BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 1065 - Walters
Introduced: February 17, 2010
Hearing: April 14, 2010 Fiscal: Yes
SUMMARY: Makes Permanent Currently Expired Innocent Spouse
Relief Conformity to Federal Law
EXISTING STATE AND FEDERAL LAW provide that spouses
who file a joint tax return are individually responsible
for the return's accuracy and the tax liability, regardless
of the amount of income each spouse generates, often called
"joint and several" liability. Because spouses can
occasionally misrepresent tax information without the
knowledge of the other spouse, federal law (The Internal
Revenue Restructuring Act of 1998) allows an innocent
spouse to qualify for relief under one of the following
provisions:
1.Understatement/Apportionment. To qualify for relief the
taxpayer must show that the understatement of tax is a
result of an erroneous item. In addition, the taxpayer
must show that at the time the return was signed he or
she did not know and had no reason to know of the
understatement of tax. Another option allows the
requesting spouse to show partial liability. To qualify
for relief from the liability that is attributed to the
portion of the understatement of income, the taxpayer
must show the same lack of knowledge, as described above,
when they signed the return.
2.Separate liability election. A requesting spouse may
elect to be taxed as though he or she filed a married
filing separate tax return. Any liability for
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understatement of tax, interest, and penalties will be
limited to the amount attributable to the income the
individual spouse actually earned. This relief is
available to taxpayers that are no longer married, are
legally separated, or have lived apart from their spouse
for 12 months prior to requesting relief. At the time
the joint return was signed, the requesting spouse must
have lacked actual knowledge of the item resulting in the
tax deficiency.
3.Equitable relief. The Internal Revenue Service (IRS)
determines from a review of all the facts and
circumstances that the requesting taxpayer would not
qualify for relief under either 1 or 2 above and it would
not be equitable to hold the requesting spouse liable for
any unpaid tax or any deficiency.
California conformed to portions of the 1998 federal Act
by enacting the Taxpayer Bill of Rights Act of 1999, which
revised and expanded innocent spouse relief at the state
level (SB 94, Chesbro, 1999). As a result, the California
innocent spouse provision was based upon, and similar to,
the federal provision.
EXISTING LAW , prior to 2003 and currently in place
because the provisions of SB 285 have expired (as discussed
below), requires FTB to provide notice and appeal rights to
the taxpayer on the joint return that did not request the
innocent spouse relief. California law allows two avenues
for relief that is not available under federal law.
1.Relief from Self-Assessed or Deficiency Tax Amounts by
Court Order. A taxpayer may seek a divorce court order
relieving the taxpayer of joint and several liabilities
for state income tax on a joint return as well as state
income tax resulting from an audit. The order cannot
relieve tax on any income that was earned by or derived
from assets under the exclusive control and management of
the taxpayer seeking relief. The gross income reported
on the return must not exceed $150,000 and the tax
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liability must not exceed $7,500. The court order must
state the tax years involved and can revise only unpaid
tax amounts. In those instances where either the gross
income or the tax liability exceeds the thresholds for
relief, and the taxpayer wants judicial relief, the
taxpayer must obtain and file with the court an FTB Tax
Revision Clearance Certificate.
2.Relief from Self-Assessed Tax Amounts. A taxpayer may
seek relief from the department on any unpaid
self-assessed tax liability on a joint return, including
penalties and interest. The tax liability must not be
attributable to income that was under the exclusive
control and management of the taxpayer seeking relief.
State law requires the taxpayer to demonstrate that he or
she did not know and had no reason to know of the
nonpayment of tax at the time the return was filed.
EXISTING LAW clarified that a taxpayer requesting
innocent spouse relief that previously received relief at
the federal level would be allowed similar relief at the
state level (SB 285, Speier, 2003). FTB would grant
innocent spouse relief whenever the IRS did, if:
The individual requests relief from FTB under
the federal IRS section;
The facts and circumstances that apply to the
understatement and the liabilities for which the
relief is requested are the same;
The non-requesting spouse has the opportunity
to provide information to FTB that is contrary to
information submitted by the requesting spouse.
