Existing law requires that any payment required to be remitted to the Franchise Tax Board by an individual pursuant to specified law be remitted electronically in the form and manner prescribed by the Franchise Tax Board if specified conditions are met. Existing law, where payment is required to be made electronically but is made by some other means instead, imposes a penalty equal to 1% of the amount paid, except as provided.

This bill would would, for payments made on or after January 1, 2026, change the penalty for the above-described violations violation to instead be $100 waived for the first violation and $500 for each subsequent violation.

Existing law imposes various taxes, including, but not limited to, taxes on personal and real property, income, the sales of tangible personal property at retail, and the storage, use, or other consumption in this state of tangible personal property purchased from any retailer. Existing law imposes various penalties on certain violations related to these taxes, including, for purposes of income taxes, an additional 5% tax on income tax due for each month or fraction thereof elapsing between the due date of the return and the date on which it is filed, as specified, if the taxpayer fails to make and file a required return.

This bill would state the intent of the Legislature to enact legislation relating to the review and revision of the Revenue and Taxation Code to ensure penalties are commensurate to the violation or violations of that code. The bill would make related findings and declarations.

Date of Hearing: August 20, 2025

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Buffy Wicks, Chair

SBPCA Bill Id:SB 591

Author:(Valladares) – As Amended Ver:July 17, 2025

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill requires, for a payment made on or after January 1, 2026, the Franchise Tax Board (FTB) to provide a first-time penalty waiver to an individual taxpayer that fails to remit a payment required to be made electronically.

FISCAL EFFECT:

1. Potential ongoing General Fund (GF) revenue loss of an unknown amount, potentially in excess of $150,000, by requiring FTB to grant a penalty waiver to an individual taxpayer that must otherwise pay a penalty of 1% of the amount of tax required to be remitted electronically. By potentially decreasing personal income tax revenue, this bill may also decrease Proposition 98 GF spending by approximately 40% of the GF revenue loss (the exact amount depends on the specific amount of the annual Proposition 98 guarantee).
2. Costs of an unknown, but likely absorbable amount, to FTB to update penalty rules.

COMMENTS:

1. Purpose. According to the author:

California’s tax system should encourage compliance, not punish honest mistakes with eye-watering penalties. Under current law, a business that pays its entire tax bill on time – but mails a check instead of sending an electronic transfer – can face a 10-percent surcharge that quickly climbs into six figures. Individuals face a 1-percent hit for the same clerical slip. These penalties dwarf the offense, create distrust, and make California an outlier among states.

This bill is supported by the California Taxpayers Association and tax preparer entities.

1. Electronic Payment Requirements. A taxpayer with a total tax liability exceeding $80,000, or that makes an estimated tax or extension payment exceeding $20,000, is required to remit payments electronically to FTB. A taxpayer may request a waiver from the electronic mandate if certain conditions are met. Otherwise, a corporate taxpayer required to remit payment electronically but that does so via other means is assessed a penalty of 10% of the payment, and an individual taxpayer who does so is assessed a penalty of 1% of the payment. The penalty is assessed unless the taxpayer demonstrates to FTB that the failure to make the payment electronically was for reasonable cause, and not the result of willful neglect. This bill provides that the 1% penalty is automatically waived for an individual taxpayer’s first violation.

Analysis Prepared by: Irene Ho / APPR. / (916) 319-2081

Date of Hearing: July 14, 2025

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Mike Gipson, Chair

SBPCA Bill Id:SB 591

Author:(Valladares) – As Amended Ver:March 26, 2025

SUSPENSE

Majority vote. Fiscal committee.

SENATE VOTE: 38-0

SUBJECT: Taxation: electronic funds transfer: penalties

SUMMARY: Reduces the penalties applicable to taxpayers required to remit payment to the Franchise Tax Board (FTB) electronically but that fail to do so. Specifically, this bill:

1. Contains the following legislative findings and declarations:
   1. It is important to promote and protect the integrity of the California tax system;
   2. It is important that California's tax system is perceived as, and is in fact, fair to all taxpayers;
   3. It is important that violations of the Revenue and Taxation Code (R&TC) are subject to appropriate penalties; and,
   4. It is important that these penalties are commensurate with the violation or violations.
2. Reduces the penalty applicable to a corporate taxpayer required to remit payment by electronic funds transfer (EFT) that makes payment by other means. Specifically, replaces the current penalty equaling 10% of the amount paid with a penalty of $100 for the initial noncompliance and $500 for each subsequent violation.
3. Reduces the penalty applicable to an individual required to remit payment electronically who makes payment by other means. Specifically, replaces the current penalty equaling 1% of the amount paid with a penalty of $100 for the initial noncompliance and $500 for each subsequent violation.

