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Tax News May / June 2003

Tax relief for military personnel serving in combat zones

Your military clients serving in combat zones will receive relief with their personal income tax on par with what they receive from the federal government.

Now that California's military servicemen and women are in harm's way, tax issues should be the least of their concerns," said State Controller and Franchise Tax Board Chair Steve Westly.

California tax law generally conforms to federal tax benefits for combat zones and qualified hazardous duty areas. These include:

  • Extensions of the filing and payment of tax due dates for personal income tax returns until at least 180 days after leaving the combat zone or qualified hazardous duty area without incurring penalties or interest.
  • Suspension of delinquent tax collection of military personnel serving in the combat area for 180 days after leaving the combat zone or qualified hazardous duty area.
  • For enlisted members and warrant officers, all compensation for active service earned in a combat zone or a qualified hazardous duty area is tax-free.
  • This includes regular basic pay. Special pay, such as reenlistment bonuses, is also tax-free if the service member reenlists in a combat zone. For commissioned officers, the monthly tax exclusion is capped at the highest enlisted pay, plus any hostile or imminent danger pay received. For 2003, this amount is $5,882.70 per month.

Military taxpayers filing on extension should alert us when they do file by writing in red on top of their tax return or payment: COMBAT ZONE: OPERATION IRAQI FREEDOM (or the name of the specific combat zone served in). Taxpayers also need to include the dates they entered and left the combat zone or qualified hazardous duty area.

Here are answers to some of the questions we're receiving from affected taxpayers:

Q: Do I have to file my return and pay my tax by the original due date?

No. Military personnel on duty outside the United States or in a designated combat zone or in a qualified hazardous duty area are allowed a filing extension of up to 180 days to file their California income tax returns and pay their tax, without interest or penalties as described below:

If you were in a designated combat zone or in a qualified hazardous duty area anytime during the tax year or filing period (January 1 to April 15), you are entitled to an extension of time to file and pay, without interest and penalties, of up to 180 days after leaving the combat zone or a qualified hazardous duty area. In addition, you are entitled to an additional extension of up to 106 days (number of days you were in a combat zone or QHDA during the filing period).

  • If you served outside the United States, but not in a designated combat zone or QHDA, you are entitled to an extension of time to file and pay without interest and penalties, of up to 180 days after returning from overseas.
  • For married persons filing a joint return, only one spouse needs to meet the requirement to qualify for the extension.

Q: Do I need to obtain a Power of Attorney from my spouse in order to file my return now?

No. California generally does not require a formal Power of Attorney in the same manner as the Internal Revenue Service. If your spouse is on active duty outside the United States, you may file a joint return now by attaching a statement to the return explaining the circumstances and signing the return on behalf of your spouse. When signing the return, be sure to indicate on the signature line that you are signing the return for your spouse, (Mary Smith for John Smith).

Steer clear of abusive tax schemes

This article is the first in our series on abusive tax scheme transactions.

In recent years, individuals and business entities have increasingly taken advantage of abusive tax schemes.

The Internal Revenue Service defines abusive tax schemes as transactions promoted for the promise of tax benefits with no meaningful change in the taxpayer's control over or benefit from the taxpayer's income or assets.

These transactions typically have no economic purpose other than reducing taxes, and most involve the use of multiple layers of domestic and foreign pass-through entities including: partnerships, S corporations, limited liability companies, and trusts.

Another common abusive tax scheme uses offshore banks that issue debit/credit cards. The IRS is vigorously pursuing taxpayers investing in apparent abusive tax schemes. They are focusing on tax return preparers and the promoters of these investment schemes, and are pursuing penalties and criminal prosecution for these cases.

The IRS also has had limited compliance initiatives for certain abusive tax schemes that encouraged taxpayers to voluntarily come into compliance with the federal tax law and file amended returns before the IRS contacted them for an audit. As a result of these compliance initiatives the IRS was able to obtain the names of promoters and tax preparers involved in the marketing of abusive tax schemes, as well as the names of taxpayers investing in these schemes. Information received from the first initiative alone resulted in the disclosure of deductions totaling $30 billion.

For additional information on IRS activity on abusive tax schemes and numerous notices and announcements focusing on tax shelters, log onto their Website at http://www.irs.gov/businesses/corporations.

We are stepping up our audit activities on taxpayers investing in abusive tax schemes and working closely with the IRS to identify taxpayers, perform audits, and uncover abusive tax scheme transactions.

