Will California Tax Man Let You Move States?

As reported by Forbes.com:

California’s Proposition 55 extended–through 2030–the “temporary” 13.3% tax rate on California’s high-income earners. It applies to 1.5% of Californians, singles with an income of $263,000, or joint filers with incomes of $526,000. It is the highest marginal tax rate in the nation. And with anticipated cuts in federal taxes in 2017, California’s tax rates may look even higher. And for some people tax-free Nevada, Texas, Washington, and Florida will hold considerable allure.

But fear of being chased by California’s Franchise Tax Board can be real. Fortunately, there is a safe harbor for certain individuals leaving California under employment-related contracts. The safe harbor says that an individual domiciled in California, who is outside California under an employment-related contract for an uninterrupted period of at least 546 consecutive days, will be considered a nonresident unless either:

  1. The individual has intangible income exceeding $200,000 in any tax year during which the employment-related contract is in effect.
  2. The principal purpose of the absence from California is to avoid personal income tax.

The spouse of an individual covered by the safe harbor can qualify too. Return visits to California that do not exceed a total of 45 days during any tax year covered by the employment contract are considered temporary. …

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CA Tax Board Owes Millions to Overcharged Taxpayers

TaxesThe California Franchise Tax Board potentially owes millions of dollars to 27,000 taxpayers who were overcharged interest after applying overpayments from one year to estimated tax payments in the following year. Due to FTB interest miscalculations going back nearly two decades, many more taxpayers may have been overcharged. But they’ll never be reimbursed due to the expiration of the statute of limitations.

How Much is Owed?

The FTB is trying to figure out exactly how much money is owed to about 24,000 individual tax filers and 3,000 businesses still eligible for refunds, and what it will cost the agency to process those claims, FTB Filing Division Chief Anne Miller told the board at its July 21 meeting:

These two interest calculations may impact a limited number of individuals and business entities that meet a set of specific and rare criteria. The criteria are centered primarily around overpayments being transferred or refunded from one particular tax year followed by an additional tax assessment on that same tax year. As a result, our systems may have overcharged interest.

Due to the complexity of the calculations, it’s been quite a challenge for us to determine the fiscal impacts. We estimate that if work was to be done manually on each of these individual accounts, it could take three hours per account. We have enlisted the help of our experts in the Economics and Statistical Research Bureau to help us with these calculations because they are so complex.

About 1,000 of the individual taxpayers are owed for more than one year, placing the total adjustments around 28,000. That equates to 40 FTB staffers working for a year to do the calculations, based on three hours per adjustment if an automated solution isn’t found.

“[W]e believe the adjustments could range from a very minor amount (a few dollars) to thousands of dollars for each account,” said the FTB in its Aug. 3 Tax News. The total amount owed could be in the millions of dollars, according to the California Taxpayers Association, which brought the problem to the attention of FTB management in March.

“CalTax is aware of millions of dollars in miscalculated interest based on what a limited number of taxpayers have told us,” said Gina Rodriquez, CalTax vice president for state tax policy. She continued:

In one case, the FTB overcharged interest by $1 million, and in another case $2 million.

In some of the cases that were reported to us, taxpayers asked the FTB to adjust the interest before their cases went final, i.e., before the taxpayer’s protest, appeal or settlement went final. Taxpayers who had already paid and subsequently discovered the error had to file refund claims to get the interest back if they already paid their assessments. In all cases reported to us, the FTB made the adjustment for the interest miscalculation without any argument, as they knew their calculations were wrong.

When I met with FTB management in the spring to discuss this issue, the FTB acknowledged that their computer system cannot properly calculate interest for taxpayers that fall into the two affected categories.

Origins of Miscalculation

The main category of miscalculation, potentially affecting 26,000 taxpayers, dates back to a lawsuit that May Department Stores Company won in 1996 against the United States for miscalculation of interest on the company’s tax underpayments a decade earlier. The IRS issued a notice in 1997 acquiescing to the court decision.

The complexity of the situation is evident on an FTB web page, which explains that you may be owed a refund under the May Department Stores ruling if:

  • You filed an amended return for additional tax or received a deficiency assessment after the original return was filed for the same tax year, and
  • On the original return, you elected an overpayment transfer to the subsequent year’s estimate tax, and
  • On the subsequent year, the required first quarter estimate payment was less than the requested overpayment transfer amount. The maximum amount of the adjustment is one year of interest on the additional tax or deficiency amount.