SB 285 allowed the non-requesting spouse to provide
information that relief should not be granted to the extent
that:
Information that provides the facts and
circumstances for state relief are different than
those for federal relief;
Information that finds there has not been
relief granted under the federal provisions or that
relief has been substantially altered.
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The bill prohibited the FTB from issuing its
determination (denying or granting a request for relief) if
a request for federal relief is pending, and also precluded
relief if a court revises tax liability as part of a
dissolution of marriage. SB 285 applied to innocent spouse
relief requests received on or after its effective date,
January 1, 2004, but expired due to its sunset provision on
January 1, 2009.
THIS BILL reenacts the above provisions from SB 285.
Provisions relative to requests for innocent spouse relief
apply retroactively to January 1, 2009.
FISCAL EFFECT:
According to FTB, SB 1065 results in revenue losses of
$90,000 in 2009-10, and $200,000 annually thereafter.
COMMENTS:
A. Purpose of the Bill
Most married taxpayers file a joint tax return. In
the event a couple divorces, each individual is what the
law calls "jointly and severally liable" for the entire tax
liability. In situations where one individual, without the
knowledge of the other individual, has manipulated the
joint tax liability by concealing income or inflating
deductions, both individuals remain "jointly and severally
liable."
The law permits a taxpayer relief of the joint and
several liability if they demonstrate they did not know or
had no reason to know about the improperly reported income
or deductions. This person is deemed an "innocent spouse."
In these situations, collections efforts cease for the
"innocent spouse" and continue against the remaining
responsible taxpayer.
During the period from January 1, 2004, through
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December 31, 2008, under changes made by SB 285 (Speier,
Stats. 2003, Ch. 370), the Franchise Tax Board could grant
innocent spouse relief where the IRS already made an
innocent spouse finding. These changes relieved the burden
on a taxpayer to show for a second time that they were
entitled to relief and reduced the use of the state's
financial and personnel resources, in short, a WIN-WIN
situation.
In addition to reauthorizing the Franchise Tax Board
to rely on a federal innocent spouse determination, SB 1065
would enhance equitable treatment by conforming to recent
federal changes that broaden the appeal rights applicable
to innocent spouse relief determinations and would reduce
taxpayer confusion by eliminating obsolete language.
Taxpayers who request innocent spouse relief are often
going through a turbulent and emotional period. The
changes SB 1065 would make are both appropriate to the
circumstances and compassionate.
B. Not That Innocent
As part of SB 285, FTB submitted its review to the
Legislature displaying statistics for applicants of the
program on April 3, 2008. FTB staff have found the program
to be an effective improvement over past laws by
eliminating barriers for innocent spouses to claim and
receive relief. Additionally, given the difficult personal
issues involved with innocent spouse cases, having a
superior procedure assists both taxpayers and tax
administrators. The table below shows the quantitative
elements of innocent spouse relief:
Innocent Spouse Relief Claims
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-----------------------------------------------------------
| |Claims | |Claims | |
| |Received | |Granted | |
| | | | | |
|-----------+-----------+-----------+-----------+-----------|
|Year |Count |Value |Count |Value |
| | | | | |
|-----------+-----------+-----------+-----------+-----------|
|2004 |730 |$7,817,501 |123 |$3,624,320 |
| | | | | |
|-----------+-----------+-----------+-----------+-----------|
|2005 |721 |$21,168,260|125 |$4,866,962 |
| | | | | |
| | | | | |
|-----------+-----------+-----------+-----------+-----------|
|2006 |470 |$10,895,524|185 |$4,369,407 |
| | | | | |
| | | | | |
|-----------+-----------+-----------+-----------+-----------|
|2007 |483 |$3,020,471 |116 |$1,851,216 |
| | | | | |
|-----------+-----------+-----------+-----------+-----------|
|Total |2004 |$42,901,756|549 |$14,711,905|
| | | | | |
| | | | | |
|-----------+-----------+-----------+-----------+-----------|
| | | | | |
| | | | | |
-----------------------------------------------------------
Support and Opposition
Support:Franchise Tax Board (Sponsor)
Oppose:None Received
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Consultant: Colin Grinnell