We've identified, for audit, tax returns reporting approximately $4 billion in losses and we are also holding on to many tax returns pending the completion of the IRS' audits. Congress is considering legislation aimed at deterring or discouraging investment in abusive tax schemes.

Some of the proposed provisions include:

  • Extending the period for issuing a federal deficiency notice for abusive tax scheme losses from three to six years, to allow the IRS more time to identify and address abusive tax schemes.
  • Imposing penalties equal to 40 percent of the tax liability attributed to the abusive tax scheme for taxpayers investing in abusive tax schemes.
  • Imposing penalties up to $200,000 on taxpayers who do not disclose their investment in an abusive tax scheme on their return.
  • Imposing penalties of up to 100 percent of the gross income earned in the marketing of the abusive tax scheme on the promoters.

The California legislature is also considering law changes to address abusive tax schemes, including considering the proposed federal legislation.

New process for Canadian retirement plans

We recently received an inquiry about the taxability of the earnings and distributions from a Canadian Registered Retirement Savings Plan (RRSP).

After reviewing the characteristics of a RRSP, we have revised our internal procedures and will now treat a RRSP like a savings account, not a functional equivalent of an Individual Retirement Arrangement. As a result, California resident taxpayers' original contributions, made while a Canadian resident, are treated as a capital investment in the RRSP. California residents are required to include the earnings from their RRSP in their California taxable income in the year earned. After taxpayers pay tax on these earnings, the earnings will also be treated as a capital investment in the RRSP.

When taxpayers receive distributions from their RRSP, the amount consisting of the contributions and the previously taxed earnings is treated as a nontaxable return of capital. Please note that the federal election to defer taxation on the RRSP earnings until a taxpayer begins receiving distributions, as discussed in Revenue Procedures 89-45 and 2002-23, is only available for federal income tax purposes and is unavailable for California income tax purposes.

Our revised treatment for a RRSP is now reflected in the online information resource used by our Tax Practitioner hotline. The number to call is (916) 845-7057.

Editor's note: The April 1, 2003 issue of Spidell's California Taxletter contains an article on this topic.

Filing returns for military personnel?

The following publications provide special information about filing and preparing California tax returns for military personnel. They are also available on our Website, /.

  • FTB Pub. 1021 - California Tax Information For Military Personnel - Extensions and Income Exclusions.
  • FTB Pub. 1031 - Guidelines for Determining Residency Status.
  • FTB Pub. 1032 - Tax Information for Military Personnel.

Ask the Advocate: Hardships

Q: My client has a hardship as a result of your collection actions. Do you have a process for handling cases such as this?

A: If any of your clients has a hardship as a result of our collection actions, there is a way to provide some relief. Our form FTB 911, Request for Relief From Hardship, enables you to obtain immediate relief for your clients when they experience hardship as a result of collection action taken by us.

The form is for tax practitioner use only. When you submit it, be sure to include a completed form FTB 3520, Power of Attorney, if you do not already have a current one on file with us.

We also provide, for tax practitioners only, a Collections Fax Help Line. Use it to get a fast resolution to personal income tax collection issues. The fax line number is (916) 845-0494 and is available 24 hours a day, seven days a week. In most cases, we respond within two business days.

Settlement program announces survey results

In August 2002, our Franchise Tax Board Settlement Program administered a survey to taxpayers and tax practitioners who had contact with the program between 2000 and 2002. From that survey we learned that our settlement program is doing a good job of listening to its customers and working with them to find solutions for their tax problems.

We also learned that at times the process takes too long, particularly the response times between the Chief Counsel approval and the Attorney General and Board approval steps.

Revenue and Taxation Code Section 19442, authorizes our FTB Settlement Bureau to settle civil tax matters in dispute that are subject of protests, appeals, or refund claims. It is responsible for the negotiation of settlements of civil matters in dispute consistent with a reasonable evaluation of the costs and risks associated with the litigation of these matters.

The settlement of litigation cases and audits in progress are statutorily excluded from our settlement program. The settlement program is also distinct from our Offer in Compromise Program, which assists taxpayers with undisputed tax liability matters.

In the survey we asked customers questions aimed at finding out how effective our settlement program is in meeting their needs. The responses from the survey were generally very positive and indicated that the program is effective. The survey also identified areas within the program that could be improved.

Further details about the survey are available on our Website. Go to the Tax Professionals Gateway at / and click on Tax News Online.

