Existing law imposes penalties when a taxpayer fails to timely file an income tax return or fails to timely pay the tax due as shown on, or as required to be shown on, the tax return, unless it is shown that the failure is due to reasonable cause and not due to willful neglect.

This bill, for taxable years beginning on and after January 1, 2019, would require the Franchise Tax Board, upon request by an individual taxpayer, to grant a onetime abatement of a failure-to-file or failure-to-pay timeliness penalty if the taxpayer was not previously required to file a California personal income tax return or the Franchise Tax Board has not imposed a timeliness penalty in the year of the request or any proceeding taxable years, has not previously been granted abatement under this section, the taxpayer has filed all required returns as of the date of the request for abatement, and the taxpayer has paid, or is in a current arrangement to pay, all tax currently due.

Existing law imposes penalties when a taxpayer fails to timely file an income tax return or fails to timely pay the tax due as shown on, or as required to be shown on, the tax return, unless it is shown that the failure is due to reasonable cause and not due to willful neglect.

This bill, for taxable years beginning on and after January 1, 2019, would require the Franchise Tax Board, upon request by an individual taxpayer, to grant a onetime abatement of a failure-to-file or failure-to-pay timeliness penalty if the taxpayer was not previously required to file a California personal income tax return or the Franchise Tax Board has not imposed a timeliness penalty in the year of the request or any proceeding taxable years, the taxpayer has filed all required returns as of the date of the request for abatement, and the taxpayer has paid, or is in a current arrangement to pay, all tax currently due.

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

SB 1082 (Bradford) - Income taxation: timeliness penalty: abatement

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

SB 1082 would allow a first-time penalty abatement program for qualified taxpayers.

Fiscal Impact:

The Franchise Tax Board (FTB) indicates that this bill would result in a General Fund revenue loss of $2.3 million in 2019-20, $9.6 million 2020-21, and $8.4 million in 2021-22. FTB’s administrative costs resulting from the bill have yet to be determined.

Background:

With certain exceptions, California law generally does not automatically conform to changes to federal tax law. On the contrary, the Legislature must affirmatively conform to federal changes. It does so either through (1) individual tax bills to conform to specific federal changes, or (2) as one omnibus bill that provides that state law conforms to federal law as of a specified date (currently January 1, 2015).

Federal and state tax law both impose penalties for (1) failure to file, and (2) failure to pay timely. However, these penalties can be abated if the taxpayer can demonstrate that the failure was due to reasonable cause and not willful neglect. Reasonable cause means that the act occurred despite the exercise of ordinary business care and prudence, and the failure was due to events beyond the taxpayer’s control. Examples include business records being destroyed by a fire, the taxpayer’s mental incompetence, or a dishonored payment due to a banking error.

In California, the failure to file penalty is 5 percent of the tax due after allowing for timely payments for every month that the return is late up to a maximum of 25 percent. The failure to pay penalty is 5 percent of the unpaid tax plus 1/2 of 1 percent each month up to 25 percent of the total unpaid tax. The penalty is imposed regardless of an extension of time to file.

The administrative policy of the Internal Revenue Service (IRS) allows a "first-time" abatement procedure, which requires it to abate these timeliness penalties based on compliance history without making a separate reasonable cause determination. Under the policy, IRS must waive penalties if (1) the taxpayer had not previously been required to file a return, or (2) if no prior penalties have been assessed in the past three years, except the estimated tax penalty. The taxpayer must also file a valid extension for all currently required returns and paid, or arrange to pay under a payment plan, any tax due. Penalty abatement applies only to single tax periods. Neither California law nor Franchise Tax Board (FTB) administrative policy currently allows for a first time abatement program.

Proposed Law:

This bill would permit taxpayers to request abatement (beginning in taxable year 2019) from either the failure to file or the failure to pay penalty on their personal tax return (this option would be in addition to FTB’s reasonable cause request). Upon taxpayer request, FTB must abate the penalty if the taxpayer (1) has not previously been required to file a return or has not previously been granted abatement under this bill, (2) has filed all returns as of the date of the request, (3) has paid in full (or arranged to pay) any taxes, fees, penalties, and interest due with the required returns, and (4) has not been charged with any other timeliness penalties in the calendar year of the request. A previously-imposed timeliness penalty that FTB subsequently abates for reasonable cause would not disqualify the taxpayer for making a request under the first time abatement policy.

