Tax News July/August 2004
- FTB permanently closes three public service lobbies
- Intent and action needed to change residency
- Ask the Advocate: Tax Gap
- California's Tax Gap
- FTB closes abusive shelter hotline; opens new email address
- FTB's secure online services save you time
- New e-file signature option on 2004 returns
- Oct. 15 is right around the corner
- Get answers fast with Secure Electronic Communications
- With Web Pay, paying taxes has never been easier
- First year of mandatory e-file a success
- Check Website for e-file workshops
- Tax e-news: Free service gets breaking news from FTB to you.fast
- FTB to begin assessing withholding at source information return penalties
- State's median income up slightly in 2002
FTB permanently closes three public service lobbies
The Long Beach, Van Nuys, and West Covina public service lobbies will permanently close on July 1, 2004, due to budget constraints. If taxpayers need further assistance, they can:
- Visit our Website at: www.ftb.ca.gov.
- Call the telephone number located on their billing notice.
- Call our toll-free number at (800) 338-0505.
- Visit one of these field offices:
|Los Angeles Field Office
300 S. Spring Street
Los Angeles CA 90013
|San Diego Field Office
7575 Metropolitan Drive
San Diego CA 92108
|Oakland Field Office
1515 Clay Street
Oakland CA 94612
|San Francisco Field Office
121 Spear Street
San Francisco CA 94105
|Sacramento Field Office
3321 Power Inn Road
Sacramento CA 95826
|Santa Ana Field Office
600 W. Santa Ana Blvd.
Santa Ana CA 92701
Intent & Change in Residence
Your clients, long-time California residents, inform you they intend to change their California residency status later this year. How would you advise them regarding their future residency change?
You first need to understand that California considers the terms "domicile" and "residence" as two distinct concepts. "Domicile" defines the one location with which for legal purposes a person maintains the most settled and permanent connections, the place where they intend to remain and to which, whenever absent, they intend to return. The term "residence" defines the place where a person maintains their closest connections.
In order for your clients to change their domicile to a new location outside California, they must:
- Abandon their California domicile.
- Physically move to and reside in the new location.
- Intend to remain in the new location permanently or indefinitely.
Intent alone is not enough to change California domicile. In a recent decision, Homer E. Noble v. Franchise Tax Board, the 2nd Appellate District of the California Court of Appeal provided guidance in this area. The opinion states, "A resident's intent to move unsupported by physical acts is not the determinative factor as to whether a taxpayer has changed his or her residence or domicile for tax purposes."
The Court cited numerous physical acts in determining the Nobles remained domiciled in and residents of California during the time period at issue. The Court's opinion illustrates the importance of considering all the facts and circumstances of a person's particular situation when determining that person's residency status.
In applying the Court's opinion, your clients' physical acts must demonstrate they severed their California connections, physically moved to and resided in their new location, and intend to remain in their new location permanently or indefinitely. Their physical acts must also demonstrate they changed their California residence by establishing and maintaining their closest connections in their new location.
Ask the Advocate: Tax Gap
The tax gap - the difference between what taxpayers owe and what they voluntarily pay or what is detected and collected, has grown into a $6.5 billion a year problem for California and has recaptured the attention of lawmakers. The tax gap is now generating considerable buzz in the tax professional community, too.
The tax gap is not a new phenomenon. The Internal Revenue Service has been measuring its impact since the 1970s; but it is now in the spotlight due to the state's burgeoning budget shortfall.
Besides lost tax revenue, the tax gap creates an unfair advantage for tax cheats. Those who do not pay their fair share of taxes unfairly shift the state's financial burden to the backs of honest taxpayers who do. It is not a victimless crime.
We have to reduce the tax gap, but we cannot do it alone. For millions of taxpayers/clients, you are the most influential source of tax information.
An amnesty program for individuals and business entities (Assembly Bill 2203) and increased penalties are just two of the possibilities lawmakers are considering using to help close the tax gap. Whatever they decide, you undoubtedly will play a key role. Prepare yourself by learning more about the tax gap and by getting involved. Look for tax gap events in your area and share your ideas and concerns with your fellow tax professionals and us. We will continue to provide you Tax News and frequent tax gap updates on our Website, www.ftb.ca.gov.
