BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: SB 1158 HEARING: 4/11/12 AUTHOR: Price FISCAL: Yes VERSION: 2/22/12 TAX LEVY: No CONSULTANT: Grinnell ABATEMENT OF INTEREST FOR DISASTERS Allows Postponement of Deadlines and Abatement of Penalties and Interest for Taxpayers Affected by Disasters Declared by the Governor. Background and Existing Law Federal law allows the Internal Revenue Service (IRS) to specify a period for up to one year to postpone tax-related deadlines in the event of a President-declared disaster or terrorist or military action that affects the taxpayer. During that period, the taxpayer is eligible for later deadlines, as well as relief from any penalty, interest, or addition to tax. Currently, state law provides that a taxpayer that misses a deadline for filing an income tax return, paying tax, or filing a claim for refund is subject to penalties and payment of interest, assessed by the Franchise Tax Board (FTB). However, FTB may abate interest when an unreasonable delay occurs in the administrative process is due to the tax agency's error or delay. Additionally, FTB may also abate interest for disaster victims if the tax agency extends the period for any single taxpayer residing in a disaster area as declared by the President of the United States or the Governor of California. However, while penalty abatement is automatic, FTB only abates interest in either case at its discretion, and no specific authority exists to abate interest when the delay is attributable to FTB sending a notice that requires response from the taxpayer affected by the disaster. Additionally, while state law conforms to federal law relating to disaster-affected taxpayers when the President declares a disaster, it does not provide similar authority for FTB to postpone deadlines due to disasters declared by the Governor, but not the President. SB 1158 (Price) - 2/22/12 -- Page 2 Generally, taxpayers may appeal FTB determinations of the appropriate tax due to the State Board of Equalization (BOE) once they have exhausted their administrative remedies. Among the determinations, taxpayers denied interest abatement due to FTB's error or delay may appeal that determination to BOE. Proposed Law Senate Bill 1158 conforms state law to federal law, allowing FTB to postpone deadlines for a period up to one year for Governor-declared disasters, and abate interest to the extent that the interest is attributable to FTB's delay in mailing a notice of correspondence that requires a response from the taxpayer affected by a disaster declared by either the President or the Governor. The measure provides a process for taxpayers to appeal FTB denials of requests for interest abatement to BOE. Taxpayers must apply in writing, and have 30 days to file an appeal for unpaid interest, and 90 days for paid interest. The appeal process mirrors existing law on BOE appeals for interest abatement for errors made by FTB. The measure applies to taxable years starting on or after January 1, 2013. The measure also corrects an erroneous cross-reference. State Revenue Impact According to FTB, "Due to the unpredictable nature of disasters, department staff is unable to provide a revenue estimate." Comments 1. Purpose of the bill . According to the Author, "SB 1158 is needed to provide equitable treatment to 'all' taxpayers located in presidentially or gubernatorially declared disaster areas. Currently, only taxpayers who are "affected by the disaster" can request abatement of interest. This bill ensures that taxpayers who live in the SB 1158 (Price) - 2/22/12 -- Page 3 disaster area but who are "unaffected" by the disaster, can also request abatement of interest when circumstances are beyond their control and for which they are not responsible (i.e., the FTB sends out delayed notices). During a presidentially-declared disaster, the FTB routinely delays billings, notices, and correspondence to affected taxpayers in a disaster area. (An FTB public service bulletin is published to inform the public of the period of the suspended notices and the counties affected by the disaster.) As a result of the delayed mailings to disaster areas, many taxpayers in the area who are "unaffected" by the disaster, but who are engaged in the tax audits, protests, or appeals, suffer delays in these processes, which ultimately could result in additional interest being accrued. This bill gives the FTB the authority, in these instances, to abate the interest. In addition, this bill gives FTB the authority to delay tax-related deadlines when a disaster is declared by the Governor for specific areas in California, but these areas were not declared a disaster by the President. 2. We're one, but we're not the same . Each year, the Legislature responds to individual disasters by enacting legislation that provides taxpayers in affected areas excess disaster loss treatment on personal and corporate income taxes, provide that the assessor cannot revoke a taxpayer's homeowners' exemption from property tax when he or she must vacate the property due to the disaster, and reimburses property tax revenue losses to local agencies attributable to downward reassessments of disaster-affected property. SB 1158 provides different, disaster-related tax benefits: first, it applies to all future Governor-declared disaster, not specific ones, and second, it provides authority for FTB to delay tax-related deadlines and allow interest abatement in a wide set of circumstances. Support and Opposition (04/05/11) Support : State Board of Equalization Chair Jerome Horton (Sponsor) Opposition : None received. SB 1158 (Price) - 2/22/12 -- Page 4