Here are some of the key survey results:

Overall impression of the settlement program

  • 97 percent indicated that they were treated courteously.
  • 92 percent indicated that the settlement process was clearly explained.
  • 91 percent indicated that negotiations were conducted in a professional manner.
  • 90 percent indicated that contacts were timely.
  • 89 percent were satisfied or very satisfied with the settlement process.
  • 88 percent indicated that they would use the settlement process again. (Four percent indicated that they would not use the process again; eight percent had no opinion).
  • 83 percent indicated that nine months was an adequate time for settlements with occasional extensions when needed. (Of these, five percent wanted shorter periods).

Comparison with other dispute resolution processes

  • 56 percent indicated that the settlement process was better than the appeals process.
  • 41 percent indicated that the settlement process was the same as the appeals process.
  • 3 percent indicated that the settlement process was worse than the appeals process.
  • 61 percent indicated that the settlement process was better than the protest process.
  • 38 percent indicated that the settlement process was the same as the protest process.
  • 1 percent indicated that the settlement process was worse than the protest process.

Settling audits

The respondents split as to whether there should be an opportunity to settle audits: 42 percent said yes, 33 percent said no, and 25 percent had no opinion or left the answer blank.

Program's best features

The best features of the settlement program were:

  • Opportunity to consider pros and cons and resolve accordingly.
  • Opportunity to discuss issues with knowledgeable staff.
  • Response time is often quicker than in other processes.
  • High level of professionalism, knowledge and preparation exhibited by the settlement staff.

Suggestions for improvements

We received numerous comments regarding how the settlement program can be improved. Here are a few of them:

  • Timely Responses.
  • Offer conferences outside Sacramento.
  • Lessen the time between Chief Counsel approval and the Attorney General and Board approval.
  • Combine our settlement program with our offer in compromise program.
  • Provide timelines for action.

More information

For more information about our Settlement Program refer to FTB Notice 2003-2, dated March 14, 2003, available on our Website. (/law/notices/2003/2003_02.pdf)

e-file news for May/June 2003

You can e-file until Oct. 1

You can still e-file your clients' California tax returns during the six-month extension period following the
April 15, 2003, deadline.

We will accept both refund and balance due returns through October 15, 2003. Please remember that any taxes owed must have been paid by April 15, 2003, to avoid any penalties and interest. (Note: The extended due date for the Internal Revenue Service is August 15, 2003.)

Take advantage of e-file's many benefits. If you are not an approved Electronic Return Originator and you want to e-file your clients' returns during the extension period, complete the fillable California Application to Participate in the e-file Program (form FTB 8633) online at /. You'll find it in the Tax Professionals Gateway, under General Information. Once you have completed the application, print, sign, and send it to us. You can also send the completed application via fax to our e-file Help Desk at (916) 845-0287,or mail it to the address shown on the application.

View Payments and Balance Due

Now you can view tax year summaries through our expanded e-service: View Payments and Balance Due. For accounts with a balance due as of the date you access this service, you can view their total tax liability, total payments, credits, voluntary contributions, penalties, fees, and interest.

View Payments and Balance Due is easy to find. Go to / and look for it under Get Answers. The link is entitled: Check my payments or account balance. This service is available 24 hours a day, seven days a week and operates in a secure and confidential electronic environment. To use this service you will need your client's social security number and customer service number. In addition to the new tax year summary information, this service provides information on up to 25 estimated tax payments, estimate transfers, and extension payments waiting to be applied to a tax return and up to 60 of the most recent payments applied to a balance due.

Governor's budget contains mandatory e-file proposal

Governor Gray Davis has, in his 2003-2004 State Budget plan, proposed the implementation of mandatory e-file for tax practitioners who prepare more than 100 state tax returns annually. This measure will reduce tax return processing costs for the state. If you have questions or comments about mandatory e-file, contact us at e-file@ftb.ca.gov. You may also wish to contact your state legislator.

e-file workshops

Our e-file workshops, conducted with the Internal Revenue Service, continue to generate enthusiasm among tax professionals interested in participating in the e-file program. If you haven't participated before, now is a good time to get on board for the next filing season. The workshops are filled with essential information about the IRS and FTB e-file programs. Look for the schedule of upcoming workshops on our Website (/professionals/index.shtml).

