BILL ANALYSIS Ó SB 540 Page 1 Date of Hearing: June 22, 2015 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Philip Ting, Chair SB 540 (Hertzberg) - As Amended April 15, 2015 Majority vote. Fiscal committee. SENATE VOTE: 36-0 SUBJECT: Franchise Tax Board: Taxpayers' Rights Advocate. SUMMARY: Modifies the Franchise Tax Board (FTB) Taxpayers' Rights Advocate Equity Relief Program (the "Program"). Specifically, this bill: 1)Extends the Program indefinitely, by repealing the January 1, 2016 sunset date. SB 540 Page 2 2)Requires the Taxpayers' Rights Advocate (the "Advocate") to coordinate with FTB's Chief Counsel (Chief Counsel), on or after January 1, 2016, in order to abate penalties, fees, additions to tax, or interest attributable to an erroneous action or inaction of, unreasonable delay caused by, or specified written advice issued by the FTB. 3)Eliminates the requirement for a taxpayer to file an application for relief. 4)Requires that records of relief granted to taxpayers be retained for at least one year. 5)Removes the cap imposed on the amount of total relief that may be granted by the Advocate. 6)Makes technical clarifying changes relating to the administration of the Program and specifies the operative dates for the proposed amendments. EXISTING STATE LAW: 1)Allows FTB staff to abate penalties, fees, additions to tax, and interest under very narrow circumstances. Specifically, interest may be abated in any of the following situations: a) The interest is attributable to an unreasonable delay by the FTB in performing a ministerial or managerial act. b) The FTB issues an assessment based on an Internal Revenue Service (IRS) assessment and the IRS abates interest due to an IRS delay. SB 540 Page 3 c) The FTB delays mailing notices or correspondence in connection with a presidentially-declared disaster or Governor-declared state of emergency. d) A taxpayer is experiencing an extreme financial hardship caused by a significant disability or catastrophic circumstance. e) A taxpayer relied on the written advice of a legal ruling by the Chief Counsel. 2)Provides that interest may be suspended in situations where the FTB fails to provide a notice to the taxpayer stating the amount owed and the basis of the amount owed within 36 months from the date on which the return was filed, or if later, the date it is due without regard to extension. Allows an abatement of some penalties in situations where the penalties carry reasonable-cause exceptions. 3)Allows an abatement of penalties or fees when the Chief Counsel rescinds the application of tax shelter penalties or fees as authorized. 4)Establishes the position of Advocate to coordinate the resolution of taxpayer complaints and problems and empowers the Advocate to review actions taken on a taxpayer's account. 5)Authorized the Advocate, from January 1, 2009, until January 1, 2016, to resolve taxpayer issues identified by the FTB and to waive penalties, fees, additions to tax, or interest attributable to an error or unreasonable delay on the part of the FTB. 6)Authorizes the Advocate to relieve taxpayers from penalties, fees, additions to tax, or interest, provided that the penalties, fees, additions to tax, or interest are SB 540 Page 4 attributable to any of the following: a) Erroneous action or inaction by the FTB in processing documents filed or payments made by taxpayers; b) Unreasonable delay caused by the FTB; or, c) Erroneous written advice that does not qualify for relief under Chief Counsel authority. [Revenue and Taxation Code (R&TC) Section 21012.] 7)Specifies that relief may be granted only if both of the following conditions are met: a) No significant aspect of that error or delay is attributed to the taxpayer involved; and, b) Relief is not available under any other provision of the Personal Income Tax Law or the Corporation Tax Law, including any relief granted under any regulation or other FTB administrative pronouncement. 8)Requires any relief in which the total reduction exceeds $500 to be submitted to Chief Counsel for concurrence. 9)Limits the amount of relief that may be granted by the Advocate to a taxpayer to $7,500 and authorizes the FTB to adjust the $7,500 amount for inflation, as specified. For tax year 2013, total relief granted by the Advocate may not exceed SB 540 Page 5 $7,600. 10)Provides that a public record with respect to a relief granted shall be placed on file in the office of the FTB's executive officer. Requires the public record to include all of the following information: a) The taxpayer's name; b) The total amount involved; c) The amount payable or refundable due to the error or delay; and, d) A summary of why the relief is warranted. 11)Specifies that a refund may be paid as a result of the relief granted only if the written claim for refund is received by the Advocate within the applicable statute of limitations. 12)States that a determination made by the Advocate is not subject to administrative or judicial review. FISCAL EFFECT: Unknown. SB 540 Page 6 COMMENTS: 1)Author's Statement . The author has provided the following statement in support of this bill: "Filing taxes can be challenging; it's even more frustrating for individuals who fall victim to administrative errors and delays from the tax collection agency. SB 540 improves the Taxpayers' Rights Advocate (TRA) program at the California Franchise Tax Board (FTB). The TRA works on behalf of Californians to correct problems that can cost individual taxpayers thousands of dollars." 2)Arguments in Support . The proponents of this bill state that the "[w]hen taxpayers fall victim to FTB errors and delays, prompt action is necessary to relieve erroneously assessed penalties, fees and interest." They note that since the "abatement program was enacted in 2009, relief has been provided to taxpayers for FTB's erroneous processing of tax returns, unreasonable delay in issuing a tax bill (due to a technology upgrade), and erroneous instruction of a specified tax form." The proponents argue that when dealing with the government, "taxpayers should have an advocate looking out for them to ensure that any errors and oversights are addressed in a timely manner," and that SB 540 recognizes that "the state should be held accountable for causing errors and delays." They further argue that eliminating the cap on the potential refund would not increase "the potential for claims or costs to the state," given the "strict standards under which a refund can be granted under this program." 