unpaid tax liability with the State of Missouri, you may apply to participate in the program.

To download a Tax Amnesty Application, or to get additional information, please visit the from the Missouri Department of Revenue's Web site at: http://dor.mo.gov/ or call (573) 751-7200.

Note: The California Legislature considered a similar measure, Senate Bill 1439.