In this issue of Tax News we kickoff our tax gap series with the basics of the tax gap - what it is, what causes it, and our strategy for reducing it.
What is the tax gap?
The income tax gap is defined as the difference between what taxpayers owe and what they voluntarily pay or we detect and collect.
What causes the tax gap?
Individuals and business entities create the tax gap when they:
- Underreport (or over deduct from) their income (80 percent of the federal tax gap). Examples include failing to report income, hiding barter and cash transactions.
- Fail to file required tax returns (10 percent of the tax gap based on federal estimates).
- Underpay their tax owed (10 percent of the tax gap based on federal estimates) - Examples include failing to pay a balance due with a tax return and minimizing withholding of required taxes through false claims.
Individuals who do not fully report their income make up about three-fourths of the tax gap. According to the IRS:
- Wage earners whose wages are subject to tax withholding report about 99 percent of their income.
- Self-employed individuals who formally operate businesses other than farms, only report about 68 percent of their business income.
- Self-employed informal suppliers report an estimated 19 percent of their business income.
Business entities make up the remaining one-fourth of the tax gap:
- Small corporations tend to mirror the compliance behavior of self-employed individuals.
- Unreported income is the biggest compliance problem among small corporations.
- Noncompliance and underreporting occurs in large corporations primarily as a result of differing interpretations of the tax code. The corporation may interpret the law one way, and, upon audit, we interpret it another way, and as result, we recommend adjustments to the corporation's tax liability.
Contractors who make cash payments to their employees; families who pay cash to household employees such as nannies, tutors, housekeepers, and landscapers; unlicensed contractors who usually work for cash; waitresses and waiters who conceal their tips; professionals who trade or barter services with one another; and people involved in illegal activities such as drug pushers and prostitutes all contribute to the tax gap.
How big is the tax gap?
For the 2001 tax year (most recent information available), the IRS estimates the national tax gap at $255 billion.
The overall federal noncompliance rate is estimated to be 15 percent of all taxes administered by the IRS, including personal and corporate income tax, estate tax, excise tax, and employment tax. For income taxes administered by us, a cursory calculation that assumes California's “noncompliance rate” is proportional to the federal rate would produce an estimate of a state income tax gap of about $6.5 billion per year.
Although not addressed here, California’s tax gap, in addition to the estimated $ 6.5 billion for income taxes, include taxes and fees owed to the state but unpaid annually, such as:
- Sales and use taxes administered by the Board of Equalization.
- Employment taxes administered by the Employment Development Department.
How do you reduce the tax gap?
Reducing the tax gap will require a balanced approach of enforcement, taxpayer education, and taxpayer service:
- Find unreported income, assess it, and collect the taxes due.
We receive more than 220 million records from employers, banks, the IRS, and other financial information sources annually. We sort through them seeking to identify individuals and business entities that are generating income and not accurately filing their returns or not filing them at all.
We are looking at other information sources and tools that will help us detect noncompliance activities. Using new enforcement tools and information sources will help level the playing field for those taxpayers that do honestly file and pay. A business that properly pays their taxes is at a financial disadvantage when the business next door plays the tax roulette game and does not pay their state and federal taxes. Similarly, the policeman that is paid through wages (99 percent income reported) and files and pays is at a disadvantage when competing against an informal supplier (19 percent income reported) for the purchase of a family home.
- Encourage nonfilers to pay their fair share of taxes in the future.
Lawmakers have authorized us to impose penalties, interest, and fees against individuals and business entities that do not report or underreport their income. We can impose late filing, underpayment, demand, frivolous return, and accuracy-related penalties. In the case of business entities that are doing business while out of compliance with the tax laws, we can not only impose penalties, but also suspend the corporation's rights, powers, and privileges.
Lawmakers, in the past, have also authorized us to operate an amnesty program as a way to encourage nonfilers to come into compliance, and to remain in compliance once they do.
