This blog entry will focus on the various techniques that the California Franchise Tax Board (FTB) use to collect on outstanding liabilities.There are a number of ways that a taxpayer could end up owing the FTB. Generally it is due to either: (1) filing a return and not paying the amount owed in full; (2) the FTB files a substitute for return on your behalf; or (3) you owe as a result of an audit and possibly lead to FTB collections.
When it comes to unfiled returns, the FTB will often file a return on your behalf. This is known as a substitute for return. The FTB bases the substitute for return it prepares off of information provided by both the IRS as well as California licensing agencies. This means, if you received tax documents such as a W-2 or 1099, the FTB will receive a copy of it. If you are a licensed professional such as a real estate agent, the FTB will also often include income that they believe you earned. This amount is based off of what an average person with your specific license generally makes.
Prior to filing a substitute for return, the FTB will send a demand to file letter. This letter informs you that the FTB has some questions regarding why you did not file your return for a specific year, and they also advise you to respond as to why you did not file, or in the alternative, provide a copy of your return. If you fail to respond to this letter and the FTB files a substitute for return, you will be assessed with a 25% demand to file penalty. Unlike most penalties, this penalty is assessed before applying any payments or credits. Therefore, you may owe penalties and interest even if your tax return shows that a refund is due. If you are in this situation you should file your returns immediately. If the FTB has already filed a return on your behalf, it most likely did not accurately reflect your income, and therefore if you file a correct return to replace the FTB prepared return, you will likely lower your liability.
Once you owe the FTB money, they have the right to start collection action. FTB collections may include: filing a lien, levying a bank account, garnishing your wages, and interception of funds owed to you by other states or the federal government. Taxpayers have a variety of options when dealing with the California Franchise Tax Board. These options include: (1) paying the liability in full; (2) entering into an installment agreement and paying the liability off over a course of months or years; (3) settling your liability through an offer in compromise; or (4) establishing that a financial hardship prevents you from paying your liability. Assuming that you cannot pay in full, you will need to either provide financials to show your ability to pay via an installment agreement, or submit an offer in compromise.
With installment agreements, the California Franchise Tax Board will look at your income and expenses. The FTB only allows certain expenses, and often times you will need to prove up specific expenses (for example mortgage payments, vehicle payments, and health insurance payments). The FTB will determine the difference between your income and expenses and set up an installment agreement for this amount. If your expenses exceed your income, the FTB will place your account on financial hardship, and you will not be required to pay at that time (they will review your financials at a later date). Offer in compromises will be covered in a different blog entry, however the concept is you offer all of the equity in your assets plus some of your future disposable income. Much like an installment agreement, with an FTB offer in compromise, the FTB will require you to prove up your expenses. With both installment agreements and offers in compromise you will be required to provide three to six months of bank statements. The California Franchise Tax Board will securitize the taxpayer’s bank statements to confirm that the monthly income deposited in the account is the same as the income reported on the financials.
If you do not work with the California Franchise Tax Board, there are a number of ways the FTB can collect from you involuntarily. Generally this is through either a wage garnishment or a bank levy. If you have experienced either of these, you have options. When a wage garnishment is issued, the California Franchise Tax Board orders your employer to pay over 25% of your earnings, however if you make less than $942.50 per month, the FTB will not take any funds. With a bank levy, the FTB orders the bank to pull money from the taxpayers’ bank account and to send it to the FTB. With both wage garnishments and bank levies, you have options.
With wage garnishments, you can provide financials to the FTB and request that they lower the garnishment amount to what you can afford (the difference between your monthly income and expenses). With both levies and wage garnishments, your bank/employer will hold on to the funds for ten business days, after which the money will be sent to the FTB. During this ten business day time period, if the taxpayer can prove that the funds are needed and that the levy/wage garnishment is causing a financial hardship, the FTB may agree to release some or all of the funds.
The most important thing to remember when it comes to dealing with FTB collections is to face the situation head on. While it can be nerve racking to deal with the FTB, failure to do so may result in involuntary collections. While the FTB can be aggressive, they are willing to work with taxpayers, and the earlier you attempt to work something out, the less aggressive the FTB will be.
Please keep in mind the information and advice presented in this blog is not intended to be used as formal legal advice. Contact a tax professional for personalized tax advice pertaining to your specific situation. While we try and answer all parts of the question when we write our blogs, sometimes there may be some left unanswered. If you have any questions about your problems with the IRS, SBOE, FTB, or BOE, or tax law in general, call RJS Law at (619) 595-1655.