Related Legislation:

• SB 375 (Bradford, 2017) would have allowed a taxpayer to request abatement once every four years. The bill was held under submission on the Suspense File of this Committee.
• AB 1777 (Quirk-Silva, 2013-14), was similar to this bill, and would have established penalty abatement authority similar to the federal first-time abatement procedure. This bill would have allowed taxpayers subject to the PITL or Corporation Tax Law to apply for abatement, but specified that a “qualified taxpayer” would mean any corporation with gross receipts of less than one million dollars in the taxable year on which the timeliness penalty is imposed or an individual taxpayer. AB 1777 failed to pass out of the house of origin by the constitutional deadline.

Staff Comments:

This bill would generally conform California income tax law to IRS procedures that allow for relief of select timeliness tax penalties, as specified.

FTB’s revenue estimate is based on its penalty data for failure to file a tax return and failure to timely pay the amount due. On average, FTB assesses $93 million in net penalties annually. The department then grew this amount to $100 million in tax year 2019 to reflect growth in the economy. Of this amounts, FTB estimates that approximately 25 percent, or $25 million, would qualify for the penalty relief proposed in this bill, and would request abatement in tax year 2020. FTB notes that with each year the program is in place, the amount of qualifying penalties would decrease. The estimated penalty relief request amounts would be $16 million in 2021, and $11 million in 2022. Of these amounts, it is estimated that 30 percent would have been collected in the year assessed, 15 percent one year after assessed, and would continue to decline each year thereafter.

-- END --

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Income taxation: timeliness penalty: abatement

Allows a first time penalty abatement program for qualified taxpayers.

Background

Both federal and state laws impose timeliness penalties on individual taxpayers who do not file an income tax return by the requisite due date. There are two types of timeliness penalties: the failure to file penalty and the failure to pay penalty. Both penalties can be abated if the taxpayer can demonstrate that the failure was due to reasonable cause and not due to willful neglect. Reasonable cause means that the act occurred despite the taxpayer exercising ordinary business care and prudence. In other words, the failure was due to events beyond the taxpayer’s control: the taxpayer’s records were destroyed in a fire, or the taxpayer’s dishonored payment was due to a bank error.

In California, if an individual taxpayer fails to file his or her income tax return, then FTB imposes a penalty. For taxpayers who fail to file within 60 days of the filing deadline, the failure to file penalty is the lesser of:

• $135; or
• The amount of tax required to be shown on the return.

For taxpayers who file more than 60 days after the filing deadline, the failure to file penalty is 5% of the tax due. The penalty increases by 5% for each month the return remains unfiled, to a maximum of 25%.

If an individual taxpayer fails to pay the appropriate tax due, he or she can incur a failure to pay penalty. The failure to pay penalty is 5% of the unpaid tax. An additional 0.5% monthly penalty is imposed, up to a maximum of 20% (40 months), for each month the tax remains unpaid. Even if the taxpayer has been granted an extension, FTB imposes the failure to pay penalty if the appropriate amount of tax is not paid by the tax return’s original due date. The aggregate failure to pay penalty cannot exceed 25% of the total tax unpaid.

Federal law has a first time penalty abatement policy. Under the Internal Revenue Service’s (IRS) general authority, taxpayers with a history of compliance can request relief from both the failure to file and the failure to pay penalties. The relief is generally available if the taxpayer:

• Has not previously been required to file a return or has no prior penalties for the preceding three years; and
• Has a valid extension for all currently required returns and has paid, or arranged to pay, any tax due.

It’s important to note that the IRS’s first time penalty abatement policy is separate from the reasonable cause exception. A taxpayer can file for abatement under the first time penalty abatement policy and if it is not granted, the taxpayer can then file for abatement under the reasonable cause exception.

Neither state law nor the Franchise Tax Board’s (FTB) administrative policy currently allows for first time penalty abatement. The author wants to allow taxpayers the opportunity to request abatement of both timeliness penalties in certain circumstances.

