BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 228 HEARING: 5/11/11
AUTHOR: Wyland FISCAL: Yes
VERSION: 4/25/11 TAX LEVY: Yes
CONSULTANT: Grinnell
TAX LIENS
Allows the Board of Equalization and the Franchise Tax
Board to Withdraw Paid Tax Liens
Background and Existing Law
Federal and state tax agencies record tax liens in the
amount of the tax owed, plus applicable penalties,
interests, fees and costs in favor of the federal or state
government against the property of a person who refuses or
neglects to pay a tax after notice and demand. Tax
agencies record liens with county recorders in counties
where the taxpayer owns property. Tax liens are public
documents that generally give the government collections
priority over other debts secured by the property.
Potential lenders and credit reporting agencies use them to
assess a taxpayer's credit risk.
The Internal Revenue Service (IRS) must file a notice of
federal tax lien with county recorders that complies with
California's Uniform Federal Lien Registration Act. When
the IRS determines that the taxpayer satisfied the lien or
deems it legally unenforceable, it records a "Notice of
Release." Since 2001, the IRS can also file a "Notice of
Withdrawal" when it determines that it recorded the lien in
error or in a way inconsistent with administrative
procedures, if the taxpayer enters into an installment, or
if the IRS determines that withdrawal is in the best
interest of the taxpayer as determined by the national
taxpayer advocate and the government according to the
Secretary of the Treasury. When the IRS withdraws a tax
lien, it's treated as if it never happened. If he or she
grants a withdrawal, the Secretary must make reasonable
efforts to contact credit reporting agencies to notify them
of the withdrawal upon request of the taxpayer.
SB 228 - 4/25/11 -- Page 2
In February, the IRS changed its rules to help struggling
taxpayers by withdrawing any fully paid tax lien upon
request from the taxpayer, instead of releasing it. An IRS
press release states that withdrawal is in the best
interest of the government and taxpayers.
The Fair Credit Reporting Act bars credit reporting
agencies from including in credit reports paid tax liens
seven years after the date of payment. That Act also
preempts states from regulating information in credit
reports.
Under state law, when the Franchise Tax Board (FTB),
records a notice of withdrawal, it records a "Notice of
State Tax Lien Filed in Error." When the FTB files the
notice of error, it must mail a copy to the major credit
reporting companies in the county where it recorded the
lien. Board of Equalization (BOE) can release liens, but
not withdraw them.
Proposed Law
SB 228 allows the BOE to withdraw notice of a state tax
lien, and apply the withdrawal as if BOE had never filed
the lien if the taxpayer pays the liability securing the
lien in full. BOE shall file the withdrawal notice in the
same office where they filed the lien, and send a copy of
the notice to the taxpayer. Upon request of the taxpayer,
BOE shall make reasonable efforts to notify credit
reporting agencies and any financial institution or
creditor whose name and address are specified in that
request of the withdrawal of the lien.
The bill applies to liens the BOE records under the laws
for Sales and Use Tax, Motor Vehicle Fuel Tax, Use Fuel
Tax, Private Railroad Car Tax, Cigarette and Tobacco
Products Tax, Alcoholic Beverage Tax, Timber Yield Tax,
Energy Resources Surcharge, Emergency Telephone Users
Surcharge, Hazardous Substances Tax, Integrated Waste
Management Fee, Oil Spill Response, Prevention, and
Administration Fees, Underground Storage Tank Maintenance
Fee, Fee Collection Procedures, and Diesel Fuel Tax.
SB 228 additionally allows the Franchise Tax Board to
withdraw notice of a state tax lien according to the
SB 228 - 4/25/11 -- Page 3
procedures above if the taxpayer pays the lien in full.
The measure applies to liens FTB records under the Personal
Income and Corporation Tax Law.
State Revenue Impact
BOE states that "Enactment of this bill could have a
positive impact to state and local revenues to the extent
taxpayers would have an incentive to clear their tax debts
more quickly. This effect, however, is difficult to
quantify."
FTB revenue estimate is pending.
Comments
1. Purpose of the bill . According to the Author, "Under
existing law, the Franchise Tax Board has the ability to
collect delinquent taxes, fees and surcharge liabilities.
