BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 526 |Hearing |4/29/15 |
| | |Date: | |
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|Author: |Fuller |Tax Levy: |No |
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|Version: |4/14/15 |Fiscal: |Yes |
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|Consultant|Grinnell |
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PERSONAL INCOME TAXES: JOINT RETURNS: RELIEF FROM LIABILITY.
Directs FTB to consider the terms of a divorce settlement when
determining whether to grant equitable relief on a taxpayer's
own income.
Background and Existing Law
Spouses filing as "married filing jointly" are individually
responsible for the return's accuracy and the tax liability,
regardless of the amount of income each spouse generates, often
called "joint and several" liability. However, a court may
revise this liability in a proceeding for the dissolution of the
marriage, but cannot relieve a spouse of tax liability on income
that he or she earns or has exclusive management and control
over.
Because spouses can occasionally misrepresent tax information on
a joint return without the knowledge of the other spouse,
federal law allows an innocent spouse to qualify for relief
under specified circumstances, which California conforms to for
the most part. To qualify for "innocent spouse relief" for
state income tax purposes:
The taxpayer must elect to do so within two years of the
beginning of involuntary collection activities,
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The taxpayer must demonstrate the he or she did not know
and had no reason to know of the understatement of tax at
the time the return was signed.
Franchise Tax Board (FTB) must determine that it's
inequitable to hold the innocent spouse liable, taking into
account all facts and circumstances.
FTB can also reassign liabilities to the responsible spouse or
registered domestic partner (RDPs). The taxpayer must satisfy
all of the above requirements, but also must be divorced,
separated, or living apart from the other person on the joint
return for 12 months before making the election to request
relief. Additionally, the Legislature directed Franchise Tax
Board (FTB) to allow similar relief for California income taxes
whenever the Internal Revenue Service (IRS) does under the
following conditions (SB 285, Speier, 2003, and SB 1055,
Walters, 2010):
The taxpayer requests the same relief from FTB that they
did from the IRS,
The taxpayer furnishes FTB with a copy of the IRS's
determination,
The facts and circumstances that apply to the
understatement and the liabilities for which the relief is
requested are the same;
The non-requesting spouse has the opportunity to provide
information to FTB that is contrary to information
submitted by the requesting spouse.
For those not meeting the above requirements, taxpayers can also
request "equitable relief" from FTB for self-assessed unpaid
taxes reported on a joint return, similar to federal law. While
not part of the law, FTB states that it considers the following
factors when determining whether to relieve individuals of
liability of unpaid taxes or any deficiency:
The taxpayer's current marital/registered domestic
partner status.
Documented proof of abuse from spouse/RDP during
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marriage or registered domestic partnership.
Proof that when the taxpayer signed the tax return, he
or she expected to satisfy the tax liability.
In the case of tax resulting from an audit, the taxpayer
wasn't aware of the tax liability understatement.
The taxpayer's current financial situation and ability
to pay the tax liability.
Whether a divorce decree, termination of a registered
domestic partnership, or the legally binding agreement
identifies one taxpayer as legally liable to pay the tax
liability.
Whether the taxpayer received a significant benefit from
the unpaid income tax liability or tax deficiency.
Taxpayer compliance with income tax laws in later tax
years,
FTB must notify the other spouse, ex-spouse, RDP, or ex-RDP to
allow the non-requesting spouse/RDP an opportunity to provide
documentation to grant relief. FTB also notifies them of any
action, and provides the non-requesting spouse/RDP with an
opportunity to appeal.
IRS Revenue Procedures set forth the requirements for equitable
relief at the federal level, including that the taxpayer
requesting relief did not know or have reason to know that there
was an understatement or deficiency on the joint return. IRS
recently expanded its equitable relief provisions to provide
that this requirement is satisfied when the requesting spouse
has been abused and didn't challenge anything on the joint
return for fear of the nonrequesting spouse's retaliation.
Because federal and state statutes are very similar, so FTB
usually applies IRS revenue procedures for innocent spouse
relief for California cases; however, taxpayers who don't obtain
relief can appeal these decisions to the Board of Equalization
(BOE).
In the recent BOE case, Appeal of Tonya M. Jarrell, the taxpayer
appealed FTB's denial of equitable relief for past unpaid taxes.
