BILL ANALYSIS
SB 402
Page 1
SENATE THIRD READING
SB 402 (Wolk)
As Amended April 28, 2009
Majority vote
SENATE VOTE :23-16
REVENUE & TAXATION 6-2 APPROPRIATIONS 12-5
-----------------------------------------------------------------
|Ayes:|Charles Calderon, Beall, |Ayes:|De Leon, Ammiano, |
| |Coto, Ma, Portantino, | |Charles Calderon, Coto, |
| |Saldana | |Davis, |
| | | |Fuentes, Hall, John A. |
| | | |Perez, |
| | | |Skinner, Solorio, |
| | | |Torlakson, Hill |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Harkey, Hagman |Nays:|Conway, Harkey, Miller, |
| | | |Nielsen, |
| | | |Audra Strickland |
| | | | |
-----------------------------------------------------------------
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
SB 402
Page 2
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
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
SB 402
Page 3
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
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
SB 402
Page 4
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.
FISCAL EFFECT : According to FTB staff, this measure, due to
increased tax collections, will result in an annual gain of $19
million in fiscal year (FY) 2009-10, $60 million in FY 2010-11,
and $99 million in FY 2011-12, plus some increases in non-tax
debt collections. In addition, FTB staff estimates that the
implementation of this measure would cost $3.2 million in FY
2009-10, $7.9 million in FY 2010-11, and $4.7 million in FY
2011-12.
COMMENTS : 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."
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
SB 402
Page 5
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 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.
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
SB 402
Page 6
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
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 order
to withhold (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.
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 the Financial Information Data Match
Program (FIDM) and closely resembles FIDM. 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
SB 402
Page 7
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 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.
Similar legislation. SB 17 X3 (Ducheny), introduced in the
current Third Extraordinary Session, as amended June 28, 2009,
creates an identical FIRM program. SBx3 17 was vetoed by
Governor Schwarzenegger.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
FN:
0002477