BILL ANALYSIS Ó
AB 2692
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Date of Hearing: April 18, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 2692
(Brough) - As Introduced February 19, 2016
Majority vote. Fiscal committee.
SUBJECT: Personal income tax: corporation tax: sales and use
taxes: tax penalty and fee waiver programs
SUMMARY: Requires the State Board of Equalization (BOE) and
Franchise Tax Board (FTB) to administer tax penalty and fee
waiver programs for specified taxpayers' penalties and fees
incurred in tax years prior to January 1, 2015. Specifically,
this bill:
1)Requires the BOE to develop and administer a tax penalty
waiver program for taxpayers subject to the Sales and Use Tax
(SUT) Law:
a) Provides that the program shall be conducted for a
three-month period beginning February 1, 2017 to April 30,
2017, inclusive, or during an unspecified time frame ending
no later than June 30, 2017.
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b) Provides that the program shall apply to tax liabilities
due and payable for tax reporting periods prior to January
1, 2015.
c) Waives all penalties for the non-reporting or
underreporting of tax liabilities or the nonpayment of any
taxes, except in cases when the taxpayer is on notice of a
criminal investigation or a court proceeding has already
been initiated against him or her at the commencement of
the waiver program.
d) Prohibits criminal action against the taxpayer for the
non-reporting or underreporting of tax liabilities, unless
criminal action is already underway.
e) Specifies that no refund or credit shall be granted for
any previously paid penalty.
f) Requires the taxpayer to file a completed waiver
application with the BOE, signed under penalty of perjury,
in order to participate, and specifies that mere payment of
any taxes or interest due alone shall not constitute an
acceptable waiver application.
g) Requires any taxpayer who has filed for bankruptcy
protection under Title 11 of the United States Code to
submit an authorizing order from a Federal Bankruptcy
Court, in order to participate.
h) Requires the taxpayer to file completed or amended tax
returns for all underreported periods and pay in full the
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taxes and interest due, within the 60 days after the
conclusion of the waiver period.
i) Allows the taxpayer to apply for an installment
agreement, in lieu of paying in full the taxes and interest
due within 60 days after the conclusion of the waiver
period, so long as full payment is received by June 30,
2018.
j) Specifies that failure by the taxpayer to fully comply
with the installment payment agreement shall render the
waiver of penalties null and void and the full payment
immediately due and payable, unless the BOE determines
there was a reasonable cause for such failure.
aa) Requires the BOE to publicize the program to maximize
public awareness and participation, and coordinate such
actions with those for similar programs administered by the
FTB.
2)Requires the FTB to administer a tax penalty and fee waiver
for taxpayers subject to the Personal Income Tax (PIT) Law and
Corporation Tax (CT) Law:
a) Provides that the program shall be conducted for a
three-month period beginning February 1, 2017 to April 31,
2017, inclusive, or during an unspecified time frame ending
no later than June 30, 2017.
b) Provides that the program shall apply to tax liabilities
due and payable for taxable years prior to January 1, 2015.
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c) Waives all penalties and fees for the non-reporting or
underreporting of tax liabilities or the nonpayment of any
taxes, except in cases when the taxpayer is on notice of a
criminal investigation, under criminal investigation, or a
court proceeding has already been initiated against him or
her at the commencement of the waiver program.
d) Prohibits criminal action against the taxpayer for the
non-reporting or underreporting of tax liabilities, unless
criminal action is already underway.
e) Provides that the program shall not apply to any
non-reported or underreported tax liability amounts
attributable to tax shelter items that could have been
granted amnesty under previous state and federal programs,
as specified.
f) Specifies that no refund or credit shall be granted for
any previously paid penalty or fee, and that a taxpayer may
not file a claim for refund or credit for any amounts paid
under this program.
g) Requires the taxpayer to file a completed waiver
application with the FTB, signed under penalty of perjury,
in order to participate, and specifies that mere payment of
any taxes or interest due alone shall not constitute an
acceptable waiver application.
h) Requires any taxpayer who has filed for bankruptcy
protection under Title 11 of the United States Code to
submit an authorizing order from a Federal Bankruptcy
Court, in order to participate.
