BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: SB 1548 HEARING: 4/25/12 AUTHOR: Wyland FISCAL: Yes VERSION: 2/24/12 TAX LEVY: No CONSULTANT: Grinnell OFFERS IN COMPROMISE Removes the sunset on the BOE's authority to accept offers in compromise from firms currently in operation Background and Existing Law An "offer in compromise" is a way to resolve a tax delinquency in which there is no dispute about the amount owed, but the taxpayer cannot pay the full amount. Negotiating an offer in compromise may allow a tax agency to collect the maximum amount feasible in a timely manner without forcing a taxpayer into bankruptcy, which further delays collection. Generally, once the tax agency determines that the liability is final, the taxpayer makes an offer, which the agency then reviews to ensure that the offer represents the maximum amount it can expect to receive from the taxpayer in a reasonable period of time, typically five to seven years. The Legislature first allowed the Franchise Tax Board to accept offers in compromise (SB 94, Romero, 1999), then later authorized the Board of Equalization to do so for final tax liabilities for owners of defunct businesses under the Sales and Use Tax Law, the Use Fuel Tax Law, and the Underground Storage Tank Maintenance Fee Law (AB 1458, Kelley, 2002). The Legislature then extended the authority for the BOE to make offers in compromise for final tax liabilities under the Cigarette and Tobacco Products Law, Alcoholic Beverage Tax Law, Timber Yield Tax Law, Energy Resources Surcharge Law, Emergency Telephone Users Surcharge Law, Hazardous Substances Tax Law, Integrated Waste Management Fee Law, Fee Collection Procedures Law, Diesel Fuel Tax Law, and the Oil Spill Response Prevention and Administration Fees law (AB 3076, Committee on Revenue and Taxation, 2006). SB 1548 -- 2/24/12 -- Page 2 Under the BOE and FTB programs, the taxpayer must establish that the amount offered in payment is the most that can be expected to be paid or collected and they do not have reasonable prospects of acquiring increased income or assets that would enable them to satisfy a greater amount of the tax liability than the amount offered. BOE and FTB can reestablish the final tax liability should the taxpayer have sufficient annual income during the succeeding five-year period following the date of the compromise. When BOE and FTB determine that a taxpayer concealed assets or falsified, withheld, destroyed, or mutilated any book, document, or record relating to their financial condition, they may reestablish all compromised liabilities and the taxpayer may be found guilty of a felony crime, fined up to $50,000, and imprisoned. In 2007, the Legislature expanded the program to allow BOE to accept offers in compromise for businesses currently in operation, as many taxpayers were surprised when BOE audits uncovered transactions that the taxpayer didn't know were taxable, so they never charged consumers the tax (AB 2047, Horton, 2008). Additionally, for many firms, paying the entire liability would cause the business to close. The bill allowed BOE to accept offers from operating firms when: The final tax liability arises from transactions for which the BOE finds no evidence that the taxpayer collected sales tax reimbursement or use tax, The person liable is the successor to the business, or A consumer has a use tax liability. When the Legislature expanded the program to include businesses in operation, it applied a sunset for existing businesses, but left the authority to compromise with defunct ones intact. BOE wants to remove the sunset. Proposed Law Senate Bill 1548 removes the sunset on the BOE's authority to accept offers in compromise from firms currently in operation. The measure applies to the Sales and Use Tax Law, Cigarette and Tobacco Products Law, Use Fuel Tax Law, Alcoholic Beverage Tax Law, Emergency Telephone Users Surcharge Law, Fee Collection Procedures Law, Diesel Fuel SB 1548 -- 2/24/12 -- Page 3 Tax Law, and the Oil Spill Response Prevention and Administration Fees law. State Revenue Impact According to BOE, SB 1548 results in revenue increases of $286,034 per year. Comments 1. Purpose of the bill . According to the Author, Offer in Compromise programs are mechanisms that government agencies use to help taxpayers settle outstanding tax liabilities that they could not pay in full without having to declare bankruptcy. The goal of establishing an OIC program is to incentivize taxpayers to negotiate with the government agency to pay a reduced amount to settle their tax liability. This approach allows the taxpayer to keep their business open, which creates further economic development. At the same time, OIC programs increase the likelihood that tax liabilities will be collected, even if for a reduced amount. Both the Internal Revenue Service (IRS) and the California Franchise Tax Board (FTB) operate OIC programs for both taxpayers and businesses. In 2002, Assembly Bill 1458 (Kelley) was signed into law which allowed the BOE to create an OIC program. The program authorized by the legislation only applied to discontinued or successor businesses that inherited tax liabilities. Only business owners who had tax liabilities from uncollected taxes or fees were allowed to participate in the OIC program. Businesses that collected the fee or tax but never remitted them to the BOE were ineligible from participating in the OIC program. In addition to having tax liabilities, the business must show that if they were forced to pay the liability in full it would cause the business to cease operation and declare bankruptcy. With this information on hand, the BOE and the business work together to find an appropriate amount that should be paid to release the liability. The program expanded in 2008 with the passage of AB 2047 (Horton) to include active businesses. When passed in 2008 it was estimated that total revenue collected by the BOE would increase by $2.5 million because of these OIC programs, with $1.4 million going to the general fund. When enacted, AB 2047 contained a sunset SB 1548 -- 2/24/12 -- Page 4 date of January 1, 2013. If the OIC program is not extended it will sunset and cease to exist. SB 1548 extends the operation of the Offer in Compromise (OIC) program maintained by the California Board of Equalization (BOE). The Offer in Compromise program allows the BOE to work with businesses to reduce certain tax liabilities that would have forced the business to cease operation and declare bankruptcy." 2. So, how did we do ? When the Committee on Revenue and Taxation, the predecessor to this Committee, approved AB 2047 in 2008, it inserted a sunset to review the authority granted by the bill to accept offers from firms still in operation. According to BOE, they have accepted a total of eight offers from firms that were not defunct when they made the offer, seven of which are still in operation. The total amount collected was $532,668, and the BOE forgave approximately $357,000 when accepting those offers. The Committee may wish to consider whether the amounts forgiven are sufficiently consistent with sound tax collection practices to merit sunset removal, another five year sunset extension, or terminating the authority. Support and Opposition (4/19/12) Support : State Board of Equalization (Sponsor), BOE Member George Runner, Los Angeles Area Chamber of Commerce, Orange Chamber of Commerce, Grass Valley/Nevada Chamber of Commerce, Industry Manufacturing Council, California Taxpayers' Association; California Chamber of Commerce. Opposition : Unknown.