This year, State Controller and Franchise Tax Board Chair Steve Westly co-authored AB 2203 (Chu), a bill that would create an amnesty program for taxpayers who have failed to file income tax returns, underreported reported income on a previously filed income tax return, or failed to file taxes previously assessed. The bill would be effective on January 1, 2005. The amnesty program would only apply to taxable years beginning before January 1, 2003.
"Tax amnesty can make the difference between preserving services and putting them on the budget chopping block," said Westly.
We recently concluded a highly successful amnesty program aimed at taxpayers participating in abusive tax shelters. Called the Voluntary Compliance Initiative, it allowed abusive tax shelter participants to file an amended return, pay the tax and interest associated with the abusive tax shelter, and not be assessed any penalties. We were authorized to use an expended regimen of penalties we could assess, and to demand broader reporting requirements for abusive tax shelter investors, promoters, tax advisors, and tax preparers involved in abusive tax shelters. The VCI ran from January 1 through April 15, 2004. In that short time it brought more than 750 individuals and 370 businesses into compliance. These taxpayers reported more than $1.3 billion in taxes owed.
In 2002, we identified eligible taxpayers with certain high-risk collection accounts and offered those taxpayers the opportunity to satisfy an unpaid tax liability by paying the tax in full and receiving a waiver of interest, penalties, and fees. This interest and penalty waiver program, also known as the Revenue Acceleration Project, operated from October 2002 though June 30, 2003 and it generated $32 million in tax revenue.
In 1984, we administered an amnesty program aimed at individuals who failed to report or underreported income. The program ran for about 92 days and produced about $154 million in tax revenue and interest.
If the amnesty bill passes, we must educate the public and motivate tax cheats to take advantage of it as their last chance to avoid trouble.
- Educate taxpayers about the advantages of voluntarily compliance and the cost associated with involuntary compliance.
Our primary objective is to make sure that, as many people as possible are aware of the tax gap, its effects on us all, and what we're doing about it. You can help by explaining to your clients the seriousness of the tax gap problem and by sharing with them the information we provide.
What happens next?
California's tax gap is a chronic societal problem and it is growing. According to State Controller Steve Westly, “the first step in closing the budget gap should be collecting the taxes already on the books. Before we raise taxes or cut vital services, let’s make sure everyone is paying their fair share.”
Closing the gap will require decisive, effective action. That is why the Controller has proposed expanding our income matching, audit, collections, and nonfiler identification programs; and for reinstating our questionable wage withholding and misdemeanor enforcement programs.
He has also called for using new audit modeling techniques and information sources to identify non-filers and underreported income, and for implementing additional penalties for filing false returns or failure to pay taxes, file returns, or provide required information.
He has also called on the Legislature to consider a number of new steps to reduce tax fraud, including proposals to identify taxpayers and corporations failing to file returns, create a reward program for informants who report tax violations, and to bar unscrupulous tax practitioners from doing business.
This is just the beginning of our campaign to reduce the tax gap. As things evolve look for us to increase our education and outreach activities. For more information, check out our Website, www.ftb.ca.gov (enter the keywords tax gap), and Tax News Online.
To track AB 2203, the amnesty bill, go to the Bill Information Webpage at www.leginfo.ca.gov.
FTB closes abusive shelter hotline; opens new email address
On May 17, we ended our Voluntary Compliance Initiative Hotline and canceled the special voluntary Compliance Initiative email address. We have established a new email address for abusive tax shelter queries.
The Voluntary Compliance Initiative ended April 15. It provided taxpayers, who used abusive tax shelters or transactions to underreport their income or tax liability, the option to amend their returns and obtain a waiver of various penalties. The hotline and email address were initially created to provide quick answers to your questions regarding participation in the initiative.
From now until September, all calls to our Voluntary Compliance Initiative Hotline will automatically transfer to our toll-free service number (800) 852-5711. Any emails sent to the old email@example.com address will be automatically forwarded to the new abusive tax shelter email address, TaxShelter@ftb.ca.gov.