We're still listening

We want to provide an e-file program that meets all your needs. To do so we need your input. We recently surveyed 1,200 tax professionals about our e-file program. Here's what we found:

  • Three out of every five respondents said they would likely use e-file to transmit tax returns year-round.
  • Two-thirds of the respondents said they would likely take an online training class to learn about e-file.
  • The business entity tax returns respondents are most interested in using e-file for include: forms FTB 565, California Partnership, FTB, 100, Corporation Income, and FTB 100S, S Corporation.
  • More than one - half of the respondents thought it would be useful if we sent their clients an e-mail message containing basic tax information, along with a reminder to file their tax return.
  • Approximately one - half of the respondents prepared less than 100 personal income tax returns last year.
  • Forty percent did not use e-file last year.

e-file on CD-ROM

Did you receive the e-file CD-ROM we sent you in December, 2002? It contained the 2002 e-file Handbook (FTB Pub. 1345), 2002 e-file Handbook Supplement (FTB Pub. 1345A), e-file Quick References, and other resource information. We replaced the paper versions of these publications with the CD-ROM and we want to know if you prefer the CD-ROM to the paper version. Tell us what you think by sending a message to e-file@ftb.ca.gov. Write CD-ROM in the subject line. If you did not receive a CD-ROM and would like one, send your request to the same email address.

State Reports on Median Income for 2001

The statistical report on page 7 compiled by our Economic Research and Statistics Bureau compares the median income of personal income taxpayers for each California county.

Median income is the point where one-half of the tax returns are above and one - half are below the midpoint. It represents the income reported by a typical California individual or couple.

California taxpayers reported a 10 percent decrease in adjusted gross income on their 2001 state income tax returns.

Californians filed nearly 14.2 million 2001 state income tax returns, reporting nearly $891.1 billion of adjusted gross income. This marks a 10.3 percent decrease from the $993.5 billion reported in 2000.

The statewide median income on all returns was $31,666, an increase of 1.7 percent over the median income amount report for the year 2000.

For joint returns, the statewide median income was $58,341, an increase of 0.6 percent over the 2000 income amount.

Over the past 30 years, the Bay Area counties of Marin, Santa Clara, San Mateo, and Contra Costa have consistently reported the highest median incomes. Marin County again had the highest median income for joint returns, reporting $96,826, a decrease of 4.8 percent from 2000.

The largest percentage gain in median income for all counties was 9.1 percent reported in Alpine County. For joint returns the largest gain was in Sierra County with a 6.1 percent increase.

Editor's Note: Please refer to the attached chart for specific county information.

 