The other miscalculation category, known as “corporation interest netting,” may affect about 1,000 businesses that have made a previous refund or payment transfer, then filed a subsequent deficiency or amended return for additional tax with interest for the same tax year.

Thus far fewer of those overcharged are aware that they are owed money. “We’ve received three written requests for interest adjustments as well as a few visits to our website,” Miller told the board. “But our contact center has not reported any phone calls on this issue.”

Time Running Out

The clock is ticking on taxpayers who want to receive refunds. The statute of limitations runs out four years from the date the return was filed if it was filed within the extension period, or one year from the date a payment was made.

FTB plans to avoid this situation in the future. “In order to better serve taxpayers who may qualify for the interest computation adjustments, we have trained our staff to proactively identify cases that meet this criteria as well as put procedures in place to ensure that cases that do meet the criteria proactively receive proper treatment,” said Miller.

Betty YeeFTB Chairwoman Betty Yee, who is also the state controller, was appreciative of Miller’s work. “Thank you for really responding with such a strong focus on just initially identifying the universe [of affected taxpayers], which I know was quite complex,” said Yee. “And now to try to put a fiscal impact around what’s been identified. We look forward to getting that information in September.”

In her capacity as state controller, Yee directed the FTB on April 8 to review the interest miscalculations. “These rulings deal with complex interest calculations that affect very few taxpayers. However, these taxpayers are entitled to receive refunds of allowed overpaid interest,” Yee said. “As chair of the FTB, I work to ensure the rights of taxpayers are protected.”

FTB Board Member Jerome Horton said, “I want to thank the department for being proactive on this and engaging. It’s very important. As always we have stepped up and done so.”

Miller is scheduled to provide an update at the board’s next meeting on Sept. 22.

Originally published by CalWatchdog.com

CA Tax Board Delays Refunding Taxpayers’ Money

California’s Franchise Tax Board is taking too long to complete audits and resolve taxpayers’ refund claims, protests and appeals, costing businesses hundreds of millions of dollars, according to the California Taxpayers Association.

Gina Rodriquez, vice president of state tax policy for CalTax, voiced her concerns last week at the FTB’s annual Taxpayers’ Bill of Rights hearing. The Bill of Rights, which was enacted by the state Legislature in 1988, spells out the rules and procedures for tax audits and taxpayer protests and appeals of those audits. The protest is the first step in the audit appeal process.

The FTB has consistently shortchanged taxpayers by not following its own guidelines, according to Rodriquez. “CalTax brought this to your attention last year,” she told the tax board. “However, the FTB seems to have fallen a bit short in addressing our concerns. I want to go through this with you again this year.

“Taxpayers’ liabilities should be determined within a reasonable timeframe. Once determined, any overpayment should be returned to them as quickly as possible. The FTB’s high compliance backlog seems to violate the spirit of the Taxpayers’ Bill of Rights. The FTB must do more to avoid any conflict between protecting revenue and providing due process to taxpayers.”

FTB guidelines require the agency to resolve tax protests in two years. But in 2013 it was taking FTB auditors nearly twice as long, 44 months, to close out protest cases, according to Rodriquez.

Report

The 2014 annual report to the Legislature by the FTB’s Taxpayers’ Rights Advocate Steve Sims has also noted the problem. “For the past several years, I have raised concerns about the additional time and resources required for taxpayers to protest an assessment,” said Sims in the report.

“I am pleased that the focused efforts by our Legal and Audit Divisions to resolve older protests resulted in a 200 percent increase in the number of cases resolved, and an overall reduction of 12 percent in the total number of protest inventory cases. Yet, for the business-entity, docketed protests resolved by our Legal Division for FY 2013/14, only 47 percent of the tax at issue was sustained. This once again raises concern about the number of revisions to assessments that occur once a business entity taxpayer elects to file a protest.”

The FTB has also fallen short in responding in a timely manner to taxpayers’ claims for refunds, said Rodriquez.

“The FTB has in its inventory more than 500 refund claims that are more than three years old,” she said. “This is an unacceptable number, as it means hundreds of millions of dollars – and maybe more, we don’t have a real good handle on the dollar amount – [withheld from] the taxpayers’ working capital, stifling economic advancement.”