For information about our abusive tax shelter program, go to our Website at www.ftb.ca.gov, keywords: abusive tax shelter.
Get answers fast with Secure Electronic Communications
Don't spend your time waiting on the slow mail process – join the over 260 tax professionals and individuals using our fast Secure Electronic Communications system! It's free, available 24/7, and easy to use. It allows you to exchange confidential documents with us without compromising your client's privacy or security.
All you need is a browser that supports 128-bit SSL encryption and the latest virus protection software. To get started, simply tell your Franchise Tax Board Audit or Legal contact that you want to use our Secure Electronic Communications system. We will initiate the registration process and send you information about how to use the system.
New e-file signature option on 2004 returns
We are adding electronic signature options to our e-file signature procedures. Many e-filers have requested we mirror the Internal Revenue Service and allow taxpayers and tax practitioners to sign using a personal identification number (PIN). Beginning January 2005, we will accept electronic signatures using the Self-Select PIN and Practitioner PIN methods.
In addition to the new electronic signature options you will still have the option to use the California e-file Return Authorization (form FTB 8453).
Look for more information on this subject in the next edition of Tax News and soon on our Website www.ftb.ca.gov.
Oct. 15 is right around the corner
You still can file your clients' returns electronically through October 15, 2004.
If you have clients who still have not yet filed and you have been thinking about joining the e-file program, now would be a good time. You can see how the program works without the stress of the April 15 deadline and your clients can take advantage of the benefits of e-file. Benefits include:
- Acknowledgement of receipt. You and your clients will not have to worry about whether we received their returns before the October 15 deadline, because we provide an electronic acknowledgement as soon as we accept their return.
- Faster refunds. If your clients are getting refunds, they can have it electronically deposited into their bank accounts.
- Electronic funds withdrawal. Clients with a balance due can authorize us to debit their bank accounts on a specified date for the amount due.
See the difference e-file can make in your business. Complete and submit the California e-file Program Enrollment Form (Form FTB 8633), online at www.ftb.ca.gov. To locate, use the key words: join e-file. There's nothing to mail. You will be enrolled within 48 hours and generally can begin submitting e-file returns at that time. You will receive a confirmation letter and program information from us by mail within seven days.
FTB's secure online services save you time
In 2003, we sent over 130,000 correction notices regarding estimate payment discrepancies to taxpayers with professionally prepared returns. You can avoid the hassle for this type of correction notice by taking one small step prior to preparing their returns.
Verify your clients’ estimated tax payments online before you prepare their returns with our View Payments and Balance Due service. This service can also be used to view recent payments applied to a balance due, the current balance due, and a summary of each balance due tax year for personal income tax accounts.
It’s easy to use. Your clients (or you, with your clients’ permission) only need their Franchise Tax Board Customer Service Number (CSN) and Social Security Number (SSN). The CSN is the key to unlocking the many secure online services we offer.
You or your clients can retrieve their CSN with our online CSN service. The online CSN service requires only your client’s Social Security Number and a shared secret from their original 2002 California tax return.
Clients expecting refunds can see the status of their refund by checking with us instead of contacting you. They can do this online using our Refund Status service. The service will let them know that we received their current year return and the approximate day they can expect to receive their refund. By directing your clients to our Website, you may reduce calls to your office.
Go to www.ftb.ca.gov and check all the e-services we provide.
With Web Pay, paying taxes has never been easier
Your clients can pay their personal income tax bill for the 2003 tax year when they e-file or through our Website using Web Pay. Both methods work much like any other online bill payment system or electronic funds withdrawal request.
When you e-file your clients' 2003 tax returns, you can conveniently schedule electronic funds withdrawal requests for any or all of their 2004 estimated tax payments. Your software will prompt you to specify the withdrawal date and the amount of the estimated tax payments and will display the information on your client's California e-file Return Authorization (Form FTB 8453). Be sure to check if your software offers the electronic funds withdrawal feature for estimated tax payments.
