BILL ANALYSIS �
AB 1006
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Date of Hearing: May 2, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 1006 (Cook) - As Amended: April 25, 2011
VOTE ONLY
Majority vote. Fiscal committee.
SUBJECT : Taxation: Franchise Tax Board: burden of proof.
SUMMARY : Transfers the burden of proof from the taxpayer to the
Franchise Tax Board (FTB) in all court and tax administrative
tax proceedings. 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)Requires the FTB to have "just cause" in order to begin any
audit.
4)Applies only to the following taxpayers:
a) A taxpayer whose filing status is a single taxpayer, a
married taxpayer filing separately, a registered domestic
partner filing separately, a head of household, or a
qualifying widow or widower, whose adjusted gross income
(AGI) is less than $100,000.
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b) A taxpayer whose filing status is a married taxpayer
filing jointly or a registered domestic partner filing
jointly, whose AGI is less than $250,000.
5)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
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convincing, and that burden rests with the tax agency.
In modified conformity with the federal law, FTB, in connection
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.
FISCAL EFFECT : The FTB staff estimates that this bill will
reduce General Fund revenues by $3.6 million in fiscal year (FY)
2011-12, $34 million in FY 2012-13, and $55 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)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
tax return is filed.
3)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
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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.
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) 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.
4) 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
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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) Committee staff questions whether this bill would
undermine the efforts of the state to close the tax gap
during this critical fiscal period.
5)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.
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
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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
to pass out of this Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
Analysis Prepared by : Myriam Bouaziz and Oksana Jaffe / REV. &
TAX. / (916) 319-2098
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