Do you have unfiled personal income California tax returns?
If so, this is a great time to prepare and file original tax returns. Believe or not, the California Franchise Tax Board (FTB) will prepare tax returns (which they call “filing enforcements”) on behalf of taxpayers based on (1) income reported to them by third parties and/or (2) estimated income from a taxpayer’s occupational license. If a tax return is prepared on behalf of a taxpayer, the taxing authority will use the filing status as single or married filing separate. A taxpayer can be married with 5 children, but the FTB filing enforcement will only give the taxpayer credit for one exemption and will not give the taxpayer any deductions. More often than not, if the FTB files a return on behalf of a taxpayer, the taxpayer will owe more tax, penalties and interest than if the taxpayer filed an original tax return. Therefore, it is in the taxpayer’s best interest to file original tax returns.
Once the taxpayer files their tax returns and knows exactly what they owe to the taxing authorities, the taxpayer can request an installment agreement. Note for the FTB, original tax returns have to be filed before requesting an installment agreement. If original tax returns are not filed, and there are FTB filing enforcements instead, the taxpayer can request a “provisional” installment agreement based on the current balances, but must file the original tax returns within 30 days. If the original tax returns are not filed within said time frame, the provisional installment agreement defaults and the taxpayer is back in collections. Note that the Collections Division will collect on the balances due based on the filing enforcements (which is generally more than what the taxpayer would have owed if the taxpayer filed original tax returns).
Do you owe money to the California Franchise Tax Board (FTB)?
If a taxpayer has a balance due to the FTB, the taxpayer can several payment options. One option, of course, is to immediately pay the balance due in full, including penalties and interest. If additional time is needed, a taxpayer can request 90-days to full pay the balance due. However, the FTB will request that the taxpayer make 3 equal monthly payments to the FTB. During this 90-day period a tax lien will not be filed, assuming that a tax lien has not been previously filed. Although, this is a great option for taxpayers that have the ability to full pay, it is not always an available option for all taxpayers.
Another option for taxpayers is to request an installment agreement. When the FTB considers an installment agreement, they must take into account the total balance due, and the amount remaining on the collection statute. Generally, the FTB has 20 years from the date of assessment to collect on an outstanding balance due. For example, if the 2010 tax return was filed in 2015, the FTB will generally have 20 years from 2015 to collect on the balance due. Note that interest and penalties continue to accrue from the date the return was due which is April 15, 2011 (for personal income taxes). Additionally, the FTB will file a state tax lien to protect their interest on the outstanding balance due.
If the taxpayer has a balance due below $25,000, usually the FTB will consider an installment agreement over 36 months without the taxpayer disclosing their financial information. To streamline the process, the FTB will take the total balance due and divide it by a 36-month period. For example, if a taxpayer owes $12,000, the FTB will generally accept a monthly payment of approximately $350 per month. This assumes that all of the tax returns are filed (and assessed), and the taxpayer agrees to have the payments directly debited from their bank account.
If a taxpayer has a balance due above $25,000, the FTB will also consider a payment plan over 36-months and the taxpayer does not have to disclose their financial information. However, many times, the monthly amount to be paid over 36 months is too high for the taxpayer, and the taxpayer cannot afford to make the monthly payments. If that is the case, the taxpayer will be required to complete an Installment Agreement Financial Statement and provide supporting documentation to determine their ability to pay.
The problem however, with disclosing a taxpayer’s financial information to the FTB is that the FTB representative reviewing the information can use their discretion on what expenses are allowable. For example, the FTB allows (based on their discretion) a monthly expense for groceries and the amount allowed varies depending on the number of persons in the household. Once I had an FTB representative who reduced the amount claimed for food and household items because the taxpayer did not purchase the items at Costco or Sam’s Club. The FTB representative claimed that my client had excessive shopping habits. Note that this was an extreme case which was escalated to a manager, but it illustrates how FTB representatives can use their discretion to determine a taxpayer’s ability to pay their back taxes, by reducing the amount of their allowable expenses.
Once a monthly amount is negotiated between the FTB and the taxpayer, the taxpayer must complete a form which includes the agreed upon monthly amount and authorizes the FTB to directly withdraw the monthly payments from the taxpayer’s bank account. It generally takes approximately 60 to 90-days for the direct debit payments to take effect. In the meantime, the taxpayer is required to send manual payments to the FTB. The taxpayer can make a payment by:
- Webpay – to make payment from a checking or savings account, the taxpayer can go to https://www.ftb.ca.gov/pay/credit-card.html to make the payment on-line.
- Credit Card – to make payment with a Discover, MasterCard, or American Express card, the taxpayer can go to https://www.ftb.ca.gov/pay/credit-card.html. The taxpayer will be charged a fee.
- Check or money order – A check or money order must be made payable to Franchise Tax Board and the taxpayer must include their social security number, tax form (i.e. Form 540 for individuals) and tax year (i.e. 2015) on the payment. The payment must be mailed to Franchise Tax Board, P.O. Box 942867, Sacramento, CA 94267-0001.
- Western Union – a taxpayer can make a payment online, by phone, or in person at one of the Western Union locations throughout the world. Note that the taxpayer will be charged a fee.
What if your installment agreement with the FTB defaults, can you request another agreement?
When a taxpayer agrees to an installment agreement, they agree to the following terms:
- Timely make the monthly payments to the FTB – All installment agreements must be set-up as direct debit agreements. This means that the FTB will directly debit a taxpayer’s bank account on a specified due date every month for the amount agreed upon by the taxpayer. Therefore, it is the taxpayer’s responsibility to make sure that there are sufficient funds in the bank account. If the bank account has insufficient funds the day the payment is due, the installment agreement will default due to a missed payment.
- The taxpayer must timely file their future tax returns. If the taxpayer does not file their tax return either by the due date (i.e. April 15th for personal income tax returns) or by the extension to file date (October 15th for personal income tax returns), the installment agreement will default because the taxpayer is not in filing compliance. Note, if the taxpayer has a provisional installment agreement, the taxpayer also agrees to file their past due returns within the next 30-days of the request for the provisional installment agreement, otherwise the agreement defaults.
- The taxpayer must timely pay any balances incurred after the installment agreement was approved. For example, a taxpayer has an installment agreement for the 2013 and 2014 tax years. However, when the taxpayer timely filed their 2015 tax return, the taxpayer had a balance due. To remain in compliance with the terms of the installment agreement, the taxpayer must full pay the balance due on the 2015 return. Otherwise, the installment agreement will default because the taxpayer has incurred a new balance. Note that a taxpayer can incur a new balance from an audit of a prior year tax return and if the additional taxes, penalties and interest are not paid, it defaults the existing installment agreement.
If the terms of the installment agreement are not met, the FTB is making it more difficult for taxpayers to reinstate or renegotiate an installment agreement. For example, if a taxpayer has an installment agreement for 2014, and incurs a new tax liability for 2015, the installment agreement defaults. The FTB representative will request that the taxpayer pay the 2015 tax due to reinstate the installment agreement for the 2014 tax liability, or ask the taxpayer to pay the 2014 tax due, and set-up an installment agreement for 2015 tax due. If the taxpayer cannot pay for the 2014 or 2015 tax liability, the taxpayer may be subject to enforcement action, such as a bank levy or a wage garnishment which the FTB refers to as an Earnings Withholding Order.
