BILL ANALYSIS Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair 1065 (Walters) Hearing Date: 05/03/2010 Amended: As Introduced Consultant: Mark McKenzie Policy Vote: Rev&Tax 5-0 _________________________________________________________________ ____ BILL SUMMARY: SB 1065 would reenact certain "innocent spouse relief" provisions and apply them retroactively to January 1, 2009. Specifically, this bill would require the Franchise Tax Board (FTB) to grant "innocent spouse" relief from taxes and penalties if the taxpayer has been granted innocent spouse relief for federal tax purposes, with certain restrictions. _________________________________________________________________ ____ Fiscal Impact (in thousands) Major Provisions 2010-11 2011-12 2012-13 Fund Tax revenue loss $200 $200 $200 General (additional revenue loss of $90 in 2009-10) _________________________________________________________________ ____ STAFF COMMENTS: This bill meets the criteria for referral to the Suspense File. Existing state and federal law provides that spouses who file a joint tax return are individually liable for the accuracy of the return and the full tax liability, regardless of the income earned by each spouse (joint and severable liability). Because one spouse may not be aware of another spouse's misrepresentation of tax information on the return, the federal Internal Revenue Code allows a spouse to be relieved of some or all of the responsibility of a joint debt under certain circumstances (innocent spouse relief). State law generally conforms to the federal provisions that were enacted in 1998. However, state innocent spouse relief provisions differ from federal provisions in several ways: State law does not conform to federal provisions enacted in 2006 that broaden the appeal rights by authorizing the tax court to review the IRS denial of innocent spouse relief and suspending the period of limitations while on appeal. State law allows a taxpayer to seek a divorce court order relieving that taxpayer of liability for state income tax on a joint return. State law allows a taxpayer to seek relief from FTB on any unpaid self-assessed tax liability on a joint return. In some circumstances, a taxpayer may be granted innocent spouse relief under federal law, but not state law. During the period from January 1, 2004 through December 31, 2008, under changes to innocent spouse relief provisions enacted by SB 285 (Speier), Chapter 370 of 2003, FTB was required to grant relief to a taxpayer that previously had received an innocent spouse relief determination at the federal level and the facts and circumstances that supported the determination were the same. SB 285 also authorized the spouse who did not request relief to provide FTB with information contrary to what was provided by the requesting spouse and information that may support a determination that relief should not be granted. Page 2 SB 1065 (Walters) SB 1065 would reinstate the provisions of SB 285 and apply them retroactively to January 1, 2009. This bill would also conform to federal provisions enacted in 2006 to broaden the appeal rights applicable to innocent spouse relief determinations, and delete obsolete language that refers to a four year period for submitting a request for innocent spouse relief. FTB estimates that this bill would result in a revenue loss of approximately $90,000 in 2009-10 and $200,000 annually thereafter. This estimate is based on the relatively small number of innocent spouse claims filed annually and the few cases in which an FTB determination may differ from an IRS ruling.