BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 526 (Fuller) - Personal income taxes: joint returns: relief
from liability
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|Version: April 14, 2015 |Policy Vote: GOV. & F. 6 - 0 |
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|Urgency: No |Mandate: No |
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|Hearing Date: May 11, 2015 |Consultant: Robert Ingenito |
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This bill meets the criteria for referral to the Suspense File.
Bill
Summary: SB 526 would direct the Franchise Tax Board (FTB) to
consider the terms of a divorce settlement when determining
whether to grant equitable relief on a taxpayer's own income.
Fiscal
Impact: FTB indicates that the bill would result in an unknown
reduction to General Fund revenues; however, it estimates that
for every $1 million dollars of relief granted, General Fund
revenues would be reduced by $60,000. Administrative costs to
FTB are also expected to be minimally in the tens of thousands
of dollars annually (General Fund).
SB 526 (Fuller) Page 1 of
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Background: Spouses filing as "married filing jointly" are individually
responsible for the return's accuracy and the tax liability,
irrespective of the income split between them. This is referred
to as "joint and several" liability. While a court may revise
the tax liability in a proceeding for the dissolution of the
marriage, it cannot relieve a spouse of tax liability on earned
income over which he or she 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, to which California generally
conforms. To qualify for "innocent spouse relief" for state
income tax purposes, the following must occur:
The taxpayer must elect to do so within two years of the
beginning of involuntary collection activities.
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.
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 FTB to allow
similar relief for California income taxes whenever the Internal
Revenue Service (IRS) does so, under specified conditions. For
those not meeting the conditions, taxpayers can also request
"equitable relief" from FTB for self-assessed unpaid taxes
SB 526 (Fuller) Page 2 of
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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
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
SB 526 (Fuller) Page 3 of
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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.
Federal and state statutes are very similar; consequently, 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 a BOE case, a taxpayer appealed FTB's denial of equitable
relief for past unpaid taxes. 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.
Proposed Law:
This bill would provide 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.
SB 526 (Fuller) Page 4 of
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Staff
Comments: FTB would have to predict both the frequency and
dollar value of its own future discretionary actions in order to
accurately calculate future revenue loss resulting from this
bill. Specifically, it would need to estimate instances of when
it will provide discretionary relief. Such instances cannot be
known in advance; moreover, both the frequency and amounts of
such judgments would be unknown. Instead, FTB has developed a
calculation that for every $1 million of relief granted under
this bill, the General Fund revenue loss would be $60,000.
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