BILL ANALYSIS
SB 402
Page 1
Date of Hearing: July 6, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
SB 402 (Wolk) - As Amended: April 28, 2009
Majority vote. Fiscal committee.
SENATE VOTE : 23-16
SUBJECT : Franchise Tax Board: administration: financial
institution record match program.
SUMMARY : Requires the Franchise Tax Board (FTB), in
coordination with financial institutions, to operate a Financial
Institution Record Match (FIRM) System, which would allow FTB to
match its list of delinquent tax debtors against the financial
institutions' customer records. Specifically, this bill :
1)Requires the FTB, in coordination with financial institutions
doing business in California, to operate the FIRM program to
match a list of delinquent tax debtors prepared by the FTB
against the customer records of financial institutions.
2)Authorizes FTB to prescribe rules and regulations necessary or
appropriate to implement FIRM system, including all of the
following:
a) A file matching structure for FTB and financial
institutions or their data processing agents;
b) An option for financial institutions without the
technical ability to process the data or hire a data
processing agent to forward customer information to FTB to
perform the match;
c) Authority for the FTB to exempt a financial institution
from the requirements of the FIRM program if FTB determines
that the financial institution's participation would not
generate sufficient revenue to be cost effective; and,
d) Authority for the FTB to suspend the FIRM requirements
for a financial institution if the financial institution
provides FTB with a written notice from its supervisory
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banking authority that the financial institution is
undercapitalized, significantly undercapitalized, or
critically undercapitalized, as defined by Federal Deposit
Insurance Corporation (Regulation 325.103(b)(3), (4), and
(5), or National Credit Union Association Regulation
702.102.
3)Requires financial institutions, subject to the FIRM
requirements, to provide to the FTB, on a quarterly basis, the
name, record address, social security number or taxpayer
identification number for each delinquent tax debtor
identified in their customer records.
4)Limits the first data file created by the FTB under the FIRM
program to 600,000 data records and specifies that the number
of tax debtor records included in a subsequent data file may
not be increased by more than 600,000 records.
5)Exempts the FIRM system from the provisions of the California
Act to Financial Privacy Act (Government Code Chapter 20 of
Division 7 of Title 1).
6)Specifies that criminal sanctions apply to any state employee,
or a Member, of the FTB who uses the information provided
under the FIRM program for any purpose other than the
collection of delinquent tax or non-tax debt referred to FTB
for collection.
7)Prohibits financial institutions from disclosing to a
depositor or an accountholder that his/her name has been
submitted to FTB, except as otherwise provided by law.
8)Provides that a financial institution may not be held liable
for furnishing information to the FTB, as required by FIRM,
for failing to disclose to a depositor that his/her name and
information was supplied to the FTB, or any other action taken
by the financial institution in good faith to comply with the
program.
9)Authorizes the FTB to institute civil proceedings to enforce
this bill.
10)Allows FTB to impose a penalty of $50 per each report not
provided by a financial institution if the financial
institution willfully failed to comply with FIRM, unless the
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failure was due to reasonable cause. Limits to $100,000 the
total amount of penalty that may be imposed on that financial
institution for all such failures during a calendar year.
11)Defines the term "account" as any demand deposit account,
share or share draft account, checking or negotiable
withdrawal order account, savings account, time deposit
account, or money market mutual fund account, regardless of
whether the account bears interest.
12)Defines the term "financial institution" as a depository
institution, an institution-affiliated party, a federal or
state credit union, or any benefit association, insurance
company, safe deposit company, money-market fund, or similar
entity authorized to do business in this state.
13)Defines the phrase "delinquent tax debtor" as any person
liable for any income or franchise tax or other debt referred
to the FTB for collection, including tax, penalties, interest,
and fees, where the tax or debt, including the amount, if any,
referred to the FTB for collection remains unpaid after 30
days from demand for payment by the FTB, and the person is not
making current timely installment payments on the liability
under an agreement.
14)Requires FTB, upon receipt of an invoice from a financial
institution, to reimburse the financial institution for its
actual costs incurred in implementing FIRM. Limits the amount
of reimbursement to $2,500 for start up costs and to $250 per
calendar quarter for data matching costs.
15)States that the implementation of the FIRM program is
contingent upon an appropriation of funds and is not operative
until 120 days after the date the funds are appropriated.
16)Applies to persons that are delinquent tax debtors on and
after the effective date of this bill.
17)Provides that no reimbursement to local agencies is required
for a specified reason.
EXISTING LAW :
1)Creates the Financial Information Data Match (FIDM) program,
which requires financial institutions to match their customer
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records against a list of child support debtors. The
information received through FIDM may not be used for any
purpose other than child support collection.