EXISTING LAW:

1. Provides that, with respect to any corporation, specified payments must be remitted to the FTB by EFT if any of the following conditions are met:
   1. Any installment payment of estimated tax made under R&TC Section 19025 or the payment made pursuant to R&TC Section 18604 with regard to an extension of time to file exceeds $20,000; or,
   2. The total tax liability exceeds $80,000. (R&TC Section 19011(a).)
2. Provides that any corporate taxpayer required to remit payment by EFT that makes payment by other means shall pay a penalty of 10% of the amount paid, unless it is shown that the failure to make payment as required was for reasonable cause and was not the result of willful neglect. (R&TC Section 19011(c).)
3. Provides that any corporate taxpayer required to remit payments by EFT may request a waiver of those requirements from the FTB, as specified. (R&TC Section 19011(d).)
4. Provides that payment is considered complete on the date the EFT is initiated, if settlement to the state's demand account occurs on or before the banking day following the date the transfer is initiated. (R&TC Section 19011(e).)
5. Provides that, in the case of an individual, specified payments must be electronically remitted to the FTB, once either of the following conditions are met by an individual:
   1. Any installment payment of estimated tax in excess of $20,000, or any payment made pursuant to R&TC Section 18567 with regard to an extension of time to file that exceeds $20,000; or,
   2. The total tax liability exceeds $80,000. (R&TC Section 19011.5(a).)
6. Provides that any individual taxpayer required to remit payment electronically who makes payment by other means shall pay a penalty of 1% of the amount paid, unless it is shown that the failure to make payment as required was for reasonable cause and was not the result of willful neglect. (R&TC Section 19011.5(c).)
7. Provides that any individual taxpayer required to remit payments electronically may request a waiver of those requirements from the FTB, as specified. (R&TC Section 19011.5(d).)

FISCAL EFFECT: The FTB notes that this bill would not impact the computation of state income or franchise tax. At the same time, the FTB has noted that, by reducing future penalty amounts, this bill would likely result in lost General Fund (GF) revenues exceeding this Committee's suspense threshold of $150,000.

COMMENTS:

1. The author has provided the following statement in support of this bill:

California's tax system should encourage compliance, not punish honest mistakes with eye-watering penalties. Under current law, a business that pays its entire tax bill on time – but mails a check instead of sending an electronic transfer – can face a 10-percent surcharge that quickly climbs into six figures. Individuals face a 1-percent hit for the same clerical slip. These penalties dwarf the offense, create distrust, and make California an outlier among states.

SB 591 replaces those uncapped percentage penalties with a sensible, two-tier flat fee: $100 for a first misstep and $500 for any subsequent ones, unless the taxpayer shows reasonable cause. The new structure still discourages paying by check and directs taxpayers toward the lower-cost Electronic Funds Transfer system, but it eliminates disproportionate, windfall fines that bear no relationship to intent or harm.

This bill aligns enforcement with fundamental principles of fairness, brings California's practice closer to other jurisdictions, and strengthens public confidence in the integrity of our tax administration. Penalties should promote compliance – never overburden taxpayers for a paperwork error.

1. This bill is supported by PwC, which notes the following:

Currently, taxpayers in California who are required to remit payments via the Electronic Funds Transfer (EFT) system risk disproportionately high penalties when they inadvertently remit payments by another method – even if the payment otherwise arrives in full and on time. Specifically, under CRTC Sections 19011 and 19011.5, corporations can face a penalty of 10% on the amount paid, while individuals face a penalty of 1%, without regard to the actual harm or intent.

SB 591 addresses this issue by replacing these percentage-based penalties with a fixed penalty amount set at:

• One hundred dollars ($100) for an initial failure to use EFT, and
• Five hundred dollars ($500) for each subsequent failure, unless it is shown that the failure was for reasonable cause and not due to willful neglect.

By instituting a modest tiered penalty system, the bill preserves the integrity of the EFT requirement while preventing taxpayers from incurring penalties that are excessively punitive. Importantly, the measure provides a safeguard for circumstances in which the failure to pay via EFT was not the result of willful neglect – aligning the state's penalty framework more closely with principles of equity and fairness.