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i) Requires the taxpayer to file completed or amended tax
returns for all underreported tax years and pay in full the
taxes and interest due, within the 60 days after the
conclusion of the waiver period.
j) Allows the taxpayer to apply for an installment
agreement, in lieu of paying in full the taxes and interest
due within 60 days after the conclusion of the waiver
period, so long as full payment is received by June 30,
2018.
aa) Specifies that failure by the taxpayer to fully comply
with the installment payment agreement shall render the
waiver of penalties and fees null and void and the full
payment immediately due and payable, unless the FTB
determines there was a reasonable cause for such failure.
bb) Provides that the FTB may propose a deficiency, impose
penalties and fees, or initiate criminal action if a
difference is determined between the tax reported on the
new or amended return and the correct amount of tax due,
upon conclusion of the program.
cc) Provides that no interest shall be allowed on any
overpayment of tax reported on the new or amended return if
it is refunded or credited within 180 days after filing.
dd) Provides that any standard, criterion, procedure,
determination, rule, notice, or guidelines established by
the FTB to implement this program shall not be subject to
the regulatory review process undertaken by the Office of
Administrative Law.
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ee) Requires the FTB to publicize the program to maximize
public awareness and participation, make taxpayers aware of
the costs associated with failure to participate, and
identify taxpayers who may be eligible for the program.
3)Provides that there shall not be an increased penalty
structure on outstanding tax liabilities upon the conclusion
of the program's waiver period.
4)Provides that no reimbursement is required by this act
pursuant to Section 6 of Article XIII B of the California
Constitution because the only costs that may be incurred by a
local agency or school district will be incurred because this
act creates a new crime or infraction, eliminates a new crime
or infraction, or changes the penalty for a crime or
infraction.
EXISTING LAW:
1)Requires the BOE to collect and administer the SUT, and the
FTB to collect and administer the PIT and CT, and sets forth
penalties for the nonpayment or late payment of those taxes,
and the failure to file or intentional filing of incorrect
returns.
2)Authorizes the BOE to administer a voluntary disclosure
program for in-state purchasers who fail to report use tax on
purchases of tangible personal property from a retailer
outside of this state, and for out-of-state businesses that
fail to report use tax on sales to consumers in this state.
If the taxpayer files all returns and pays all of the tax and
interest due, the BOE limits the time it can assess use tax to
the prior three years and waives penalties otherwise owed.
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3)Authorizes the FTB to administer a voluntary disclosure
program for out-of-state business entities that fail to file
returns because they were unaware of the obligation. The FTB
may waive penalties if the taxpayer files all returns that are
due, pays all of the tax and interest for the preceding six
taxable years, and agrees to future compliance with state tax
law.
4)Establishes a tax amnesty program under the SUT and PIT that
authorized BOE and FTB to forgive any penalties and interest
on unpaid taxes between October 1, 2002 through June 30, 2003
for taxes owed prior to October 1, 2002, if the taxes were
paid in full by taxpayers they identified as owing liabilities
that would be uneconomical to collect and would not be paid in
full within a reasonable amount of time.
5)Establishes a tax amnesty program under the SUT, PIT, and CT
law that required BOE and FTB to waive all unpaid penalties
and fees for taxpayers who filed for amnesty between February
1, 2005 through March 31, 2005 for tax years prior to January
1, 2003, and filed updated returns and paid in full owed taxes
and interest. The program also:
a) Sets the franchise and income tax accuracy-related
penalty at 40% on any tax understatement for tax years
prior to January 1, 2003 if that understatement is
identified after the close of the amnesty period.
b) Creates an enhanced penalty in the amount of 50% of
unpaid interest for any taxpayer who failed to pay the full
amount due at the end of the amnesty period or failed to
come forward during the amnesty period and is later
discovered.
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6)Establishes two Voluntary Compliance Initiatives (VCI) that do
the following:
a) Waives penalties for taxpayers who amended their returns
to unwind an Abusive Tax Avoidance Transaction (ATAT) and
paid all taxes and interest, if the taxpayer came forward
between January 1, 2004 through April 15, 2004 for tax
years prior to January 1, 2003, and enhances penalties to
curtail the use of abusive tax shelters.
b) Waives penalties for taxpayers who amended their returns
to unwind an ATAT or report income from the use of an
off-shore financial agreement and paid all taxes and
interest, if the taxpayer came forward between August 1,
2011 through October 31, 2011 for tax years prior to
January 1, 2011, and increases FTB enforcement authority to
identify such taxpayers who did not come forward.