3)The Taxpayers' Rights Advocate: Background . In 1988, the Katz-Harris Taxpayers' Bill of Rights Act (Chapter 1573, Statutes of 1988) codified many existing FTB administrative procedures and clarified the rights of California taxpayers. SB 540 Page 7 The Act also established the position of a Taxpayers' Rights Advocate to provide specified protections for taxpayers, including a resolution of taxpayer complaints and problems. On July 30, 1996, the federal Taxpayer Bill of Rights (P.L.104-168) was passed and California followed by enacting the Taxpayers' Rights: Conformity Legislation (Chapter 600, Statutes of 1997). A few years later, the California Legislature created the Taxpayers' Bill of Rights Act of 1999, further increasing protection of taxpayers' rights. The Taxpayers' Rights Advocate reports directly to the FTB's Executive Officer. The Advocate or his/her designee coordinates the resolution of taxpayer complaints and problems and, if appropriate, postpones enforcement action while the case is under review. In 2008, the Legislature temporarily provided the Advocate with the discretionary authority to grant relief to taxpayers under limited circumstances. (Chapter 305, Statutes of 2008.) Specifically, from January 1, 2009 until January 1, 2012, the Advocate was allowed to provide relief from penalties, fees, additions to tax, or interest imposed on a taxpayer due to erroneous actions or inactions of the FTB. The Advocate was able to grant relief only if no significant part of the error or delay was attributable to the taxpayer and relief was not available under existing law. This authority applied to requests received by the Advocate on or after January 1, 2009, and before January 1, 2012, regardless of the year involved. However, the Chief Counsel's concurrence was required to provide relief in excess of $500, as adjusted for inflation. The Chief Counsel was also required to notify the FTB of a relief amount exceeding $7,500. In 2012, the Legislature extended the Advocate's authority to grant relief until January 1, 2016 (Chapter 349, Statutes of 2012). At that time, the Legislature imposed a $7,500 cap on the amount of relief that may be provided in any given case, as adjusted annually for inflation, and required any relief exceeding $500 to be approved by FTB's executive officer, SB 540 Page 8 instead Chief Counsel. According to the FTB, since January 1, 2009, the Taxpayers' Rights Advocate used the discretionary authority three times to grant relief to taxpayers by abating interest. In one case, the interest amount of $2,100 was abated due to an erroneous action by the FTB, which occurred in the processing of the taxpayer's return. In the second case, relief in the amount of $1,800 was granted to the taxpayer because of an unreasonable delay by the FTB in issuing a bill due to a technology upgrade. Lastly, the Advocate abated interest for a group of 50 taxpayers because of the erroneous written advice contained in the California Fiduciary tax form instruction. While the total amount of interest abated in the last case was $1.1 million, the amount of relief granted to each individual taxpayer was below the statutory limit. The Advocate may only grant a refund when the taxpayer sends the written claim for relief within the applicable statutes of limitations. Whenever relief is granted, a public record must be created in the executive officer's office that documents the taxpayer's name, the total amount involved, the amount payable or refundable due to the error or delay, and a summary of why relief is warranted. However, existing law does not prescribe any retention period for records of relief granted by the Advocate. 4)What Does This Bill Do ? This bill proposes to eliminate the sunset date, thus making the Program permanent and remove the $7,500 cap on the amount of relief that may be granted by the Advocate. In addition, this bill requires the Advocate to coordinate with the Chief Counsel, beginning on January 1, 2016, in abating penalties, fees, additions to tax, or interest imposed, but would retain the existing requirement for the FTB Executive Officer to approve the amount of relief in excess of $500. This bill also eliminates the requirement for a taxpayer to file with the Advocate an application for SB 540 Page 9 relief and requires that the records of relief granted to taxpayers be placed on file in the office of the FTB Executive Officer for at least one year. 5)Is the Advocate's Permanent Authority Justified ? In the absence of the Advocate's authority to grant relief, eligible taxpayers do have other avenues for obtaining relief from penalties, fees, additions to tax or interest imposed. For example, those taxpayers may appeal to the State Board of Equalization or file a lawsuit for refund of taxes with a court. However, in those cases, the taxpayers most likely will have to incur additional costs, which may exceed the amount of penalties, interest, or other additions to tax. The FTB staff argues that the Advocate has prudently applied the discretionary authority since 2009, and it is time to re-enact the law without the sunset provision. 6)The Sky is the Limit . Existing law limits the total amount of relief that may be granted by the Advocate to $7,500, as adjusted for inflation. Existing law also authorizes, but does not require, the Advocate to grant relief to taxpayers under the Program. SB 540 proposes to remove the $7,500 ceiling and to require the Advocate to provide relief to taxpayer in coordination with the FTB Chief Counsel. The Committee may wish to consider whether the removal of the $7,500 ceiling is warranted, especially in light of the fact that the Advocate would be required to provide relief, as specified in the Program, and would have little discretion in deciding whether the relief - or its amount - is appropriate under the circumstances, once all of the applicable conditions have been met. REGISTERED SUPPORT / OPPOSITION: SB 540 Page 10 Support Franchise Tax Board (Sponsor) Howard Jarvis Taxpayers Association California Taxpayers Association California Chamber of Commerce Opposition None on file Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098 SB 540 Page 11