1. The FTB notes the following implementation consideration in its staff analysis of this bill:

This bill does not provide a specific operative date. For clarity, the author may wish to amend the bill to include an operative date to specify application to payments made on or after a certain date.

1. Committee Staff Comments:
   1. General background: A taxpayer whose total tax liability exceeds $80,000, or that makes an estimated tax or extension payment exceeding $20,000, is required to remit electronically all future payments, regardless of the payment type, amount, or the taxable year. Corporate taxpayers that are required to pay electronically but that remit payment by other means are assessed a penalty of 10% of the payment. Individual taxpayers, in turn, who are required to pay electronically but pay by other means are assessed a mandatory e-pay penalty of 1% of the payment. The penalty is assessed unless the taxpayer can show that the failure to make the electronic payment was for reasonable cause and not the result of willful neglect.

The FTB notes that taxpayers can request a waiver from the mandatory electronic payment requirement if:

• • 1. The taxpayer did not make an estimated tax or extension payment in excess of $20,000 for the previous taxable year;
    2. The tax liability for the previous year did not exceed $80,000; or,
    3. The amount paid was not representative of future payments or tax liability.

If the FTB grants a waiver and the taxpayer subsequently meets the mandatory electronic payment requirements, the taxpayer must resume making payments electronically. Certain taxpayers with permanent physical or mental impairment may request a permanent waiver of the mandatory electronic payment requirement.

• 1. When were the mandatory electronic payment requirements enacted? It appears that the mandatory electronic payment requirements for corporations, along with the associated penalty for noncompliance, were originally enacted in 1994, with the passage of AB 3389 (Friedman), Chapter 271, Statutes of 1994. The Legislature enacted the mandatory electronic payment requirements for individual taxpayers with the passage of AB 1389 (Committee on Budget), Chapter 751, Statutes of 2008. According to the Senate Floor Analysis of this budget trailer bill, the FTB estimated that this provision would increase GF interest earnings by $2 million in fiscal year 2008-09 and by $4 million annually thereafter "due to quicker receipt of these funds."
  2. Why is electronic payment beneficial? Electronic payment provides a host of benefits for both taxpayers and tax agencies. Not only are EFT payments considered very safe, but when a taxpayer initiates payment via EFT, there is a clear record of the payment having been made. By comparison, when a taxpayer sends a check by mail, the envelope may be lost or even stolen by bad actors seeking access to information useful in identity theft. Alternatively, envelopes can and often do arrive without a postmark, leading to disputes about the timeliness of payment. EFT payments take less time to post to the state's accounts, which accelerates cash receipts and increases the amount of interest earned. EFT payments also require less handling and processing, thereby increasing tax agency efficiency. As such, for the last 31 years, the state has required corporations with sizable tax payments to avail themselves of EFT. Individual taxpayers with significant liabilities have been required to do so for 17 years.
  3. The Federal Government moves in the same direction: California is by no means alone in moving towards EFT wherever possible. On March 25, 2025, the Federal Government issued Executive Order 14247 to promote operational efficiency by mandating the transition to electronic payments for all Federal disbursements and receipts. In setting forth the purpose of this action, the Executive Order noted the following:

The continued use of paper-based payments by the Federal Government, including checks and money orders, flowing into and out of the United States General Fund [. . .] imposes unnecessary costs; delays; and risks of fraud, lost payments, theft, and inefficiencies. Mail theft complaints have increased substantially since the COVID-19 pandemic. Historically, Department of the Treasury checks are 16 times more likely to be reported lost or stolen, returned undeliverable, or altered than an electronic funds transfer (EFT). Maintaining the physical infrastructure and specialized technology for digitizing paper records cost the American taxpayer over $657 million in Fiscal Year 2024 alone.

• 1. What would this bill do? As noted above, this bill would significantly reduce the penalties applicable to both individual and corporate taxpayers that are required to remit payment by electronic means but that fail to do so for whatever reason. Specifically, this bill would eliminate the percentage-based penalties for both individual and corporate taxpayers and replace them with flat penalties of $100 for the first noncomplying payment and $500 for each subsequent failure to remit payment electronically.
  2. What do California's other tax agencies do? As we move well into the 21^st Century, the FTB is by no means alone is requiring taxpayers with sizable liabilities to make their payments electronically. For example, the California Department of Tax and Fee Administration, which administers the Sales and Use Tax (SUT) Law along with a host of other tax and fee programs, requires electronic payment in multiple situations. Specifically, one must make payment by EFT if:
     1. Your average monthly SUT liability equals or exceeds $10,000 over a 12-month period;
     2. Your average monthly Prepaid Mobile Telephony Services Surcharge liability equals or exceeds $10,000; or,
     3. Your average monthly special tax and fee liability equals or exceeds $20,000 over a 12-month period.

