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.









                                                                        

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              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."











                                                                        

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            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  








                                                                        

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            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.



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            Consultant: Colin Grinnell