BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: AB 2686 HEARING: 6/27/12 AUTHOR: Committee on Revenue & TaxationFISCAL: Yes VERSION: 3/12/12 TAX LEVY: No CONSULTANT: Miller TAXATION: TAXPAYERS' RIGHTS ADVOCATE Repeals the sunset for the Taxpayer Advocate Equity Relief Program at the FTB. Background and Existing Law Existing state law allows the FTB staff to abate penalties, fees, additions to tax and interest under four circumstances: 1. The interest is attributable to an unreasonable delay by the FTB in performing a ministerial or managerial act. 2. The FTB issues an assessment based on an Internal Revenue Service (IRS) assessment and the IRS abates interest due to an IRS delay. 3. A taxpayer is experiencing an extreme financial hardship caused by a significant disability or catastrophic circumstance. 4. A taxpayer relied on the written advice of a legal ruling by the FTB's Chief Counsel. Existing state law also allows interest to be suspended if the FTB fails to inform the taxpayer of the amount owed within 36 months after the return was filed, or if later, the date it is due without regard to extension. Penalties that carry reasonable cause exceptions may be abated. The law allows only the Chief Counsel to rescind or abate the application of tax shelter fees and penalties as well if the taxpayer successfully makes a case to him or her. The office of the Taxpayer Advocate (Advocate) within the FTB was created to coordinate the resolution of taxpayer AB 2686 -- 3/12/12 -- Page 2 complaints and problems. The Advocate is empowered to review actions taken on a taxpayer's account. Existing law authorized the Advocate, from January 1, 2009, until January 1, 2012, to resolve taxpayer issues identified by the FTB and to waive penalties, fees, additions to tax, or interest attributable to an error or unreasonable delay on the part of the FTB if the three conditions are met. 1. Erroneous action or inaction by the FTB in processing documents filed or payments made by taxpayers; 2. Unreasonable delay caused by the FTB; or, 3. Erroneous written advice that does not qualify for relief under Chief Counsel authority The Advocate may only grant relief as long as no significant part of the error is due to the taxpayer and when relief is not allowed under any other law. The Advocate may relieve amounts below $500; anything above is subject to concurrence by the Chief Counsel. If the relief exceeds $7,500, the Chief Counsel must inform the FTB (the FTB may adjust the $7,500 for inflation). The Advocate must also provide a public record of the relief in the FTB's office with the taxpayer's name, total amount of tax involved, total amount refundable or payable, and a summary of why the relief is warranted. A determination made by the Advocate is not subject to administrative or judicial review. Proposed Law Assembly Bill 2696 repeals the sunset and allows the Advocate to continue to relieve taxpayers from penalties, fees, additions to tax, and interest attributable to the Franchise Tax Board's (FTB) erroneous actions permanently. State Revenue Impact According to the FTB, they are unable to quantify future case volumes, but expect that the bill will ultimately save minor litigation and appeal costs. AB 2686 -- 3/12/12 -- Page 3 Comments 1. Purpose of the bill . This bill is sponsored by the FTB in order to reenact the discretionary authority of the Taxpayer Advocate to grant relief to taxpayers from penalties, fees, additions to tax, or interest imposed on a tax liability because of erroneous actions of the department. 2. Jury is still out . This statute has been used twice since its enactment: (1) the first instance was for a processing error on an individual return and resulted in the interest being cancelled for $2,000. (2) The second instance was for incorrect instructions in FTB's fiduciary and trust return booklet (541), which affected about 50 trusts and resulted in $2,000. The FTB states that since the FTB located the errors prior to the written contract with the taxpayers, they couldn't receive relief under existing law. During the three years the FTB has used this authority, it is still unclear whether it is absolutely necessary. The Committee may wish to consider three amendments to determine whether this authority is working and provide additional limitations: (1) The Executive Officer of the FTB should make the final determination, not the Chief Counsel since the authority is very broad; (2) Impose another three-year sunset for purposes of review and evaluation; and (3) Cap the relief amount at $7,500 rather than providing for a notification to the FTB from the Chief Counsel. Assembly Actions Assembly Revenue and Taxation: 8-0 Assembly Appropriations: 17-0 Assembly Floor: 73-0 Support and Opposition (6/21/12) Support : Franchise Tax Board (Sponsor). Opposition : Unknown. AB 2686 -- 3/12/12 -- Page 4