BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                     SB 540


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          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. 









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          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. 








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             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  








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            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  








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            $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. 









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          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.   








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            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,  








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            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  








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            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:









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          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















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