BILL ANALYSIS
SB 1065
Page 1
Date of Hearing: June 28, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
SB 1065 (Walters) - As Introduced: February 17, 2010
Majority vote. Fiscal committee.
SENATE VOTE : 35-0
SUBJECT : Income tax: joint returns: innocent spouse relief
SUMMARY : Modifies the statutory provisions that grant "innocent
spouse" relief to more closely conform California law to federal
law. Specifically, this bill :
1)Provides that any individual who has been granted "innocent
spouse" relief under Internal Revenue Code (IRC) Section 6015,
relating to joint and several liability with respect to a
federal joint income tax return, shall be eligible for state
relief if all of the following conditions are satisfied:
a) The individual requests relief;
b) The facts and circumstances that apply to the
understatement and liabilities for which relief is
requested are the same facts and circumstances that applied
to the understatement and liabilities for which the
individual was granted relief under IRC Section 6015; and,
c) The individual seeking relief provides the Franchise Tax
Board (FTB) with a copy of the federal determination
granting relief.
2)Specifies that these relief provisions shall not apply if the
other individual who filed the joint return submits specified
information to FTB indicating that relief should not be
granted.
3)Provides that, if the individual seeking relief demonstrates
to FTB that a federal request for relief has been filed with
the Internal Revenue Service (IRS) and demonstrates that the
federal request for relief involves the same facts and
circumstances as the request pending before FTB, then FTB may
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not deny relief with respect to that request until action on
the federal request is final.
4)Allows a taxpayer to appeal FTB's decision on an "equitable
relief" request for innocent spouse relief.
5)Applies on and after January 1, 2009.
EXISTING LAW provides that:
1)Whenever a joint return is filed by a husband and wife, the
liability for the tax on the aggregate income is joint and
several.
2)An individual who has made a joint return may seek innocent
spouse tax relief if the following conditions are met:
a) On that return there is an understatement of tax
attributable to erroneous items of one individual filing
the joint return;
b) The other individual filing the joint return establishes
that he/she did not know of, and had no reason to know of,
that understatement;
c) Taking into account all facts and circumstances, it is
inequitable to hold the other individual liable for the
deficiency in tax attributable to that understatement; and,
d) The other individual elects relief within two years of
the date FTB begins collection activities.
3)Upon election, an individual's liability for any deficiency
assessed with respect to a joint return may not exceed the
portion of the deficiency properly allocable to the individual
if:
a) At the time of election, the individual is no longer
married to, or is legally separated from, the person with
whom that individual filed the joint return; or,
b) The individual was not a member of the same household as
the person with whom the joint return was filed at any time
during the 12-month period ending on the date the election
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is filed.
4)If relief is not available under the provisions set forth
above, FTB may relieve an individual of liability on equitable
grounds.
FISCAL EFFECT : According to FTB, this bill will result in
revenue losses of $90,000 in fiscal year 2009-10, and $200,000
annually thereafter.
COMMENTS :
1)Both the author and FTB, which is sponsoring this bill, note
the following:
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 December
31, 2008, under changes made by SB 285 (Speier, Stats.
2003, Ch. 370), the FTB 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 FTB to rely on federal
innocent spouse determinations, SB 1065 would enhance
equitable treatment by conforming to recent federal changes
that broaden the appeal rights applicable to innocent
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spouse relief determinations.
2)Committee Staff Comments
a) Background : Under both federal and state law, spouses
who file a joint tax return are individually responsible
for the return's accuracy and for the full tax liability
for that tax year. This concept, referred to as "joint and
several liability," can inequitably impact one spouse in
particular circumstances. Consequently, both the federal
government and the state have enacted "innocent spouse"
legislation. These provisions allow taxpayers, under
specified circumstances, to be relieved of some or all of
the responsibility for a joint tax debt.
b) Federal "Innocent Spouse" Law : The IRS Restructuring
and Reform Act of 1998 (1998 Act) made innocent spouse
relief easier to obtain. Specifically, the 1998 Act allows
an innocent spouse to qualify for relief under any of the
following three provisions:
i) Understatement/Apportionment : A spouse may request
relief for a taxable year to the extent the liability is
attributable to an assessment of tax exceeding the amount
reported on the return (i.e., an 'understatement of
tax'). Generally, the requesting party must show that
the understatement resulted from an erroneous item, such
as an omission of income or an overstatement of
deductible expenses. In addition, the taxpayer must show
that, at the time the return was signed, he/she did not
know and had no reason to know of the erroneous item that
caused the understatement. If the taxpayer can show lack
of knowledge with respect to a portion of the
understatement, the taxpayer may be relieved of liability
for the tax attributable to that portion of the
understatement.
ii) Separate Liability Election : A requesting spouse
may elect to be taxed as though he/she filed a "married
filing separate" tax return. This relief is available to
taxpayers who are no longer married, are legally
separated, or who have lived apart from their spouse
during the 12-month period preceding the request for
relief.
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iii) Equitable Relief : An individual who does not
qualify for the relief specified above may still obtain
relief if, after taking into account all the facts and
circumstances, it is determined to be inequitable to hold
the individual liable for any unpaid tax or any
deficiency.
The Tax Relief and Health Care Act of 2006 (2006 Act) gave
the Tax Court authority to review an IRS denial of a
taxpayer's request for equitable innocent spouse relief.
c) State "Innocent Spouse Law" : FTB notes that, in 1999,
California conformed to portions of the 1998 Act by
enacting the Taxpayers' Bill of Rights Act of 1999. In
addition, California provides two avenues for innocent
spouse relief not available under federal law:
i) The liability may be revised by a court in a
proceeding for dissolution of marriage, under specified
circumstances; and,
ii) A taxpayer may seek relief from FTB on any unpaid
self-assessed tax liability on a joint return, including
penalties and interest.
From January 1, 2004, through December 31, 2008, an
individual who had been granted relief from specified joint
and several liability provisions under IRC Section 6015
would also be granted relief under California law when the
facts and circumstances supporting relief were the same.
This provision was repealed by a sunset provision.
In addition, California has not conformed to the 2006 Act.
As a result, "equitable relief" determinations by FTB
cannot currently be appealed.
d) What Would This Bill Do? : This bill would reenact and
make permanent the statutory requirement that FTB grant
innocent spouse relief when the IRS has granted federal
relief under the same facts and circumstances. This bill
would also allow a taxpayer to appeal FTB's decision on a
request for equitable innocent spouse relief.
e) Related Legislation : SB 285 (Speier), Chapter 370,
Statutes of 2003, required FTB to grant innocent spouse
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relief to an individual who had received federal relief
based on the same facts and circumstances. SB 285 was
repealed by its own provisions effective January 1, 2009.
REGISTERED SUPPORT / OPPOSITION :
Support
Franchise Tax Board (sponsor)
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098