BILL ANALYSIS �
AB 1006
Page 1
Date of Hearing: April 11, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 1006 (Cook) - As Introduced: February 18, 2011
Majority vote. Fiscal committee.
SUBJECT : Taxation: Franchise Tax Board: burden of proof:
statute of limitations.
SUMMARY : Transfers the burden of proof from the taxpayer to the
Franchise Tax Board (FTB) in all court and tax administrative
tax proceedings and revises the statute of limitations for the
FTB to issue a proposed deficiency from four (six in certain
instances) to three years. Specifically, this bill :
1)Requires that, in any court or administrative tax proceeding
with respect to a factual issue relating to ascertaining the
tax liability of a taxpayer, FTB has the burden of proof by a
preponderance of evidence.
a) Defines "administrative tax proceeding" as the oral
hearing before the members of the State Board of
Equalization (BOE) regarding disputes concerning taxes
collected by the FTB.
b) Defines "tax liability" as any tax or fee assessed or
determined by the FTB, including any interest accrued or
penalties levied in association with the tax or fee.
2)Does not subject a taxpayer to unreasonable search or access
to records in violation of the United States (U.S.)
Constitution, the California Constitution, or any other law.
3)Reduces the statute of limitations for the FTB to issue a
proposed deficiency from four years (six in certain instances)
to three years.
4)Requires the FTB to have "just cause" in order to begin any
audit.
5)Reduces the statute of limitations for a taxpayer to amend
his/her separate return to a joint return from four years to
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three years.
6)Applies to court and administrative tax proceedings involving
assessments and notices of determinations issued on or after
January 1, 2012.
EXISTING FEDERAL LAW places the burden of proof on the Internal
Revenue Service (IRS) in any "court proceeding" involving a
factual issue, if the taxpayer introduces credible evidence with
respect to the factual issue relevant to ascertaining the
taxpayer's tax liability �Internal Revenue Code (IRC) Section
7491]. Specifically, the burden of proof shifts to the IRS if
the taxpayer (a) complies with all the substantiation
requirements of the IRC; (b) maintains all the records required
by the IRC; (c) cooperates with the IRS' reasonable requests for
witnesses, information, documents, meetings, and interviews, and
(d) meets the net worth requirement ($7 million or less) if the
taxpayer is a partnership, corporation, or trust.
The IRS must generally issue a deficiency assessment within
three years after the original due date of the return or the
date the return was filed, whichever is the later. Returns
filed prior to the original due date are deemed to be filed on
the original due date. For omissions of gross income greater
than 25% of the gross income stated on the return, the period to
issue a deficiency assessment is increased from three years to
six. Refunds must generally be claimed within three years from
the date the return was filed or two years from the date of
payment, whichever is later.
A taxpayer may amend his/her separate return to a joint return
within three years from the original due date of the return.
EXISTING STATE LAW establishes a general burden of proof
evidentiary standard of preponderance of the evidence, thus,
placing the burden on the person controlling the facts. This
burden is imposed on the taxpayer for most items where
the taxpayer disputes a proposed assessment or claims a refund
of tax. Limited exceptions to this general burden of proof
standard exist, primarily in the imposition of penalties or, in
pursuit of, criminal convictions. For example, the evidence
standard needed to establish civil tax fraud is clear and
convincing, and that burden rests with the tax agency.
In modified conformity with the federal law, FTB, in connection
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with appeals before BOE, has the burden of producing reasonable
and probative additional information to prove the correctness of
an assessment that is based upon a taxpayer's inability to
substantiate items reflected on their income tax return,
third-party information returns, or information the FTB receives
from the IRS, if the taxpayer sets forth a reasonable argument
regarding the disputed income, appeals FTB's action, and fully
cooperates with FTB.
Generally, the FTB must issue a deficiency assessment within
four years after the original due date of the return or the date
the return was filed, whichever is the later. Returns filed
prior to the original due date are deemed to be filed on the
original due date. For omissions of gross income greater than
25% of the gross income stated on the return, the period to
issue a deficiency assessment is increased from four years to
six. Refunds must generally be claimed within four years from
the date the return was filed, four years from the date the
return was filed if filed by the extended due date, or one year
from the date of payment, whichever is later.
A taxpayer may amend his/her separate return to a joint return
within four years from the original due date of the return.
FISCAL EFFECT : The FTB staff estimates that this bill will
reduce General Fund revenues by $220 million in fiscal year (FY)
2011-12, $500 million in FY 2012-13, and $850 million in FY
2013-14.
The FTB states that this estimate does not include any revenue
loss from a decrease in self-compliance that may occur due to
placing the burden of proof on the FTB. A rule of thumb
estimate is that for every 1% decrease in self-compliance under
the Personal Income Tax and Corporate Tax Laws caused by this
bill, approximately $600 million in tax revenue would be lost.
