BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 402 - Wolk
Amended: April 16, 2009
Hearing: April 22, 2009 Fiscal: Yes
SUMMARY: Enacts the Financial Institution Record Match
Program
EXISTING LAW established the Financial Information
Data Match (FIDM) program, which requires financial
institutions to match its customer records against a list
of child support obligors. Financial institutions may
comply with the requirement by sending its depositor
information to the Franchise Tax Board (FTB), or match the
names themselves, either in-house or contracting with a
data management firm. Once a name from the child support
obligors list matches a name on the financial institution's
customer records, the FTB issues an order to withhold (OTW)
to the financial institution, which must then freeze the
taxpayer's assets, hold the assets for ten days, and then
remit to the department all cash or cash equivalents
necessary to meet the amount owed. Federal law bars any
FIDM information from being used for any other purposes.
Additionally, FIDM prohibits collecting against any income
tax debts, allowing only for outstanding child support.
EXISTING LAW generally prohibits unlawful disclosure
or inspection of any income tax return information except
as specified in law. Criminal sanctions, including
imprisonment apply to FTB personnel convicted of unlawful
disclosure or inspection of tax records. The Franchise
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Tax Board (FTB) must notify a taxpayer if criminal charges
have been filed for willful unauthorized inspection or
disclosure of their tax data.
THIS BILL enacts the Financial Information Record
Match (FIRM) program, modeled after FIDM and administered
by FTB, which requires financial institutions to match a
list for delinquent tax debtors against its customer
records. FIRM applies only to individuals who are
delinquent tax debtors on or after the enactment date of
the bill. Financial institutions must provide to the FTB
on a quarterly basis the name, record address, social
security number or taxpayer identification number for each
delinquent tax debtor in its customer records. Financial
institutions shall not disclose to a depositor that their
name and information has been submitted to FTB except as
otherwise required by law.
THIS BILL requires FTB to reimburse a financial
institution for its actual costs incurred to implement
FIRM. Financial institutions must supply FTB with an
invoice, which will then pay up to $2,500 for startup costs
and no more than $250 per calendar quarter thereafter.
THIS BILL ensures that financial institutions cannot
be held liable for furnishing information to the FTB as
required by FIRM, failing to disclose to a depositor that
their name and information was supplied to FTB, and any
other action taken in good faith to comply with the
program.
THIS BILL allows FTB to apply a penalty of $50 to a
financial institution for each record not provided, not to
exceed $100,000 per institution, for willfully failing to
comply with FIRM unless reasonable cause can be shown. FTB
may also pursue civil penalties.
THIS BILL provides definitions for its terms to ensure
consistency with FIDM.
THIS BILL allows FTB to prescribe any rules and
regulations necessary to implement FIRM, including:
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A file matching structure for FTB and
financial institutions or their data processing
agents.
An option for financial institutions
without the technical ability to process the data
or hire a data processing agent to forward
customer information to FTB to perform the match
instead.
Authority for the FTB to suspend the
requirements of the section if FTB determines
that the financial institution is
undercapitalized according to Federal Deposit
Insurance Corporation regulations.
THIS BILL states that implementing FIRM is contingent
on an appropriation of funds, and is not operative until
120 days after the date the funds are appropriated. The
bill further limits the first data file to 600,000 data
records, and subsequent data files cannot increase by more
than 600,000 records.
THIS BILL also provides an exception to laws barring
unlawful inspection and disclosure to allow FTB to disclose
names and information to financial institutions to
effectuate the program; however, the measure ties in
criminal sanctions that currently apply to FTB to any use
of information other than collection of taxes and non-tax
debt referred to FTB for collection. The bill also exempts
FIRM from the provisions of the California Right to
Financial Privacy Act.
FISCAL EFFECT:
According to FTB, the measure would result in
increased tax collections of $35 million in 2010-11, $63
million in 2011-12, and $99 million in 2012-13, plus some
increases in non tax-debt collections. The measure also
incurs implementation costs to FTB of $3.9 million in
2009-10, $7.2 million in 2010-11, and $5.3 million in
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2011-12.