Moreover, the CDTFA notes that if you are required to make payments via EFT and use another means (e.g., check, cash, money order, etc.), you will be subject to the following penalties:

• • 1. Monthly and quarterly tax or fee returns will be assessed a 10% penalty on the taxes or fees due; and,
    2. SUT prepayments will be subject to a 6% penalty.

Thus, if California were to enact this bill and eliminate percentage-based penalties for taxpayers remitting payment to the FTB, it may serve as a precedent for legislation targeting California's other tax agencies and programs.

• 1. Balancing the equities involved: Percentage-based penalties currently apply only to taxpayers with significant income and attendant tax liabilities. In the case of individuals, the 1% penalty applies only to taxpayers with a state tax liability of more than $80,000. Ostensibly, these are the very taxpayers best positioned to hire knowledgeable and competent tax professionals to inform them of an EFT requirement that has been on the books for 17 years. That said, it is not impossible to envision a scenario where a taxpayer is given erroneous advice and submits a check as payment in good faith, only to realize later that this triggered a penalty. In the case of some very high income taxpayers, this penalty may be sizable. For example, an individual making an estimated payment of $20 million by check would incur a penalty of $200,000.

Under this bill, such a taxpayer would only pay a penalty of $100 for making this first-time mistake. One would hope that, after paying this nominal penalty representing a minuscule fraction of their annual tax liability, they would realize that all future payments must be remitted by EFT and comply with the law moving forward.

The problem, however, is that under this bill, the same taxpayer, with full knowledge of their EFT obligation, could make the exact same "mistake" the next year, and the year after that, and only incur a penalty of $500 for each violation. Supporters might contend that no rational taxpayer would intentionally invite additional FTB scrutiny by making a check payment after the first offense. But this only raises the question of why this bill authorizes a de minimis $500 penalty for such repeated errors.

In addition, the Committee may wish to consider whether this penalty structure introduces a perverse incentive for very wealthy taxpayers to pay repeatedly by check because the nominal cost of the $500 penalty is outweighed by the interest earned while funds wait to be credited to the state's accounts. The FTB notes that, in most cases, checks are extracted, deposited, and applied to the state's accounts within two to five days. However, by mid-April, during the FTB's peak workload, this process can take up to two weeks depending on whether a payment must be manually matched to a taxpayer's accounts.

• 1. An alternate approach? The state has actually already grappled with the inherent tension of seeking to provide good-faith actors relief from a penalty for their first mistake while not creating a structure that incentivizes repeated bad acts. It did so by enacting AB 194 (Committee on Budget), Chapter 55, Statutes of 2022. AB 194 enacted a One-Time Penalty Abatement program that authorizes the FTB to provide individual taxpayers a one-time abatement of timeliness penalties. This includes the failure to file penalty (R&TC Section 19131) and the failure to pay penalty (R&TC Section 19132). The one-time penalty abatement is a once-in-a-lifetime abatement and is available only to individuals subject to the Personal Income Tax Law. To that end, the author and Committee may wish to consider whether it would be preferable to do something similar for the EFT penalty, by providing a nominal penalty of $100 for a first time error, and reverting to the normal percentage-based penalties for subsequent failures.
  2. Prior legislation:
     1. AB 1397 (Low), of the 2023-24 Legislative Session, would have modified the electronic payment penalty applicable to individuals by capping the 1% penalty at $25,000 per payment. AB 1397 would have applied to payments made on or after January 1, 2024, and retroactively to any payment made before January 1, 2024 that was, or may become, the subject of a timely filed protest or claim for refund. AB 1397 was not heard by this Committee.
     2. AB 1389 (Committee on Budget), Chapter 751, Statutes of 2008, among other things, required personal income taxpayers with estimated tax or extension payments in excess of $20,000, or total tax liability in excess of $80,000, to remit payment to the FTB by EFT, subject to specified requirements.