FISCAL EFFECT: The FTB estimates a PIT and CT net revenue
acceleration of $100 million in fiscal year (FY) 2015-2016 and
$6.9 million in FY 2016-2017, but revenue loss of $65 million in
FY 2017-18. The BOE estimates an overall SUT revenue gain of
$200.6 million, of which $146.5 million would be accelerated
payments and $54.1 million would be new revenue.
The FTB and BOE also estimate significant administrative costs
related to education and outreach, programming, and return
processing that have yet to be determined.
COMMENTS:
1)Author's Statement : The author has provided the following
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statement in support of this bill:
This bill would create a statewide voluntary tax amnesty
program that will offer taxpayers an opportunity to receive
a temporary waiver relating to their delinquent taxes,
fees, and penalties. This proposed amnesty program helps
incentivize taxpayers to make good on their liabilities.
Historically, California has collected over a billion
dollars in revenue as a result of multiple tax amnesty
programs. The most recent program conducted in 2005,
collected $727 million in income tax and interest. The
California Franchise Tax Board estimates that 360,000
taxpayers would participate in this new amnesty program if
AB 2692 is passed with a gross revenue gain of $240 million
in fiscal year 2016/17.
2)Arguments in Support : Proponents of this bill state:
True tax and fee amnesty programs can be powerful tools for
increasing collection of back taxes and fees, because they
are cost-effective methods for increasing revenue without
raising taxes?. Unlike a third-party collection approach,
where the state pays a portion of the proceeds to the
collection agency, amnesty programs typically are
undertaken by existing staff. Additionally, encouraging
the taxpayer to voluntarily come forward avoids cost
associated with locating the taxpayer and imposing various
sanctions.
3)Tax Amnesty Programs : Tax amnesty programs allow taxpayers to
voluntarily remit unpaid or underpaid taxes without incurring
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the full liability of penalties that they would otherwise have
to pay. Under ordinary collection processes, these taxpayers
not only owe the original tax, but also interest on the unpaid
amount and various penalties and fees, and may be subject to
criminal prosecution. The BOE generally charges a 10% penalty
and the FTB generally charges a 5% penalty for failure to file
a return or pay the tax by its due date, in addition to
mandated interest rates and other penalties for negligence,
fraud or other circumstances.
Early tax amnesty programs were often implemented with other
enforcement strategies and compliance initiatives, with the
goal of improving overall tax administration. In 1984-1985,
California offered a three-month tax amnesty program to
individual taxpayers, with legislative intent expressly
stating that it would be a one-time opportunity. The amnesty
program was also coupled with enactment of enhanced
enforcement tools intended to increase the FTB's ability to
collect unreported or underreported tax.
4)A Growing and Potentially Troubling Trend : Recently, tax
amnesty programs have increased in popularity across the state
and nation as they result in a short-term revenue boost for
cash-strapped governments without needing to undertake the
challenges associated with increasing tax rates or the tax
base. However, there is no true gain in revenue associated
with tax amnesty programs, except with regard to collection
that would not have occurred under existing enforcement
efforts. In fact, there is arguably a revenue loss in forgone
penalties that would have otherwise been collected under
existing enforcement efforts. Tax amnesty programs can also
reduce overall taxpayer compliance, especially if they occur
frequently, because taxpayers who would have otherwise paid on
schedule may now believe they have a financial interest in
noncompliance.
