BILL ANALYSIS SENATE REVENUE & TAXATION COMMITTEE Senator Lois Wolk, Chair SB 1492 - Committee on Revenue and Taxation Amended: As Introduced March 15, 2010 Hearing: April 14, 2010 Fiscal: Yes SUMMARY: Makes Three Changes to Franchise Tax Board's Voluntary Disclosure Agreement Program. EXISTING LAW allows the Franchise Tax Board (FTB) to enter into an agreement with taxpayers to file returns and pay tax for the last six years in exchange for waiving penalties, called voluntary disclosure agreements (VDAs); taxes, additions to tax, penalties, and fees imposed before the last six years are waived (AB 2280, Caldera, 1994). The Legislature enacted this program to promote voluntary compliance among some out of state taxpayers, primarily business entities and trusts, that fail to realize they have a CA filing requirement. These taxpayers may enter into an agreement with FTB when they fail to make and file a return; pay tax on time; underpay estimated tax; pay penalties; fail to file a Corporate Organization Statement, partnership or informational returns; or fail to furnish information, or maintain records. The FTB must approve all VDAs by majority vote. Approved taxpayers must remit a signed written agreement, make all payment, and submit all returns within 120 days of the signing date of the VDA. Taxpayers may remain anonymous until the signed agreement is submitted to FTB. Taxpayers may also make installment arrangements, which allow the taxpayer to make payments for a period longer than the 120 days from the signing date of the VDA. Page 3 EXISTING LAW specified the persons or entities eligible for the VDA: qualified business entities such as out of state corporations, qualified shareholders, qualified members of LLCs not organized in California or registered with the Secretary of State, and qualified trusts and its beneficiaries. THIS BILL makes three changes to the VDA program, effective for all VDAs entered into on or after January 1, 2011: Prevents taxpayers from having to file the most recent tax return before its actual statutory due date by pushing the deadline out to the extended due date. Eliminates the underpayment-of-estimated-tax penalty where the agreement is signed after the quarterly tax payment due date, and Allows taxpayers who request a payment plan additional time to pay an outstanding tax bill if FTB denies the request for a payment plan after the voluntary disclosure agreement expires. FISCAL EFFECT: According to FTB, SB 1492 does not impact state income tax revenue. COMMENTS: A. Purpose of the Bill According to the FTB, sponsor of the measure: "The purpose of this Franchise Tax Board-sponsored bull is to is to revise the VDA statutes to eliminate impediments to satisfying the VDA, thus reducing the risk of taxpayers failing to comply with the VDA and incurring penalties and collective actions." Page 3 B. Program Background According to the FTB: "Some out-of-state taxpayers that conduct business in California as defined by the R&TC may not be aware of their California franchise or income tax liability or filing requirements. The FTB also may not readily identify such taxpayers through its filing enforcement or other compliance programs. Given the substantial penalties for delinquent filing of returns and late payment of taxes, and the open statute to audit all taxable years preceding identification, these taxpayers may be reluctant to disclose their California presence and report any tax liability voluntarily. Current VDA statutes allow qualified entities, qualified shareholders, or qualified beneficiaries to disclose their liability voluntarily through a VDA. The qualified entities, qualified shareholders, or beneficiaries that choose to participate in a VDA may anonymously apply to the FTB and in exchange, if accepted, must disclose their California tax liability for the immediately preceding six taxable years. Under the VDA statute, the FTB in turn waives its authority to assess taxes, additions to tax, fees, or certain penalties for the taxable years ending before the six taxable years covered by the VDA. The Multistate Tax Commission (MTC) has an agreement with 30 states, including California, which provides incentives for taxpayers to request a VDA. The states that participate in MTC's voluntary disclosure program follow guidelines and processes provided by the MTC, thereby allowing applicants to request VDAs for multiple states through the MTC. The voluntary disclosure period in these states is the four taxable years ending before the signing date of the VDA. Each of these states allows the taxpayer to remain anonymous during the application period. As a result, the estimated tax payments due in the year immediately after the voluntary disclosure period may be late, and the taxpayer is penalized for the late payments. The Page 3 other states in the MTC Compact address penalties on a case-by-case basis. With the exception of California's six-year VDA period, current state law generally conforms to the MTC's VDA application procedures and guidelines." Support and Opposition Support:Franchise Tax Board (sponsor) Oppose:None received. --------------------------------- Consultant: Colin Grinnell