With Web Pay, taxpayers log in to this secure service using their Social Security Number and Customer Service Number (CSN). They then simply enter their bank account information, the amount they need to pay, and the date they want the payment made. We withdraw the funds from their bank account on the date they specify. For balance due returns and extension payments, taxpayers should select a date on or before April 15 to avoid penalties and interest.
Your clients can use Web Pay to arrange for automatic withdrawal of their estimated tax payment from a bank account, up to one year in advance. They can also use Web Pay to make a tax bill payment, extension payment, or payment for prior years’ taxes.
To cancel any electronic funds withdrawal or Web Pay payment, your client must call our e-Programs Customer Service Unit at (916) 845-0353 at least two business days before the scheduled payment date.
For more information on the payment options available, go to www.ftb.ca.gov and search for: payment options.
First year of mandatory e-file a success
We want to send a quick note of thanks to acknowledge all of your hard work in complying with the mandatory e-file law this first year. We know it presented many challenges but your can do attitude and willingness to work with us made the first year of mandatory e-file a success and at the same time saved the state millions of dollars. Way to go!
If you still need to get on board and enroll in the California e-file program, it's not too late. Go to the e-file enrollment page of our Website at www.ftb.ca.gov. We accept enrollment forms year-round.
Need more information? Our Website, www.ftb.ca.gov, is your best source for information about California's mandatory e-file. We are constantly updating the Frequently Asked Questions Webpage with answers to questions we receive.
If you still have a question after reviewing our Frequently Asked Questions, please be sure to contact our e-Programs Customer Service Unit at 916-845-0353, or email us at firstname.lastname@example.org.
Check Website for e-file workshops
Collaborating with the Internal Revenue Service, we’re developing great new workshops for tax practitioners. The workshops will include what you need to know to get your e-file office off the ground and use both agencies’ free electronic services. You will receive information from the IRS, FTB, and tax practitioners who are experts in e-file. If you haven't participated in prior years, now is the time to get on board.
The schedule of workshops will be posted to our website, www.ftb.ca.gov, in the near future. Just search for: e-file workshops.
Tax e-news: Free service gets breaking news from FTB to you…fast
If you have not yet signed up for Tax e-News, our free email service, you most likely missed the recent tax gap symposiums hosted by Spidell Publishing and us, and, you probably weren't’t among the tax professionals who were on the ground floor when we announced the start of our Voluntary Compliance Initiative.
When fast-breaking news about key legislation such as Assembly Bill 2203, the Amnesty Bill, becomes available, Tax e-News subscribers will be among the first to know and the first to act on behalf of their clients.
These are just a few examples of the type of information we provide in Tax e-News. How much more late-breaking news can you afford to miss?
Tax e-News is free, easy to use, relevant, and because we know how busy you are, non-intrusive. We intentionally make our bulletins simple and straightforward. We don’t bog down your computer with unessential attachments; instead we give you the news first then we tell you where, and how you can get more detailed and comprehensive information, usually from our Website, www.ftb.ca.gov. In other words, we let you choose how much information you need and how you want to read it.
We maintain a strict no-spam policy. We don’t send it and we don’t want to receive it either. For these reasons we attempt to verify every subscription request. When you sign up for Tax e-News we take an additional security measure by sending you a confirmation e-mail. This extra step:
- Helps us ensure that your email server is compatible with ours so that that you can receive our bulletins.
- Makes it tougher for a third party to put you on our mailing list without your permission. We do not want to send e-mail to you without your permission.
If you have not already signed up to receive Tax e-News, what are you waiting for? Do so now and start receiving official information about California income tax, mailed directly to your desktop. The service is free and you can subscribe as many times as you like (it is not uncommon to have more than one email account). Tax e-News subscribers also receive, free of charge, the electronic version of Tax News. You will not only receive your Tax News free, but you will also get it first, since we load it to our website several days before we mail the print version.
Here's how to subscribe to Tax e-News:
- Address an email message to email@example.com.
- On the subject line, type the following phrase: subscribe ftbtaxnews. Be sure to put a space between the two words. (If possible, do not insert your auto signature)
- Send the email.