REGISTERED SUPPORT / OPPOSITION:

Support

California Society of Enrolled Agents

California Taxpayers Association

PwC

Opposition

None on file

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098

 THIRD READING  

Bill No: SB 591

Author: Valladares (R) and Allen (D), et al.

Amended: 3/26/25

Vote: 21

SENATE REVENUE AND TAXATION COMMITTEE: 5-0, 4/23/25

AYES: McNerney, Valladares, Ashby, Grayson, Umberg

SENATE APPROPRIATIONS COMMITTEE: 6-0, 5/23/25

AYES: Caballero, Seyarto, Cabaldon, Grayson, Richardson, Wahab

NO VOTE RECORDED: Dahle

SUBJECT: Taxation: electronic funds transfer: penalties

SOURCE: Author

DIGEST:

This bill caps at fixed dollar amounts the currently percentage-based penalty for failure to pay electronically for Personal Income and Corporation Tax taxpayers.

ANALYSIS:

Existing law:

1. Requires all Personal Income and Corporation taxpayers with a tax liability exceeding $80,000 in a taxable year, or with an estimated tax payment exceeding $20,000, to remit tax payments by Electronic Funds Transfer (EFT).
2. Permits a taxpayer to request a waiver from the Franchise Tax Board (FTB) for EFT payment requirements under certain circumstances, which FTB can only grant when it determines that the particular amounts paid in excess of the threshold amounts were not representative of the taxpayer’s tax liability.
3. Imposes a penalty of 1% of the Personal Income Tax amount that should have been paid by EFT, unless it is shown that the failure to make payment as required was for reasonable cause and was not the result of willful neglect.
4. Imposes a penalty of 10% of the Corporation Tax amount that should have been paid by EFT, unless it is shown that the failure to make payment as required was for reasonable cause and was not the result of willful neglect.

This bill:

1. Changes the failure to pay electronically penalty for Personal Income and Corporation Tax taxpayers. Instead of 1% for PIT (or 10% for Corporation Tax) of the amount that should have been paid electronically, SB 591 sets penalty amounts for both taxes at $100 for an initial failure and $500 for each subsequent failure.
2. Makes legislative findings and declarations supporting its purposes.

Background

By converting the current percentage-based EFT penalty to one with a fixed dollar amount, SB 591 reduces the sting of a penalty that applies to taxpayers who fail to pay electronically. However, the measure’s benefits can only accrue to those subject to the electronic payment requirement, which only applies to taxpayers with a tax liability exceeding $80,000 in a taxable year or with an estimated tax payment exceeding $20,000. On the other hand, taxpayers are already subject to percentage-based penalties for understatements to deter noncompliance; the EFT penalty is applied only for failures in the manner of payment, not the amount.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Senate Appropriations Committee, “The Franchise Tax Board (FTB) indicates that this bill would not impact the computation of state income or franchise tax. However, by eliminating percentage-based penalties for failing to pay tax liabilities electronically, with substitutes instead set at fixed amounts, the bill would likely result in reduced General Fund penalty revenue relative to current law. The magnitude is unknown, but likely in excess of $50,000 per year. FTB’s administrative costs have yet to be identified.”

SUPPORT: (Verified 5/23/25)

California Society of Enrolled Agents

California Taxpayers Association

PricewaterhouseCoopers, LLP

OPPOSITION: (Verified 5/23/25)

None received

ARGUMENTS IN SUPPORT: According to the author, “Senate Bill 591 ensures that the penalties for certain violations of the California Revenue and Taxation Code (CRTC) are appropriately imposed and are not overly burdensome. It is important to promote and protect the integrity of the California tax system. Further, it is important that California’s tax system is perceived and is in fact fair to all taxpayers. CRTC section 19011, requires that any corporation that is required to makes payments via the Franchise Tax Board’s (FTB) Electronic Funds Transfer (EFT) system to the FTB by EFT but is made by some other means instead, imposes a penalty equal to 10% of the amount paid. CRTC section 19011.5, requires any individual taxpayer who is required to make payments via EFT who remits payment via another method shall be subject to a penalty of 1% of the amount paid. SB 591 would set the penalty at one hundred dollars ($100) for an initial failure to make a payment via the EFT system and five hundred dollars ($500) for each subsequent failure unless it is shown that the failure to make payment as required via EFT was for reasonable cause and was not the result of willful neglect. This will ensure compliance with the EFT payment requirements without creating an unjust burden on taxpayers. It is important that these penalties are commensurate with the violation.”

