BILL ANALYSIS AB 2177 Page 1 Date of Hearing: April 12, 2010 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Anthony J. Portantino, Chair AB 2177 (Beall) - As Amended: March 23, 2010 Majority vote. Fiscal committee. SUBJECT : Administration of income taxes: Franchise Tax Board: electronic communication. SUMMARY : Authorizes the Franchise Tax Board (FTB) to implement an alternative communication method that, at the request of a taxpayer, would allow FTB to communicate with the taxpayer electronically. Specifically, this bill : 1)Authorizes FTB, by regulation, to develop an alternative communication method with taxpayers that would do all of the following: a) Allow FTB, at the request of a taxpayer, to provide an electronic notification, e.g., an email, to the taxpayer stating that a notice, statement, bill, or other communication, which is required or authorized under Revenue and Taxation Code (R&TC) Part 10 (commencing with Section 17001), Part 10.2 (commencing with Section 18401), or Part 11 (commencing with Section 23001), has been posted to, or updated on, the taxpayer's online account. b) Allow taxpayers to file electronically a protest, notification, and other communication to the FTB in a secure manner, using the FTB's website. c) Specify that a taxpayer must designate a preferred electronic communication method if the taxpayer wishes to communicate with the FTB electronically. 2)Provides that sending electronic notification to a taxpayer pursuant to his/her request does not constitute a violation of R&TC Sections 19542 and 19542.1. 3)Prohibits the usage of the alternative communication method for any notice, statement, bill, protest, or other communication between the FTB and a taxpayer prior to January AB 2177 Page 2 1, 2013, or prior to the successful implementation of the Taxpayer Folder as a component of the FTB's Enterprise Data to Revenue (EDR) project, whichever is later. 4)States that any notice, statement, bill, protest, or other communication between FTB and a taxpayer pursuant to the alternative communication method shall be treated as if it were mailed by United States (U.S.) mail, postage prepaid. 5)Takes effect on January 1, 2011. EXISTING FEDERAL LAW requires the Internal Revenue Service (IRS) to mail correspondence to a taxpayer at the taxpayer's last known address and provides that the "last know address" is the address that appears on the taxpayer's recently filed federal tax return, unless the IRS has been given clear and concise notice of a different address. In addition, prior to mailing correspondence to any particular taxpayer, the IRS may access the U.S. Postal Service National Change of Address (NCOA) database to update the taxpayer's last known address. While existing federal law allows taxpayers to submit returns and payments electronically, the IRS explicitly informs taxpayers that it does not communicate with taxpayers regarding their accounts electronically. EXISTING STATE LAW defines "the taxpayer's last known address" as the address that appears on the taxpayer's last return filed with the FTB, unless the taxpayer has provided the FTB clear and concise written or electronic notification of a different address or the FTB has an address that it has reason to believe is the most current address for the taxpayer. A Notice of Proposed Assessment and final deficiency notice issued after January 1, 2008, require a postmark (which is defined as a postal marking made on a letter, package, or postcard indicating the date when the item is delivered to the U.S. Postal Service). FISCAL EFFECT : According to FTB, this bill will not impact state income revenue. COMMENTS : 1)Author's Statement . The author states that, "AB 2177 would allow the FTB, at a taxpayer's request, to send a message to the taxpayer (or their authorized representative) that a bill, AB 2177 Page 3 notice, or statement can be retrieved by the taxpayer through the secure FTB website in lieu of mailing the notice by U.S. postal mail. "Using secure authentication procedures, taxpayers would have the option of accessing electronic communications through FTB's website. The notice would be considered received by the taxpayer when the communication is transmitted in the manner as previously designated. No confidential information would be transmitted electronically within the communication. "The bill would allow the FTB to reduce postage costs, go "green" by cutting down on paper mail, and improve efficiencies in tax administration workloads, all while providing the same level of services. The option for electronic notification also ensures that taxpayers who move frequently will be given a timely receipt of FTB notices. "Should AB 2177 pass this legislative session, the operative date for the provisions would begin on January 1, 2013." 2)The Purpose of this Bill . According to FTB, the sponsor of this bill, existing state law prohibits FTB from providing electronic correspondence to taxpayers who, otherwise, would prefer to communicate with FTB electronically. AB 2177 resolves this problem by authorizing FTB to offer taxpayers the option of communicating electronically and to send an electronic notification to taxpayers when information has been posted to, or updated on, their secure online accounts. The notification would provide information guiding the taxpayer to log into the secure folder on the FTB Internet website. AB 2177 would also allow a taxpayer to file a protest, notification, or other communication with FTB in an electronically secure manner. This bill would reduce FTB's postage, paper, and processing time, would permit taxpayers to address any tax issue quickly and conveniently, and would, therefore, improve efficiency in tax administration. 3)Background . Receiving notices from a tax agency in a timely fashion is critical to taxpayers since a failure to respond may cause the taxpayer to forfeit certain rights and may result in an increase in the taxpayer's tax liability. Under current federal law, the IRS is required to send notices to the taxpayer's "last known address." Pursuant to federal regulations, the address that appears on the taxpayer's most AB 2177 Page 4 recently filed federal tax return is considered the taxpayer's last know address, unless the taxpayer notifies the IRS of a different address. Under certain conditions, updated address information received from the U.S. Postal Service NCOA database will be considered the taxpayer's last known address. Similarly, under California law, any notice mailed to a taxpayer is sufficient to satisfy the due process requirement, if it is mailed to the taxpayer's last known address. The "last known address" rule places responsibility on the taxpayer to notify the tax agency of any change of address, and there is no requirement that the taxpayer actually receive most of those notices. However, if the tax agency has reason to believe that the address previously provided by the taxpayer is no longer correct, the agency has a duty to exercise reasonable diligence to ascertain the correct address. According to the FTB, it issues approximately 17 million bills and notices each year to taxpayers that include notices in response to returns filed, collection notices for unpaid liabilities, filing enforcement notices when returns are not filed, and notices related to audit activities of taxpayer returns. Some notices are merely correspondence regarding a pending matter, but many have legal significance. Under existing law, FTB is not able to mail these notices electronically, even if the taxpayers receiving the notices would have preferred electronic communication. In addition, a Notice of Proposed Assessment and final deficiency notice issued after January 1, 2008, require a postmark, and thus, cannot be mailed electronically. 