Personal Income Tax Statistics—Comparison By County—2001 Taxable Year
County Population* All Returns - Taxable and Nontaxable Joint Returns Tax Assessed (Thousands)
Number of Returns AGI (Thousands) Median Income Rank Number of Returns Median Income Rank
Alameda 1,475,800 634,697 $39,508,452 $38,582 7 237,022 $74,616 5 $1,700,557
Alpine 1,200 296 12,492 31,999 19 151 51,470 26 355
Amador 35,850 14,226 616,447 31,931 20 7,351 51,346 27 17,983
Butte 206,800 75,889 2,840,131 24,847 46 33,203 44,582 42 80,268
Calaveras 41,500 16,631 744,289 31,780 21 8,771 50,406 30 22,092
Colusa 19,300 7,527 245,245 22,591 56 3,524 36,157 57 6,589
Contra Costa 977,000 419,867 29,672,517 43,012 4 181,601 79,989 4 1,328,640
Del Norte 27,650 7,711 276,576 25,687 40 3,729 44,164 43 6,525
El Dorado 163,900 60,134 3,667,164 39,978 5 32,176 67,175 7 137,390
Fresno 822,000 274,755 10,555,266 24,483 48 112,669 46,265 38 317,417
Glenn 26,850 9,640 318,490 23,085 55 4,718 37,187 56 7,502
Humboldt 127,800 48,012 1,752,510 24,892 45 19,800 46,004 40 48,876
Imperial 149,900 47,692 1,509,899 20,230 58 23,792 30,195 58 34,336
Inyo 18,200 7,952 318,250 27,870 34 3,632 49,691 31 9,113
Kern 681,900 213,751 8,561,726 26,906 38 96,802 48,174 35 237,571
Kings 132,700 35,354 1,241,542 24,795 47 16,241 42,622 47 28,199
Lake 60,200 20,697 760,104 25,741 41 9,504 43,084 46 19,850
Lassen 34,350 9,641 398,922 33,221 15 5,119 51,914 25 10,141
Los Angeles 9,748,850 3,682,470 185,260,578 26,909 37 1,287,740 48,801 33 7,396,751
Madera 130,000 39,646 1,398,387 23,876 53 19,085 41,450 49 35,611
Marin 248,900 119,307 13,070,415 45,869 1 46,118 96,826 1 755,186
Mariposa 17,000 6,288 225,918 26,236 39 3,082 43,372 45 5,587
Mendocino 87,500 34,733 1,337,346 25,340 43 14,762 44,777 41 40,871
Merced 216,400 71,758 2,499,690 24,159 51 32,619 41,450 48 58,434
Modoc 9,450 2,792 91,044 24,927 44 1,484 37,903 55 2,224
Mono 13,150 4,954 214,278 27,285 36 1,897 52,404 23 6,895
Monterey 408,000 147,849 7,394,217 28,994 29 60,449 52,109 24 279,611
Napa 128,100 50,265 3,218,651 35,069 11 21,908 61,850 14 144,057
Nevada 94,200 39,612 1,959,088 32,087 18 19,032 54,640 22 67,687
Orange 2,910,000 1,209,766 72,836,537 34,047 14 506,825 65,057 10 3,010,151
Placer 261,500 130,815 7,786,397 38,719 6 63,787 69,239 6 299,836
Plumas 21,000 7,909 321,460 29,717 28 4,044 47,761 36 8,892
Riverside 1,618,000 576,793 25,078,103 28,804 31 258,434 51,036 28 709,748
Sacramento 1,267,800 514,255 24,385,714 33,012 16 199,818 59,577 17 806,506
San Benito 55,200 21,155 1,113,187 34,694 12 10,024 64,783 11 37,334
San Bernardino 1,766,100 606,752 25,180,114 28,836 30 261,203 50,975 29 653,418
San Diego 2,890,600 1,173,247 64,110,170 31,267 23 475,932 57,925 18 2,551,643
San Francisco 789,600 397,070 29,622,985 37,315 9 103,405 60,635 15 1,637,335
San Joaquin 590,900 213,001 10,441,672 30,711 25 94,345 54,916 20 293,337
San Luis Obispo 252,000 101,058 4,815,226 30,686 26 44,815 55,978 19 166,232
San Mateo 714,500 323,173 33,225,802 44,697 3 128,128 84,367 3 1,950,141
Santa Barbara 405,700 159,792 8,848,558 30,080 27 65,908 54,681 21 366,234
Santa Clara 1,706,400 769,038 66,471,000 45,585 2 310,224 87,781 2 3,561,961
Santa Cruz 258,500 111,596 6,256,350 32,624 17 42,119 64,711 12 259,549
Shasta 168,600 65,338 2,668,890 27,314 35 31,936 46,052 39 78,010
Sierra 3,550 1,255 58,891 31,451 22 641 48,293 34 2,094
Siskiyou 44,650 16,835 571,723 24,068 52 8,422 38,365 52 14,544
Solano 403,100 163,714 8,179,670 37,507 8 70,850 66,443 8 250,846
Sonoma 468,400 204,036 11,129,296 35,322 10 83,293 65,338 9 428,242
Stanislaus 465,600 170,125 7,063,318 28,501 32 77,377 49,348 32 203,363
Sutter 81,000 30,345 1,151,689 26,158 40 14,833 43,930 44 31,796
Tehama 56,500 17,470 571,962 24,354 49 8,626 38,303 54 12,501
Trinity 13,050 4,473 140,930 23,400 54 2,225 38,364 53 3,104
Tulare 375,800 120,413 3,973,387 21,611 57 52,434 39,294 50 98,510
Tuolumne 55,800 21,336 909,347 28,466 33 10,367 47,741 37 28,262
Ventura 773,900 314,511 18,567,738 34,078 13 140,496 64,472 13 745,091
Yolo 174,500 68,440 3,351,668 30,825 24 28,394 59,956 16 118,095
Yuba 61,300 19,705 644,583 24,305 50 9,234 39,024 51 13,425
Resident Out-of-State - 140,923 9,484,893 27,581 - 45,058 55,615 - 499,309
Nonresident - 409,402 21,345,868 154,721 - 214,949 93,373 - 945,685
Unallocated - 24,725 1,106,368 20,558 - 6,415 45,070 - 37,039
TOTAL                  
58 Counties 34,758,000 13,637,562 $759,146,001 - - 5,416,120 - - $31,146,518
All - 14,212,612 $891,083,130 $31,666 - 5,682,542 $58,341 - $32,628,551

* As of July 1, 2001

Interest Rates

For the period of July 1, 2003, through December 31, 2003, the adjusted interest rate on underpayments and overpayments of California personal income taxes will be five (5) percent. The interest on corporation overpayments will be one (1) percent. For past interest rates, go to FAQ #617.