Within minutes you will receive a confirmation message from the FTB listserver:
Your request to add the mailbox to the list 'FTBTaxNews' has been forwarded to the list owner for approval. The number of commands processed successfully was 1.
Within 48 hours you will receive another email message from the FTB listserver:
You are now subscribed to the Franchise Tax Board's Tax News email service.
If you have questions about your subscription, contact the Tax News Helpdesk at (916) 845-7070 or send an email to firstname.lastname@example.org
To leave the list at any time, send email to ListServerAdmin@ftb.ca.gov with this command: unsubscribe FTBTaxNews
Tax e-News will arrive in your in basket with the from address CSB mailserver and the title FTB Tax e-News on the subject line. If you are using a spam filter, be sure to add our address, CSB mailserver, to your address book and be sure to make any other adjustment necessary to allow you to receive Tax e-News.
Changing your email address? First re-subscribe using your new email address. Then, unsubscribe your old address using the instructions provided in this article.
Tax e-News works hand in hand with our Website, www.ftb.ca.gov. You can always find instructions and hyperlinks to Tax e-News there. Go to www.ftb.ca.gov , click on Tax News Online, and look for the subscriptions Webpage. If you need help subscribing to Tax e-News, call the Tax News Helpdesk at (916) 845-7070.
FTB begins assessing withholding at source information return penalties
In July we began mailing notices of our intention to assess penalties for failure to file correct or timely information returns and statements regarding withholding at source.
The notices are a follow up to letters we sent in November 2002 to all identified Form 592-B withholding agents informing them of our intent.
Revenue and Taxation Code Section 18662 requires any person making California source income payments to nonresidents to withhold California income or franchise tax if the payments are for any of the following:
- Services performed by independent contractors,
- Sales of California real estate,
- Estate income,
- Trust income or
- Partnership income.
The withhold agent must report the withholding information to the payee and us. A four-part form is used for this purpose. The form that must be filed with us is an information return. The two forms that must be provided to the payee are information statements.
The forms and due dates for filing information returns and statements regarding withhold at source activity are based on the nature of the transaction. For more information or to request forms, go to our Website, www.ftb.ca.gov, Keywords: withhold at source.
Or call us at:
From within the United States (toll free)……... (888) 792-4900
From outside the United States (not toll-free) . (916) 845-4900
We comply with the American with Disabilities Act. Persons with hearing or speech impairments please call TTY/TDD (800) 822-6268.
Email: email@example.com (non-confidential email)
Fax: (916) 845-9512
State's median income up slightly in 2002
Four Bay Area counties reported the highest median income while the median income of all state returns rose slightly in 2002, according to our Economic Research and Statistics Bureau.
The statewide median income on all returns was $31,734, an increase of 0.2 percent over 2001’s median income amount. For joint returns, the statewide median income was $57,996, a decrease of 0.6 percent from 2001.
Median income is the point where one-half of the tax returns are above and one-half are below the midpoint of the range of values. Median income represents the income reported by a typical California person or couple.
Californians filed nearly 14 million 2002 state income tax returns, reporting $860.9 billion of adjusted gross income. This is a decrease of 3.4 percent from the 2001 tax year's reported $891.1 billion.
Over the past 31 years, the Bay Area counties of Contra Costa, Marin, San Mateo, and Santa Clara have consistently reported the highest median incomes. Marin County recorded the highest median income for joint returns, reporting $92,481, a decrease of 4.5 percent over 2001. Santa Clara County ranked second with $82,150, while San Mateo County ranked third with $81,259, and Contra Costa County ranked fourth with $78,670.
Los Angeles County taxpayers filed 25.9 percent of all 2002 income tax returns in California. They reported median incomes of $27,164 for all returns, and $48,798 for joint returns, ranking 39th and 33rd respectively.
The largest percentage gain in median income for all counties was 6.8 percent, reported in Alpine County. For joint returns, Alpine County again reported the largest increase of 8.4 percent.
For specific county information for 1999, 2000, and 2001, data, go to our Website, www.ftb.ca.gov and do a keyword search for median income.