Prepared by: Colin Grinnell / REV. & TAX. / (916) 651-4117

5/26/25 14:56:26

**** END ****

SENATE COMMITTEE ON

Senator Anna Caballero, Chair

2025 - 2026 Regular Session

SB 591 (Valladares) - Taxation: electronic funds transfer: penalties

Bill Summary:

SB 591 would cap the percentage-based failure to pay electronically penalty for Personal Income Tax and Corporation Tax taxpayers.

Fiscal Impact:

The Franchise Tax Board (FTB) indicates that this bill would not impact the computation of state income or franchise tax. However, by eliminating percentage-based penalties for failing to pay tax liabilities electronically, with substitutes instead set at fixed amounts, the bill would likely result in reduced General Fund penalty revenue relative to current law. The magnitude is unknown, but likely in excess of $50,000 per year. FTB’s administrative costs have yet to be identified.

Background:

Under current law, all taxpayers with a tax liability exceeding $80,000 in a taxable year, or with an estimated tax payment exceeding $20,000, must remit tax payments electronically. Specifically, in 1991, the Legislature first required Corporation Tax taxpayers with specified tax liabilities or estimated payment thresholds to remit tax payments by Electronic Funds Transfer (EFT). To enforce compliance, SB 467 imposed a penalty of 10 percent of the amount that should have been paid by EFT, unless it is shown that the failure to make payment as required was for reasonable cause and was not the result of willful neglect SB 467 was not made applicable to the Personal Income Tax (PIT), even though businesses that are not incorporated, such as sole proprietorships and partnerships, might potentially owe substantial taxes too. In 2008, the Legislature extended the requirement to the PIT, but with a lower penalty percentage of 1 percent of the amount that should have been paid by EFT.

The “failure to electronically pay” penalties are based on a percentage of tax liability owed, and have no cap. Consequently, taxpayers with large tax liabilities who fail to pay by EFT can be subject to significant penalties even though they (1) paid the correct amount of tax by other means, and (2) did so on a timely basis.

Proposed Law:

This bill would change the failure to pay electronically penalty for Personal Income and Corporation Tax taxpayers. Instead of 1 percent for PIT (or 10 percent for Corporation Tax) of the amount that should have been paid electronically, this bill would sets penalty amounts for both taxes at $100 for an initial failure and $500 for each subsequent failure.

Staff Comments:

EFT is generally a lower cost option both for taxpayers to make payments, and for FTB to process them. Generally, taxpayers can ask tax enforcement agencies to cancel penalties if they can show that there was reasonable cause for the failure, including the failure to pay electronically penalty. Generally, reasonable cause means the act occurred despite the exercise of ordinary business care and prudence, and the failure was due to events beyond the filer’s control. Per the Internal Revenue Service internet site, some examples of what may be reasonable cause are (1) fire, casualty, natural disaster, or other disturbances, (2) inability to obtain records, (3) death, serious illness, incapacitation, or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family, and (4) other reason which establish that you used all ordinary business care and prudence to meet your federal tax obligations, but were nevertheless unable to do so.

-- END --

SENATE COMMITTEE ON REVENUE AND TAXATION

Senator Jerry McNerney, Chair

2025 - 2026 Regular

Taxation: electronic funds transfer: penalties

Caps the percentage-based failure to pay electronically penalty for Personal Income and Corporation Tax taxpayers.

Background

Electronic Funds Transfer (EFT) is generally a lower cost option both for taxpayers to make payments, and for the Franchise Tax Board (FTB) to process them. In 1991, the Legislature first required Corporation Tax taxpayers with specified tax liabilities or estimated payment thresholds to remit tax payments by EFT (SB 467, Lockyer). To enforce compliance, SB 467 imposed a penalty of 10 percent of the amount that should have been paid by EFT, unless it is shown that the failure to make payment as required was for reasonable cause and was not the result of willful neglect.

SB 467 did not apply to the Personal Income Tax (PIT) Law, even though businesses that are not incorporated, such as sole proprietorships and partnerships, might potentially owe substantial taxes too. In 2008, the Legislature extended the requirement to the PIT, but with a lower penalty percentage of 1% of the amount that should have been paid by EFT (AB 1839, Committee on Budget).