Proposed Law

Senate Bill 1082 allows individual taxpayers the opportunity to request abatement from either the failure to file or the failure to pay penalty on their personal tax return. In other words, this bill establishes a state penalty abatement policy similar to the federal abatement policy. This opportunity is provided to California taxpayers in addition to the FTB’s reasonable cause request. Upon taxpayer request, FTB must abate the penalty if:

1. The taxpayer has not previously been required to file a return or has not previously been granted abatement under this bill;
2. The taxpayer has filed all returns as of the date of the request;
3. The taxpayer has paid in full (or arranged to pay) any taxes, fees, penalties, and interest due with the required returns; and
4. The taxpayer has not been charged with any other timeliness penalties in the calendar year of the request. A previously imposed timeliness penalty that FTB subsequently abates for reasonable cause doesn’t disqualify the taxpayer for making a request under the first time abatement policy.

SB 1082 applies to requests for abatement made for the 2019 taxable year and thereafter. Timeliness penalties are imposed on the date the return is filed. Additionally, the bill provides that the Administrative Procedures Act doesn’t apply to any rule, guideline, or procedure FTB prescribes to implement the bill.

State Revenue Impact

SB 1082 results in a revenue loss of $2.3 million in 2019-20, $9.6 million in 2020-21, and $8.4 million in 2021-22.

Comments

1. Purpose of the bill. According to the author, “Many individuals struggle to prepare and pay their state taxes in a timely manner — particularly if they are filing for the first time, or lack the resources to hire help. Recognizing this, SB 1082 grants a common-sense late fee waiver for the first time a Californian fails to file or pay their taxes on time. In doing so, it matches state policy with federal policy. This is a one-time late fee abatement, and all outstanding taxes must still be paid.”

2. Conformity issue. In general, state conformity with federal law promotes greater simplicity and eases the burden of administering complex tax law. However, the abatement program, as authorized by this bill, operates independently of the federal program. Thus, there could be instances where abatement is granted for state purposes but not for federal purposes, or granted for federal purposes but not for state purposes. The independent nature of a state and federal program may actually increase taxpayer dissatisfaction and do little to increase compliance. Is the penalty relief worth the administrative cost as well as possible increased complexity?

3. Purpose of penalties. Both of the timeliness penalties are imposed as a method of increasing taxpayer compliance. SB 1082 allows taxpayers who do not pay their taxes on time to avoid paying their timeliness penalties, providing even less of an incentive for taxpayers to remit money to the government in a timely manner. Even though taxpayers have to pay the appropriate amount of tax due before they could be granted abatement, the state still gets its money late. Without timely paid tax revenue, the state has to borrow money to fund vital public services such as education and public safety. The Committee may wish to consider SB 1082’s effect on taxpayer compliance.

4. Being reasonable. Some taxpayers may not meet the reasonable cause standard for receiving abatement from FTB. Reasonable cause means that the act occurred despite the taxpayer exercising ordinary business care and prudence. An example of a taxpayer not meeting the reasonable cause standard is if a taxpayer does not have sufficient withholding during the year which could be due to an employer’s decision, a midyear raise, or a new job. SB 1082 provides one time relief for taxpayers who make a mistake. While ignorance of the law is no excuse, a taxpayer would still appreciate the relief.

5. Related legislation. On April 17^th, 2017 the Committee passed a similar piece of legislation, SB 375 (Bradford, 2017) on a vote of 7 to 0. The bill later went on to Senate Appropriations where it was held on suspense. The only difference between SB 375 and SB 1082 is that under SB 375, a taxpayer could request abatement once every four years. Under SB 1082, the taxpayer can only request abatement once.

Support and Opposition

(4/18/18)

Support: BOE Member Fiona Ma; California Association of Boutique & Breakfast Inns; California Association of Winegrape Growers; California Beer and Beverage Distributors; California Business Properties Association; California Chamber of Commerce; California Hotel and Lodging Association; California Restaurant Association; California Society of Enrolled Agents; California Tank Lines Inc.; California Taxpayers Association; Chemical Transfer Co.

CompTIA; Family Business Association of California; National Federation of Independent Business; North Orange County Chamber; Orange County Business Council; San Gabriel Valley Economic Partnership; Spidell Publishing, Inc.; Superior Tank Wash Inc.; West Coast Leasing, LLC.

Opposition: Unknown.

-- END --