COMMENTS :
1)Author's Statement. The author provided the following
statement:
Current law puts honest, hard-working taxpayers at an
unfair disadvantage when dealing with the FTB. The last
thing a struggling small business owner needs is to fight
against a government audit, especially years after the
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supposed violation occurred. This bill levels the playing
field and ensures that all audits conducted by the
government are merited and fall within the law, while also
giving the taxpayer the opportunity to properly defend
themselves.
2)Purpose of this Bill. According to the author, the purpose of
this bill is to provide equality in state tax law between
taxpayers and the FTB. The author states the inequity stems
in part from the fact that taxpayers may only amend their
forms for the previous three years, while the FTB may audit
tax forms from the previous four years. As a result of the
one year difference, a taxpayer can be penalized for a mistake
that the taxpayer cannot rectify.
3)Arguments in Opposition. Opponents state that the shift in
the burden of proof to the FTB would cause disruption in tax
collections and could benefit the underground economy.
Opponents further state that the shift in the burden of proof
could also encourage large corporate taxpayers to make audit
and compliance as difficult as possible. Opponents refer to a
comment by the Tax Executives Institute, an organization that
monitors federal tax issues, that the shift in burden of proof
would either make the IRS more intrusive, or the tax system
less effective, neither of which is a desirable outcome.
4)FTB Provided the Following Information on Other States. The
states surveyed include Florida, Illinois, Massachusetts,
Michigan, Minnesota, and New York. These states were selected
due to their similarities to California's economy, business
entity types, and tax laws.
a) Florida, Illinois, Massachusetts, Michigan, Minnesota,
and New York do not have laws placing the burden of proof
on the tax agency comparable to what is proposed by this
bill.
b) The statute of limitations for Florida, Illinois,
Massachusetts, and New York to issue a deficiency
assessment is generally three years after the date the tax
return is filed.
c) The statute of limitations for Michigan and Minnesota to
issue a deficiency assessment is generally four years and
three and one-half years respectively, after the date the
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tax return is filed.
5)FTB Concerns. The FTB staff analysis of this bill identifies
numerous implementation concerns. Among these concerns are:
a) Currently, there are no statutes or regulations that
require a California taxpayer to maintain specific records,
with the exception of water's-edge entities. The FTB is
not authorized to require most taxpayers to keep records or
other evidence necessary to determine the tax. Additional
statutes would be required to create sufficient
record requirements to permit a taxpayer to meet the
definition of cooperating taxpayer and authorize the FTB to
issue regulations establishing record-keeping requirements.
b) Unlike the federal law, this bill does not require a
taxpayer to first introduce credible evidence with respect
to a factual issue in dispute. The FTB staff argues that,
if a taxpayer is not required to first introduce credible
evidence, it may be difficult in many cases for the taxing
agency to meet its burden of proof because the taxpayer has
control of the records and documents necessary to ascertain
the taxpayer's tax liability.
c) This bill would place the burden of proof on the FTB for
a deficiency assessment issued by the FTB based on changes
to a taxpayer's federal income tax return by the IRS.
Changing the burden of proof for cases based on federal
audits could require the FTB to reexamine issues already
determined by the IRS.
d) Currently, taxpayers may waive their rights to an oral
hearing before the BOE, and thus, it is not clear whether
this bill would apply to appeals where the taxpayer waived
that right. Does FTB still have a burden
of proof in the case where the taxpayer waived his/her
right to an oral hearing? A substantial majority of
taxpayers waive that right, but FTB staff learns whether
there will be an oral hearing after opening briefs are
prepared and filed. If it is the author's intent that this
bill apply to all appeals before the BOE, the author may
wish to clarify the language to state that the shift in the
burden of proof would apply to taxpayers that waive the
right to an oral hearing before the BOE.
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e) This bill states that it will only apply to court or
administrative tax proceedings involving assessments or
notices of determination issued on or after the operative
date of this bill. It is unclear if the author's intent is
to exclude matters related to a claim for refund.
f) While this bill would reduce the general statute of
limitations for the FTB to issue a deficiency assessment
from four years to three years, it would leave unchanged
the general four-year statute of limitations for the
taxpayer to file a claim for refund. This imbalance could
provide a taxpayer the opportunity to wait until after the
three-year assessment statute of limitations to file a
claim for refund for a tax year, which would prevent the
FTB from identifying any offsetting deficiency items for
the tax year for which the claim for refund is filed.
g) The FTB assumes no additional resources would be
approved by the Legislature to compensate for the effects
of this bill. This bill would not significantly impact the
department's costs; rather, this bill would result in audit
and legal staff spending more time developing cases.