CalTax doesn’t know how many hundreds of millions of dollars in potential refunds are being tied up by the FTB’s delays because “the FTB does not have a complete picture of its refund claim inventory,” said Rodriquez. “[FTB] staff is unable to tell CalTax whether the inventory has increased since the 2008 enactment of the Large Corporate Underpayment Penalty, also known as the LCUP.

“The 20 percent LCUP is quite punitive. So punitive, in fact, that taxpayers are forced to file their original returns with an overpayment to avoid the imposition of the penalty. Then they subsequently have to file refund claims for legitimate issues. The LCUP does ultimately increase government and taxpayer costs due to the increased workloads in the returns. The legislative purpose in enacting the LCUP in the 2008 budget negotiations was to raise revenue. And I ask: Has that goal been reached?”

No interest

Adding insult to injury, the FTB does not pay interest on the refunds, potentially allowing the state to use the money for years, itself accruing interest, without any compensation to the taxpayers.

Noting the IRS resolves federal tax refund claims much quicker, Rodriquez asked, “Why can’t the FTB have a dedicated staff to work those refund claims? We know we have a problem; let’s address it with some resources.”

FTB is also dragging its heels on audits, according to CalTax.

“Delayed audits have led to unfair audit practices,” said Rodriquez. “FTB is not completing many multi-state and high-level audits in a timely manner. In addition, CalTax members have reported a growing trend among auditors not to process overpayment issues before the audit closes. Some auditors request that taxpayers file a claim for a refund to address the overpayment issue for the same year that it’s under audit. This not only violates the published audit guidelines, but it worsens the high [backlog] inventory problem we have with refund claims.”

In addition, the FTB is taking too long to resolve appeals, she said. “Taxpayers deserve to have their appeals heard within a reasonable time frame. As years pass with a pending appeal, interest accrues, the audit file becomes stale, taxpayers die, key witnesses move on or become unavailable. Additionally, taxpayers lack any guidance for the years subsequent to the years under appeal.”

Concerns

Sims acknowledged CalTax’s concerns, but said the FTB is working to improve its performance, despite not having enough staff members. “[M]any of those issues have been raised in my annual report to the Legislature,” he said. “But I also want to talk to the effort the department has made in terms of trying to fix some of the problems. I’ve been working with our audit and legal division on this issue for more than the two or three years it’s been raised – more like five years. And I do want to say a lot has been done in terms of improving the process.

“One of problems regarding the protest inventory – she’s correct, it’s taking too long, in my opinion. But at the same time, they have reduced the volume of protests. I don’t know that we would have been able to do both at the same time because of the limited resources. Resources are somewhat limited. There is a resource issue that really needs to be addressed.”

Another reason for tax disputes taking longer to resolve is that they tend to be more complex than in prior years. “Taxpayers are becoming a lot more sophisticated,” he said. “The issues that are getting filed on these claims, they are full-blown audit-type issues. They require experienced resources. The department has taken certain steps to involve attorneys in the process a lot earlier to try to assist in handling these types of issues.”

Issues

Board Member Jerome Horton would like more information on the causes of the delays. “Why don’t we set up a meeting so I can have an opportunity to take a look at these in a little more detail,” he said. “I would like to have the department delineate those items that are systemic, those that are institutional and then those that are resource-type issues. If we are having a resource issue, we should consider requesting additional resources to be able to address those.”

A tax concern was also raised by Lynn Freer, president of Spidell Publishing, which provides publications and seminars for tax professionals. She said California tax law differs from federal tax law concerning the Affordable Care Act, which she dubbed “the Accountants’ Crying Act.” That lack of conformity can complicate taxes for self-employed filers who receive an insurance premium credit in 2014 only to find out they have to pay the credit back in 2015 because their income turned out to be too high to qualify for the credit.

“There are all sorts of technical issues involved,” said Freer. “So we would like to request guidance. We would like a rapid resolution. But one step further, it would be nice to have conformity. If we were to automatically conform to federal law, it would be much easier for these taxpayers. Unfortunately, folks who are involved in this premium credit are typically going to be lower-income taxpayers. They are least able to afford to pay folks to figure these things out, or least able to handle problems when they arise later.”

The FTB board did not respond to her request for Obamacare tax clarification.

This article was originally published by CalWatchdog.com