4)The "EDR" Project . Currently, a taxpayer or his/her representative may obtain from the FTB the taxpayer's limited confidential information by accessing "MY FTB ACCOUNT" on the FTB's Web site. The taxpayer must use his/her social security number and the customer service number to log into the account, which contains certain information about the taxpayer, including the taxpayer's estimated tax payments, extension payments, recent payments, a summary of the last 10 tax years, California wage and withholding information, and FTB-issued 1099-G and 1099-INT information. According to the FTB's analysis of this bill, under the EDR project, the FTB plans "to reconfigure its existing computer AB 2177 Page 5 systems to implement service-oriented architecture and improve the efficiency of existing processes." The "Taxpayer Folder" is one of the components of the EDR project; it will contain all of the relevant information regarding a particular taxpayer. Specifically, it will contain the account data, address data, and account history data for each taxpayer and will include an historical record of every notice or bill issued to the taxpayer. The Taxpayer Folder, which will be accessible online by all taxpayers and their authorized representatives, is expected to be completed by January 1, 2013. The EDR project is scheduled to be fully implemented by December 31, 2016. 5)Operative Date vs. Effective Date . AB 2177, if enacted, will be operative on or after January 1, 2011. However, the alternative communication method authorized by this bill will not apply to any communication between the FTB and a taxpayer that takes place before January 1, 2013, or until the Taxpayer Folder component of the "EDR" project is successfully implemented, whichever is later. The Committee staff notes that neither "Taxpayer Folder" nor "EDR" project is defined in this bill. Further, since the phrase "successfully implemented" may mean different things to different people, this bill, effectively, delegates to the FTB the legislative authority for determining the effective date of the "successful implementation" and of this bill. The Committee staff suggests that this bill be amended to include the definitions of all of the abovementioned terms. Alternatively, since the EDR project is not scheduled to be completed before January 1, 2013, the Committee may wish to postpone the consideration of this bill until the project is completed and the FTB has the required capability to implement the provisions of this bill. 6)Is Electronic Mail Secure ? It is well known that one's most private message can be read by others as it travels through the Internet. It appears that the "Taxpayer Folder" would allow taxpayers, who would like to communicate with the FTB electronically, to file a protest, notification, or submit other information to the FTB in a secure manner. It is unlikely, however, that taxpayers would have access to a secure channel that would allow them to receive confidential information safely. This bill provides, therefore, that electronic notification sent to the taxpayer will contain no confidential information and will only inform the taxpayer AB 2177 Page 6 that a notice, statement, bill, or other communication is available for viewing in his/her online secure account on the FTB's website. 7)Would the Electronic Notification Satisfy the Due Process Standard ? When the government takes an action against an individual that directly deprives that individual of a life, liberty, or property interest, the Due Process Clauses of the U.S. and California Constitutions require the government to abide by two discrete due process standards: substantive due process and procedural due process (U.S. Constitution, Amends. V, XIV; California Constitution, Art. I, 7). The two main elements of procedural due process are a) adequate notice, and, b) a meaningful opportunity to object. (See, e.g., Memphis Light, Gas and Water Division v. Craft (1978) 436 U.S. 1, 13; Mullane v. Central Hanover Bank & Trust Co., (1950) 339 U.S. 306, 313-14). The U.S. Supreme Court has ruled that "[a]dequate notice under the Due Process Clause has two components. It must inform affected parties of the action about to be taken against them as well as of procedures available for challenging that action." (Atkins v. Parker, (1985) 472 U.S. 115, 152 (citing Memphis Light, Gas and Water Division v. Craft and Mullane v. Central Hanover Trust Co.). Under existing federal and state tax laws, the adequate notice requirement is met when the IRS or the FTB, whichever is applicable, mails the actual notice to the taxpayer at the taxpayer's last known address. This bill, however, would allow FTB to send an electronic notification to the taxpayer, albeit with his/her consent, informing the taxpayer that a notice, statement, bill or other communication is available for viewing in the taxpayer's limited access secure folder on the FTB's website. As discussed, the notification itself will not contain, for security reasons, any substantive information about any action to be taken by the FTB against the taxpayer. To view the actual notice, statement, or bill that does contain such information, the taxpayer will need to access his/her online folder on the FTB's website. Nevertheless, such a notice, statement, or bill will be treated as if it has been mailed to the taxpayer by U.S. mail, postage prepaid. Thus, a question arises as to whether sending electronic notification, which does not contain information about the future government action or procedures available for challenging that action, would satisfy the due process requirement and whether posting the actual notice in the AB 2177 Page 7 taxpayer's online account may be treated as "mailed" for those purposes. REGISTERED SUPPORT / OPPOSITION : Support Franchise Tax Board (sponsor) California Taxpayers' Association Opposition None on file Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916) 319-2098