Spending more time developing cases combined with the
reduction of the statute of limitations for the FTB to
issue a deficiency assessment would result in fewer audits
conducted and resolved each year.
6) Committee Staff Notes all of the Following.
a) The shift in the burden of proof at the federal level
occurs only in proceedings before the U.S. Tax Court and
only after the taxpayer produces credible evidence with
respect to any factual issue relevant to ascertaining the
taxpayer's liability. This bill's attempt to shift the
burden in administrative proceedings is not consistent with
the federal action.
b) This bill requires the FTB to have "just cause" in order
to begin any audit, but fails to define the term "just
cause." The lack of definition could lead to confusion,
disputes with taxpayers, and complicate the administration
of this bill. It is recommended that this bill be amended
to define "just cause."
c) Reducing the statute of limitations for the FTB to issue
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a proposed deficiency from four years (six in certain
instances) to three years could result in reduced
efficiency.
d) The state's current four year statute of limitations,
which is one year longer than the federal statute of
limitations, allows the FTB to obtain the completed IRS
audit before the state's statute of limitations has run.
The FTB then has time to review the IRS audit, audit the
return themselves, apply the IRS' adjustments, and make
state-only adjustments. While the law allows FTB to issue
an assessment based on an IRS audit after the normal
statute of limitations expires, only issues related to the
IRS audit can be adjusted if the California statute of
limitations has expired. Consequently, it is more
efficient to allow the IRS to complete its audit first than
for the FTB to conduct a separate audit simultaneously,
which could result in duplication of effort.
e) Part of the author's stated purpose is to rectify the
inequity that stems from current law allowing the FTB to
audit tax forms for the previous four years, while allowing
a taxpayer only three years to amend a return. The current
law actually allows a taxpayer to amend their tax return
from the previous four years. If it is the author's intent
that this bill allow for the same statute of limitations
for audits and returns, current law already accomplishes
that goal.
f) Committee staff questions whether this bill would
undermine the efforts of the state to close the tax gap
during this critical fiscal period.
7)Similar Legislation.
AB 2195 (Silva), Chapter 168, Statutes of 2010, codified
existing case law and the BOE's administrative practices by
shifting the burden of proof by clear and convincing evidence
from a taxpayer to the BOE in any civil proceeding in which
the BOE asserts intent to evade or fraud by the taxpayer.
AB 1387 (Tran), introduced in the 2009-10 legislative session,
is almost identical to this bill. AB 1387 was held in this
Committee.
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AB 1600 (La Malfa) and AB 2727 (La Malfa), both introduced in
the 2007-08 legislative session, would have shifted the burden
of proof from a taxpayer to the agency collecting taxes in
certain situations. AB 1600 and AB 2727 failed to pass out of
this Committee.
SB 633 (Dutton), introduced in the 2005-06 legislative
session, similarly to AB 2727 and AB 1600, would have shifted
the burden of proof from a taxpayer to the tax agency. SB 663
was never heard in Committee.
SB 1222 (Knight), introduced in the 1999-2000 legislative
session, would have shifted the burden of proof to FTB in
court proceeding for factual issues, penalties, and
adjustments to income based on statistical information,
but not for issues resulting from federal changes. SB 1222
died in this Committee.
AB 436 (McClintock), introduced in the 1999-2000 legislative
session, would have added the Taxpayer's Rights Act that
included taxpayer rights provisions including shifting the
burden of proof to taxing agencies in any legal action
contesting the validity of any tax. AB 436 was never heard in
this Committee.
SB 1478 (Rainey), introduced in the 1997-98 legislative
session, would have declared legislative intent to conform to
the IRS Restructuring and Reform Act of 1998, including
shifting the burden of proof to state agencies
collecting taxes in any court or administrative proceeding
under certain conditions. SB 1478 was held in the Senate
Revenue and Taxation Committee.
AB 1631 (Sweeney), introduced in the 1997-98 legislative
session, would have declared legislative intent to conform to
the federal law relating to shifting the burden of proof
in connection with income taxes paid by California
taxpayers. AB 1631 was held in the Assembly Appropriations
Committee.
SB 1166 (Hurtt), introduced in the 1997-98 legislative
session, would have shifted the burden of proof from taxpayers
to the "board" in court proceedings under certain conditions
and declare legislative intent to conform to the then pending
federal taxpayer bill of rights' legislation. SB 1166 failed
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to pass out of this Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
None on File
Opposition
California Tax Reform Association
Analysis Prepared by : Myriam Bouaziz and Oksana Jaffe / REV. &
TAX. / (916) 319-2098