Currently, all taxpayers with a tax liability exceeding $80,000 in a taxable year, or with an estimated tax payment exceeding $20,000, must remit tax payments electronically. Taxpayers subject to these requirements may request a waiver from FTB under certain circumstances, which FTB can only grant when it determines that the particular amounts paid in excess of the threshold amounts were not representative of the taxpayer’s tax liability.

However, the failure to electronically pay penalties is based on a percentage of tax liability owed, and has no cap. As a result, taxpayers with large tax liabilities who fail to pay by EFT can be subject to significant penalties even though they timely paid the correct amount of tax by other means. The author wants to eliminate the percentage-based penalties for failing to pay by EFT with penalties set to fixed amounts.

Proposed Law

Senate Bill 591 changes the failure to pay electronically penalty for Personal Income and Corporation Tax taxpayers. Instead of 1% for PIT (or 10% for Corporation Tax) of the amount that should have been paid electronically, SB 591 sets penalty amounts for both taxes at $100 for an initial failure and $500 for each subsequent failure. The measure also makes legislative findings and declarations supporting its purposes.

State Revenue Impact

According to FTB, SB 591 would not impact the computation of state income or franchise tax.

Comments

1. Purpose of the bill. According to the author, “Senate Bill 591 ensures that the penalties for certain violations of the California Revenue and Taxation Code (CRTC) are appropriately imposed and are not overly burdensome. It is important to promote and protect the integrity of the California tax system. Further, it is important that California’s tax system is perceived and is in fact fair to all taxpayers. CRTC section 19011, requires that any corporation that is required to makes payments via the Franchise Tax Board’s (FTB) Electronic Funds Transfer (EFT) system to the FTB by EFT but is made by some other means instead, imposes a penalty equal to 10% of the amount paid. CRTC section 19011.5, requires any individual taxpayer who is required to make payments via EFT who remits payment via another method shall be subject to a penalty of 1% of the amount paid. SB 591 would set the penalty at one hundred dollars ($100) for an initial failure to make a payment via the EFT system and five hundred dollars ($500) for each subsequent failure unless it is shown that the failure to make payment as required via EFT was for reasonable cause and was not the result of willful neglect. This will ensure compliance with the EFT payment requirements without creating an unjust burden on taxpayers. It is important that these penalties are commensurate with the violation.”

2. Big miss. By converting the current percentage-based EFT penalty to one with a fixed dollar amount, SB 591 reduces the sting of a penalty that applies to taxpayers who fail to pay electronically. However, the measure’s benefits can only accrue to those subject to the electronic payment requirement, which only applies to taxpayers with a tax liability exceeding $80,000 in a taxable year or with an estimated tax payment exceeding $20,000. On the other hand, taxpayers are already subject to percentage-based penalties for understatements to deter noncompliance; the EFT penalty is applied only for failures in the manner of payment, not the amount.

3. Another way? In 2022, the Legislature enacted “first-time abatement,” largely based on a similar program the Internal Revenue Service administers for federal taxes (AB 194, Committee on Budget). AB 194 applies to requests for abatement made for taxable years beginning on or after January 1, 2022, and applies to individual taxpayers who have:

• Been required to file a California PIT return or received California first-time penalty abatement; and
• Filed all returns and paid or entered into an installment agreement to pay all outstanding PIT liabilities (other than the late filing-payment penalties).

However, first-time abatement in California only applies to failures to file and failures to pay, not to failure to pay by EFT. Instead of capping penalties, the Committee may wish to consider adding failure to pay electronically into the first-time abatement program instead.

4. Being reasonable. Generally, taxpayers can ask tax enforcement agencies to cancel penalties if they can show that there was reasonable cause for the failure, including the failure to pay electronically penalty. However, the circumstances that constitute reasonable cause can be confusing. As a general matter, reasonable cause means the act occurred despite the exercise of ordinary business care and prudence, and the failure was due to events beyond the filer’s control. Per the IRS website, some examples of what may be reasonable cause are:

• Fire, casualty, natural disaster, or other disturbances;
• Inability to obtain records;
• Death, serious illness, incapacitation, or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family; and
• Other reason which establish that you used all ordinary business care and prudence to meet your federal tax obligations, but were nevertheless unable to do so.

Support and Opposition

(4/20/25)

Support: California Society of Enrolled Agents

California Taxpayers Association

PricewaterhouseCoopers, LLP

Opposition: None received.

-- END --