2)Provides that financial institutions may comply with the FIDM
requirements by either sending its depositor information to
the FTB or matching the names themselves in-house or through a
contract with a data management firm.
3)Authorizes FTB to use several collection tools in order to
collect delinquent tax liabilities, one of which is an Order
to Withhold (OTW), which could be issued to any third person
in possession of funds or properties belonging to the debtor.
Once a name from the child support obligors list matches a
name on the financial institution's customer records, the FTB
issues an OTW to the financial institution. The financial
institution must freeze the taxpayer's assets, hold the assets
for 10 days, and then remit to FTB all cash or cash
equivalents necessary to meet the amount owed. If the
financial institution is in possession of any assets other
than cash or cash equivalents, it must hold those assets,
notify FTB, and await further instructions.
4)Prohibits FTB from collecting against taxpayers with income
tax debts who also have child support debts.
5)The California Right to Financial Privacy Act (Act) protects
the confidential relationship between financial institutions
and their customers, and prohibits unlawful inspection by, and
disclosure of customers' financial information to,
governmental entities, unless certain exceptions are met.
Criminal search warrants and subpoenas are two examples of
exceptions. Provides that the Act supersedes any law that
appears to violate the provisions of the Act, unless that
other law specifically provides that the Act does not apply.
6)Prohibits FTB from disclosing any confidential taxpayer
information, unless specifically authorized by law.
FISCAL EFFECT : According to FTB staff, this measure, due to
increased tax collections, will result in an annual gain of $22
million in fiscal year (FY) 2010-11, $60 million in FY 2011-12,
and $99 million in FY 2012-13, plus some increases in non-tax
debt collections. In addition, FTB staff estimates that the
implementation of this measure would cost $3.9 million in FY
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2009-10, $7.2 million in FY 2010-11, and $5.3 million in FY
2011-12.
COMMENTS :
1)Author's statement . The author states that, "In today's times
of fiscal strife, where key public services face tremendous
cuts and law-abiding taxpayers pay higher sales and income tax
rates than ever before, the state must do a better job of
employing modern collection techniques and information
technology to collect uncollected taxes due. SB 402 presents
such a step by requiring financial institutions to match its
customer records against the FTB's database of individuals
with final tax delinquencies. Tax delinquents are often very
smart - moving money from account to account before the state
can catch them. SB 402 is a smart approach - it allows FTB to
share data with banks and credit unions to identify depositors
with unpaid tax obligations and quickly issue orders to
withhold, resulting in the state collected delinquent taxes
before tax cheats can evade collections again. Banks and
credit unions already perform this data matching to collect
outstanding child support, and SB 402 builds on this
infrastructure by helping enhance tax collections without an
unworkable administrative difficulty for financial
institutions. Several other states use data matching for
income tax delinquencies, and there's never been a more
crucial time to update its efforts to collect outstanding
taxes."
2)Purpose of this bill . According to the sponsor, this bill
would permit FTB, in a timely and efficient manner, to
identify and levy on previously unknown deposit accounts held
by debtors to collect outstanding income tax debts and non-tax
debts.
3)When do taxes become delinquent ? A tax becomes delinquent if
it is unpaid at the time that it is "due and payable". (R&TC
Section 19221). The definition of "due and payable" varies,
depending on the type of debt. Generally, a tax is "due and
payable" when the amount of tax is established on the FTB's
records (posting date). Thus, if a taxpayer files a return
but does not pay the tax, that tax becomes delinquent on the
date when the FTB staff makes a note of that amount in its
records (but no earlier that the payment due date if the
taxpayer files a return prior to the due date). For a
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Jeopardy Assessment, the tax becomes delinquent upon mailing
of the notice, and for all other assessments, the tax is
delinquent on the date the assessment is final.
There is a due process procedure in place for the FTB to notify
individuals of his/her tax liability and the opportunity for
the individual to respond or dispute the amount, depending on
whether they filed a tax return. If the taxpayer filed a tax
return but has not remitted the tax, the FTB will send a
billing invoice to the taxpayer requesting the amount of tax
"due and payable". If the taxpayer has not filed a tax return
and neglected to report income, the FTB sends a Filing
Enforcement Letter to the individual specifying his/her
estimated tax liability. If the taxpayer has not responded to
that letter, the FTB provides the individual with a Notice of
a Proposed Assessment (NPA) and allows him/her 60 days to
protest the amount or respond. An NPA may also be sent to a
taxpayer that had filed a tax return but was audited by the
FTB. If the taxpayer fails to pay his/her tax liability, the
FTB may send the case to collections. Generally, prior to
starting the collection process, the FTB will mail the
taxpayer up to three notices of action: Statement of Taxes
Past Due, Income Tax Due, and Final Notice Before Levy, before
filing a tax lien against an individual's property or levying
and seizing property.