COMMENTS:
A. Purpose of the Bill
According to the Author, "In today's times of fiscal
strife, where key public services face tremendous cuts and
law-abiding taxpayers pay higher sales and income tax rates
than ever before, the state must do a better job of
employing modern collection techniques and information
technology to collect uncollected taxes due. SB 402
presents such a step by requiring financial institutions to
match its customer records against the FTB's database of
individuals with final tax delinquencies. Tax delinquents
are often very smart - moving money from account to account
before the state can catch them. SB 402 is a smart
approach - it allows FTB to share data with banks and
credit unions to identify depositors with unpaid tax
obligations and quickly issue orders to withhold, resulting
in the state collected delinquent taxes before tax cheats
can evade collections again. Banks and credit unions
already perform this data matching to collect outstanding
child support, and SB 402 builds on this infrastructure by
helping enhance tax collections without an unworkable
administrative difficulty for financial institutions.
Several other states use data matching for income tax
delinquencies, and there's never been a more crucial time
to update its efforts to collect outstanding taxes."
B. Building on Success
California has made several efforts to reduce the "tax
gap," the difference between the actual amount of taxes
owed under current law and the amount actually collected.
While estimates of the tax gap vary, reducing the tax gap
provides revenue for public services without increasing
taxes on taxpayers who comply with the law. The FIDM
program has been successful in detecting individuals who
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owe child support, and FTB wants to apply similar steps to
delinquent income tax accounts to increase collections.
Financial institutions are familiar with FIDM, and SB 402
closely resembles that program to maximize collections at a
minimum administrative difficultly for financial
institutions. SB 402 allows California to join Indiana,
Kentucky, Maryland, Massachusetts, Minnesota, New Jersey,
and New York, among others, to build upon the FIDM and
reduce the tax gap.
C. Only the Lonely Can Play
SB 402 grants FTB a powerful tool to use to collect
unpaid income taxes; data matching will result in more
orders to withhold on taxpayers who have previously eluded
other collections efforts. Data matching is currently
limited only to delinquent child support obligations. With
these considerations in mind, SB 402 is limited only to
final delinquent taxes, so its data matching tools cannot
be used for any taxpayer who is still in adjudicatory
process. The bill does not allow data matching for
accounts of taxpayers' currently protesting tax due in the
FTB administrative process, pursuing an income tax appeals
at BOE, or seeking relief from a court of law on a tax
case.
D. Suggested Amendments
SB 402 currently allows FTB to issue regulations that
exempt banks that are undercapitalized according to FDIC
regulations because banks in financial difficulty should
deploy its finite resources toward maintaining capital
levels instead of helping the state collect its income tax
debts. The Committee may wish to consider amendments that
instead of directing FTB to make a decision regarding a
financial institution's level of capitalization, instead
allows financial institutions to provide FTB a written
notice from its appropriate regulator that the firm meets
regulatory definitions of undercapitalized, significantly
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undercapitalized, or critically undercapitalized. Part of
these amendments should include a provision to ensure that
these written notices are confidential and criminal
sanctions that apply to FTB personnel for unlawful
inspection and disclosure.
On Page 1, Line 31, before "if," insert:
"if a financial institution provides to"
On Page 1, Line 31, strike out
"determines," and insert: "a formal order from
its supervisory banking authority that it is
determined to be."
On Page 1, Line 32, after "capitalized,"
insert: ", significantly undercapitalized, or
critically undercapitalized"
On Page 1, Line 33, after "(2))," insert:
"or NCUA Regulation 702.102. The notice
provided to FTB pursuant to this section shall be
subject to Section 19542."
Support and Opposition
Support:Franchise Tax Board
California School Employees Association
Oppose:None Received
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Consultant: Colin Grinnell
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