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).








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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  








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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  








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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.









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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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