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FTB stated that the taxpayer failed to establish that she had
reason to believe that her tax liability would be paid when the
return was filed, she didn't provide documentation showing she
didn't know about the liabilities, and current law doesn't allow
innocent spouse relief for income exclusively attributable to
the innocent spouse. The taxpayer argued that the divorce
settlement between her and her husband allocated the obligation
to pay delinquent taxes to him, so she should be absolved of any
tax debt. BOE Member George Runner wants to require FTB to
positively consider an instance where the individual's liability
has been revised under a judgment of dissolution of marriage
when deciding whether to grant equitable relief from liability
on income they earn or is exclusively under their control.
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Proposed Law
Senate Bill 526 provides that when FTB is considering a request
for relief from liability for income earned by the requesting
spouse or under his or her exclusive management and control,
the fact that an individual's liability for unpaid taxes or
deficiency has been revised under a judgment of dissolution of
marriage may be a factor weighing in favor of the requesting
taxpayer, when the
State Revenue Impact
Pending.
Comments
1. Purpose of the bill . According to the author, "According to
members of the Board of Equalization (BOE), the BOE has
adjudicated a number of appeals from the Franchise Tax Board
(FTB) that have involved taxpayers who believed they had
successfully divided assets and debts, including tax
liabilities, in a divorce agreement. Current law does not allow
the FTB, and by extension the BOE in its quasi-judicial
function, to rely on a marital settlement agreement to relieve a
spouse of a joint income tax liability unless the agreement
meets a number of technical conditions contained in Revenue and
Taxation Code section 19006(b). SB 526 grants the FTB the
authority to consider a divorce agreement as a factor weighing
in favor of granting relief when a taxpayer requests that the
agency assign outstanding tax liabilities to the spouse who
agreed to pay them, rather than holding both parties jointly
liable. The current law forces the spouse requesting relief to
return to court in order to have the marital settlement
agreement enforced. After negotiating a fair division of assets
and debts, taxpayers are surprised when they learn that their
agreement will not be honored by the state government. By
providing the FTB the ability to abide by the agreement that was
negotiated between spouses, this would limit additional needless
litigation in both the courts of California as well as appeals
to the Board of Equalization."
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2. Precedent . Innocent spouse relief exists for tax agencies
to provide relief from joint tax liabilities for taxpayers who
signed joint returns with their spouses, but were kept in the
dark about the other spouse's income, business interests, or
financial activities. IRS and FTB grant innocent spouse relief
to these taxpayers because they have no legitimate reason to
know that they have a tax obligation arising from items about
which they had no knowledge. Only in a few, limited
circumstances has the IRS granted relief for unpaid liability on
income earned by the requesting spouse, because that spouse
should know that tax applies whenever he or she earns income.
SB 526 sets a new precedent to allow FTB, or BOE as part of an
appeal of FTB's determination, to grant relief on the requesting
spouse's own income in any case where the requesting spouse has
a divorce agreement obligating the non-requesting spouse to pay
any outstanding taxes. IRS's recent guidance indicates that it
will grant relief on the requesting spouse's own income in cases
of abuse or misappropriation of funds, and FTB will follow that
guidance regardless of any legislative change, so SB 526 will
only apply in cases where no abuse or misappropriation of funds
occurred, putting the state out of conformity with federal
treatment. The Committee may wish to consider the precedent SB
526 sets.
3. Not so innocent ? Divorce settlements result from often
difficult negotiations between two former spouses to allocate
their former joint assets and liabilities, which often involve
tax debts. Existing law allows taxpayers to have the liability
revised by a court proceeding for dissolution of marriage. The
order must separately state the income tax liabilities for the
taxable years for which revision is granted. Taxpayers with
income above a specified amount also must obtain a tax revision
clearance certificate from FTB to give to a court issuing the
divorce settlement, detailing the amounts of tax, interest, and
penalties due to ensure this information is incorporated into
the settlement. Under SB 526, FTB or BOE could grant the
requesting spouse equitable relief merely by showing that the
settlement agreement revised any unpaid tax, thereby shifting
the obligation from the requesting spouse to the other one.
Spouses could then seek to reassign tax debts on their own
income for specific taxable years to their former spouses, when
the divorce settlement only speaks in more general terms about
tax debts from income generated by one spouse or the other, or
both, without being specific to the taxable year. Additionally,
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SB 526 doesn't compel notification to the other spouse, or grant
him or her opportunity to comment, which innocent spouse relief
provisions currently require. The Committee may wish to
consider whether SB 526 provides leverage to revise a previously
settled divorce agreement.
Support and
Opposition 4/23/15
Support : BOE Member George Runner.
Opposition : Unknown.
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