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Since 1980, 46 states have conducted at least one tax amnesty
program, with the majority of states conducting more than one
program. While the federal government has never offered a
general income tax amnesty, it has offered recent programs
limiting taxpayers' exposure to civil and criminal penalties
in exchange for voluntary disclosure of their offshore
accounts and assets. Over the last 15 years, California has
enacted four iterations of amnesty programs, all of which have
since concluded:
a) The 2002 Revenue Acceleration Project (RAP) authorized
BOE and FTB to forgive both penalties and interest on
unpaid taxes for tax liabilities they identified as
uneconomical to collect and unlikely to be paid in full
within a reasonable amount of time. The BOE and FTB
collected approximately $7.3 million and $32 million,
respectively, in revenue from RAP.
b) The 2003 VCI (VCI 1) waived penalties for taxpayers who
amended their tax return to unwind use of an ATAT and paid
all taxes and interest due. The FTB collected
approximately $1.4 billion in revenue from VCI 1, and
estimates that $600 million was simply accelerated revenue
that would have been collected without amnesty.
c) The 2005 general amnesty program required BOE and FTB to
waive all unpaid penalties and fees for taxpayers that:
(1) failed to file a return, (2) understated their taxes on
a previously filed return, or (3) failed to pay their tax
obligation if they paid all taxes and interest due. The
BOE and FTB collected approximately $600.2 million and $765
million, respectively, in revenue from this program, and
estimates that $439.8 and $727 million, respectively, was
simply accelerated revenue that would have been collected
without amnesty.
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d) The 2010 VCI (VCI 2) waived penalties for taxpayers who
either utilized an ATAT or had unreported income from the
use of an offshore financial agreement and paid all taxes
and interest due. The FTB collected approximately $350
million in revenue from VCI 2.
With the exception of RAP, these tax amnesty programs also
generally shielded participating taxpayers from criminal
prosecution, while simultaneously increasing administrative
enforcement authority and penalties to encourage future
compliance.
1)Is Tax Amnesty Fair ? Tax amnesty programs must balance
accelerated collection of revenues otherwise due against
principles of general fairness towards law-abiding taxpayers
as such collection only occurs after special treatment is
afforded to taxpayers who break the law. Taxpayers who
benefit from amnesty are essentially given a loan from the
government at an interest rate that may be lower than what is
otherwise available to individuals and businesses who comply
with the law, putting law-abiding taxpayers at a competitive
disadvantage. Tax amnesty programs also often divert staff
and resources from existing departments that provide
assistance to law-abiding taxpayers.
Research shows that tax amnesty programs generally reduce
revenue collections prospectively, but that coupling such
programs with strengthened enforcement provisions may reduce
future noncompliance and sentiments of unfairness amongst
taxpayers who do not benefit from amnesty. This bill contains
some provisions that balance revenue collection with tax
compliance. Most importantly, this bill does not waive the
taxpayer from paying all outstanding interest in full, which
would otherwise amount to providing tax evaders with an
interest-free loan.
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However, the Committee may wish to consider some programmatic
changes to create a more fair and balanced tax amnesty
program. For example, similar to California's earlier VCI
programs, amnesty could be limited to certain categories of
unreported or underreported taxes, focusing on liabilities
otherwise unknown or uncollectable to the state instead of
allowing recent accounts receivable to qualify for amnesty
when the outstanding tax liability is already known and likely
subject to current enforcement actions. Additionally, similar
to California's earlier VCI and tax amnesty programs, measures
could be taken to reinforce the importance of tax compliance
by limiting future amnesty programs, increasing penalties, or
other enforcement reforms. In contrast, this bill give some
taxpayers who qualified for, but did not participate in, prior
amnesty programs a second chance at getting their now enhanced
penalties waived, and explicitly provides that there shall not
be an increased penalty structure on outstanding tax
liabilities upon the conclusion of this program's waiver
period.
2)Alternative Strategies for Tax Compliance : Since the
conclusion of earlier tax amnesty programs, California enacted
legislation to require both the BOE and FTB to publish public
lists of the 500 largest tax delinquencies and provide for the
suspension of professional, occupational, and driver's
licenses of delinquents whose names appear on the lists, with
the goal of increasing tax compliance and enforcement. The
Financial Institution Records Match (FIRM) program was also
implemented to match tax debtors' record files at both boards
against accounts held at financial institutions doing business
in California, making collection efforts more effective. The
BOE and FTB are also both undertaking tax system modernization
efforts, the Enterprise Data to Revenue (EDR) Project at the
FTB and the Centralized Revenue Opportunity System (CROS) at
the BOE, which will augment the numerous initiatives already
run by both departments to educate taxpayers about their tax
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liability and identify and collect underpaid or underreported
taxes. The Committee may wish to consider whether a tax
amnesty program is necessary for efficient tax administration
in light of existing programs.