4)Collection of delinquent taxes . Under both federal and state
income tax laws, in general, once a tax debt becomes
delinquent, a tax lien automatically arises by operation of
law for that amount. A tax lien is a claim upon real and
personal property for the satisfaction of a debt. For federal
purposes, a tax lien exists as long as the delinquency exists
or until it becomes unenforceable due to the 10-year statute
of limitation on collection. Current state law carries a
20-year statute of limitations on the collection of tax debts.
For state purposes, a state tax lien exists for 10 years.
The Notice of State Tax Lien is recorded with a county
recorder's office or the Secretary of State and stays in
effect until the liability is satisfied and a Release of State
Tax Lien Notice is filed with the county or Secretary of
State.
Before collection actions are taken on a delinquent tax account,
the FTB mails a Notice of Collection Action. This Notice
describes the tax liability, the taxpayer's rights to contest
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the liability, the consequences of non-compliance, options
available for the taxpayer to resolve the account and the
deadline to avoid collection actions. If the taxpayer does
not respond to the Notice by initiating a payment arrangement,
paying the liability, or taking other steps to resolve the
account, the FTB is allowed to collect delinquent tax
liabilities through various collection tools, including an OTW
and Earnings Withholding Orders for Taxes (EWOTs). A EWOT is
a specific form of continuing wage garnishment that allows FTB
to collect a set portion of the employee's earnings, not to
exceed 25% of disposable income. If no wage information is
available, the FTB will issue an OTW, which is a demand to a
third person in possession of funds or properties belonging to
the taxpayer to pay over such funds to FTB. The term "person"
includes banks or others indebted to the taxpayer. If FTB has
no wage or bank information with respect to a particular
delinquent taxpayer, it may issue a Notice of State Tax Lien.
The recording of the Notice establishes a public record of the
existence of the state tax lien against all real and personal
property belonging to the taxpayer. Once a state tax lien has
been recorded, it can be renewed in 10-year increments for a
maximum of up to 20 years.
5)The FIRM program . Financial institutions are already familiar
with the FIDM program, which has been successful in detecting
individuals who owe child support. As of January 1, 2009, the
Department of Child Support Services (DCSS) assumed full
responsibility for administering the state's child support
program. However, the DCSS contracted with the FTB to
continue running the FIDM program since the FTB has
information about individuals who are delinquent on their
child support payments. However, DCSS issues its own EWOTs
and OTWs.
FIRM is modeled after FIDM and closely resembles that program.
According to the FTB, California's annual income tax gap is
approximately $6.5 billion. The FIRM program is intended to
maximize collections of delinquent taxes at a minimum
administrative difficulty for financial institutions. The
improved collection of taxes will provide revenue for public
services without increasing taxes on taxpayers who comply with
the law. This bill is limited to collections of final
delinquent taxes and court-ordered debts. It does not allow
FTB to match accounts of taxpayers who are currently
protesting tax due in the FTB administrative process, pursuing
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an income tax appeal at the Board of Equalization, or seeking
relief from a court of law. Similar programs exist in other
states, such as Indiana, Kentucky, Maryland, Massachusetts,
Minnesota, New Jersey, and New York.
6)What are the ordering rules for satisfying delinquent debts?
Existing law establishes the priority for payment when a
debtor has more than one debt to be collected by the FTB and
the amount collected is insufficient to satisfy the total
amount owed to the state (R&TC Section 19533). The delinquent
debts are collected in the following priority:
a) Child support payments (which are no longer collected by
the FTB).
b) Taxes (including penalties, interest, fees, or other
amounts due and payable).
c) Delinquent wages pursuant to the Labor Code.
d) Vehicle Registration fees.
e) Court-ordered debt.
f) Amounts owed under the Department of Industrial
Relations pursuant to the Labor Code.
This bill will provide FTB with an opportunity to obtain the
necessary information about delinquent taxpayers from
financial institutions to issue OTWs on an expedited basis.
Since an OTW is satisfied on a first-come, first-serve basis,
the FTB will be able to collect delinquent income tax debts
immediately, as long as there is enough money in the
taxpayer's bank account.
7)Similar legislation. SBx3 17 (Ducheny), introduced in the
current Third Extraordinary Session, as amended June 28, 2009,
creates an identical FIRM program. SBx3 17 is currently in
enrollment.
REGISTERED SUPPORT / OPPOSITION :
Support
Franchise Tax Board (sponsor)
SB 402
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Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098