When a tax, fee or surcharge liability is due but remains
unpaid, a state tax lien is created for the amount due plus
interest, penalties and any additional costs. The lien is
attached to the real and personal property of the taxpayer,
and will remain there until the lien is paid. Even when
the lien is fulfilled and all fees and taxes collected the
lien can remain on a credit score for up to ten years. A
tax lien is not created unless there have been documented
efforts made to contact the taxpayer by phone and in
writing. The purpose of a tax lien is to secure unpaid
debt.
A tax lien decreases an individual's credit rating and
attaches to property currently owned and later acquired by
the taxpayer. This makes it very difficult to get credit or
a loan, and may ultimately financially cripple the
individual.
Under current law, California tax agencies may release a
lien when the taxpayer pays the outstanding liability in
full. However, unless the lien was filed in error, the
release will not remove the lien from a taxpayer's credit
record, and may remain there for up to 10 years. A
withdrawal is needed to remove the lien from a taxpayer's
credit record. Currently, the tax agencies do not have the
statutory authority necessary to withdraw a tax lien.
SB 228 - 4/25/11 -- Page 4
In February 2011, the IRS changed their tax lien filing
regulations in order to help people get a fresh start with
their tax liabilities. One of the procedural changes allows
liens to be withdrawn once all owed taxes and assessed
interest and fees are paid. This change lessens the
negative impact on taxpayers by allowing them to clear up
their credit records to accurately reflect their current
fiscal situation."
2. Velvet Gloves and Iron Fists . Tax collection relies on
tangible penalties for non-compliance; without enforcement,
taxpayers in our largely self-assessed tax system would
only remit money to the government out of generosity. Tax
liens are a very severe sanction for noncompliance.
Agencies record liens against a noncompliant taxpayer's
property, so that if it's sold, the proceeds of the
property sale must be used to satisfy the tax debt before
the taxpayer and other creditors get paid. Additionally,
taxing entities make firms that assess a taxpayer's
creditworthiness aware of the lien, making it difficult for
a taxpayer subject to a lien to obtain credit.
SB 228 allows tax agencies to withdraw paid tax liens when
they're paid, something they can only now do when they
record the lien in error. The measure directs tax agencies
to tell credit reporting agencies of the withdrawal, which
may limit or erase the tax lien from the taxpayer's credit
history. When taxing entities negotiate with delinquent
taxpayers, the possibility of a tax agency filing a tax
lien can be very powerful incentive for a taxpayer to pay
outstanding tax before recording the lien becomes
necessary. If a taxpayer knows that he or she can
immediately erase a tax lien, and not suffer the negative
effect to their credit, will the remaining effect of the
sanction be sufficient for the taxpayer to comply with the
law? The Committee may wish to consider whether SB 228
will undermine tax compliance efforts.
3. I Hear You But I'm Not Listening . SB 228 intends to
help taxpayers who have paid their debts get a clean bill
of health from credit reporting agencies, but in doing so
may make credit evaluation more difficult and less
transparent. A tax lien on a credit report will severely
limit a taxpayer's ability to obtain credit, but honestly
reflects when a taxpayer has failed to pay tax upon notice
SB 228 - 4/25/11 -- Page 5
and demand, showing a potential lender that a credit risk
exists. Federal law prevents states from dictating what
may be included or excluded in a credit report, but SB 228
may evade this preemption by converting what were once
releases into withdrawals. When a credit rating agency
receives a withdrawal, it simply erases the lien from the
record when it shows releases for seven years. It's
unclear whether credit ratings agencies will apply any more
scrutiny to withdrawals that were once requests to properly
determine credit risk if the Legislature enacts SB 228.
It's additionally unclear whether the credit rating
agencies have made any adjustments due to the change in
federal policy.
4. Using Good Judgment . The current version of the bill
allows FTB and BOE to withdraw fully paid liens, but FTB
indicates that it lacks the resources to differentiate
between liens that should be withdrawn and those that
shouldn't. FTB can only implement the bill by withdrawing
all liens once fully paid. However, there may be cases
where FTB should merely release the lien instead of
withdrawing it, such as a repeat offender or when a
taxpayer defaults on a payment plan. The Committee may
wish to consider deleting FTB from the bill because
implementation considerations effectively mandate
withdrawal instead of release.
Support and Opposition (5/5/11)
Support : BOE Member George Runner.
Opposition : Unknown.