3)Voluntary Disclosure Programs : The BOE and FTB currently
administer targeted disclosure programs for specific taxpayers
who are not aware of an obligation to file taxes in
California. The BOE voluntary disclosure program applies to
in-state purchasers who fail to report use tax purchases from
out-of-state retailers and out-of-state retailers who fail to
report use tax on sales to in-state consumers. If the
taxpayer has not been previously contacted by the BOE, files
all returns, and pays all tax and interest determined to be
due, the BOE will limit collection of use tax to the prior
three years and grants penalty relief. The FTB operates a
similar voluntary disclosure program for out-of-state
entities, shareholders, and beneficiaries that fail to file
returns because they were unaware of the obligation. If the
taxpayer files all returns and pays all tax and interest due
for the preceding six taxable years, the FTB will waive its
authority assess prior years' tax and associated penalties.
The FTB also administers a broader Filing Compliance Agreement
for taxpayers that are not eligible for its voluntary
disclosure program to abate penalties for which reasonable
cause is a defense.
Administrators, practitioners, and taxpayers have generally
deemed the voluntary disclosure programs operated by the BOE
and FTB effective at bringing taxpayers into compliance with
California filing requirements and generating increased
business activity in the state. As an alternative to broader
tax amnesty, the Committee may wish to consider ways to allow
additional business entities with minimal presence in the
state an opportunity to "come clean" and fully integrate into
the state economy without the threat of harsh penalties.
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4)Technical amendments : On Page 4, Line 20, strikeout "the" and
insert "and";
On Page 4, Line 39, strikeout "31" and insert "30";
On Page 8, Line 22, strikeout "In addition, the Franchise Tax"
and strikeout Lines 23 through 25, inclusive.
5)Related Legislation : AB 567 (Gipson) would provide medical
marijuana dispensaries with a six-month window to settle sales
tax and interest payment obligations, without being assessed a
monetary penalty, or risk losing their dispensary license. AB
567 is currently pending hearing by Senate Health.
6)Prior Legislation : SB 86 (Committee on Budget and Fiscal
Review), Chapter 14, Statutes of 2011, directed the FTB to
establish a VCI for ATATs, between August 1, 2011 through
October 31, 2011 for tax years prior to January 1, 2011, and
increased FTB enforcement authority to identify such taxpayers
who did not come forward.
AB 911 (Chu), Chapter 398, Statutes of 2005, made several
changes to ease administration of the 2005 tax amnesty
program.
SB 1100 (Committee on Budget and Fiscal Review), Chapter 226,
Statutes of 2004, enacted a tax amnesty program under the SUT,
PIT, and CT law, between February 1, 2005 through March 31,
2005 for tax years prior to January 1, 2003, and created an
enhanced penalty for any taxpayer who either failed to pay all
taxes and interest due or come forward during the amnesty
period.
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AB 2203 (Chu), of the 2003-04 Legislative Session, would have
created a tax amnesty program under the SUT, PIT, and CT law;
increased certain penalties and interest rates on unpaid tax
liabilities at the conclusion of the amnesty period; and
required the BOE and FTB to publish the names of taxpayers
with the largest tax delinquencies. AB 2203 was never heard
by the Senate Committee on Revenue and Taxation.
SB 614 (Cedillo and Burton), Chapter 656, Statutes of 2003,
enhanced penalties to curtail the use of abusive tax shelters
and directed the FTB to establish a VCI for ATATs, between
January 1, 2004 through April 15, 2004 for tax years prior to
January 1, 2003.
AB 2065 (Oropeza) Chapter 488, Statutes of 2002, established a
tax amnesty program under the SUT and PIT, between October 1,
2002 through June 30, 2003 for taxes owed prior to October 1,
2002.
REGISTERED SUPPORT / OPPOSITION:
Support
California Taxpayers Association
Opposition
AB 2692
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None on file
Analysis Prepared by:Irene Ho / REV. & TAX. / (916) 319-2098