BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 1548 HEARING: 4/25/12
AUTHOR: Wyland FISCAL: Yes
VERSION: 2/24/12 TAX LEVY: No
CONSULTANT: Grinnell
OFFERS IN COMPROMISE
Removes the sunset on the BOE's authority to accept offers
in compromise from firms currently in operation
Background and Existing Law
An "offer in compromise" is a way to resolve a tax
delinquency in which there is no dispute about the amount
owed, but the taxpayer cannot pay the full amount.
Negotiating an offer in compromise may allow a tax agency
to collect the maximum amount feasible in a timely manner
without forcing a taxpayer into bankruptcy, which further
delays collection. Generally, once the tax agency
determines that the liability is final, the taxpayer makes
an offer, which the agency then reviews to ensure that the
offer represents the maximum amount it can expect to
receive from the taxpayer in a reasonable period of time,
typically five to seven years.
The Legislature first allowed the Franchise Tax Board to
accept offers in compromise (SB 94, Romero, 1999), then
later authorized the Board of Equalization to do so for
final tax liabilities for owners of defunct businesses
under the Sales and Use Tax Law, the Use Fuel Tax Law, and
the Underground Storage Tank Maintenance Fee Law (AB 1458,
Kelley, 2002). The Legislature then extended the
authority for the BOE to make offers in compromise for
final tax liabilities under the Cigarette and Tobacco
Products Law, Alcoholic Beverage Tax Law, Timber Yield Tax
Law, Energy Resources Surcharge Law, Emergency Telephone
Users Surcharge Law, Hazardous Substances Tax Law,
Integrated Waste Management Fee Law, Fee Collection
Procedures Law, Diesel Fuel Tax Law, and the Oil Spill
Response Prevention and Administration Fees law (AB 3076,
Committee on Revenue and Taxation, 2006).
SB 1548 -- 2/24/12 -- Page 2
Under the BOE and FTB programs, the taxpayer must establish
that the amount offered in payment is the most that can be
expected to be paid or collected and they do not have
reasonable prospects of acquiring increased income or
assets that would enable them to satisfy a greater amount
of the tax liability than the amount offered. BOE and FTB
can reestablish the final tax liability should the taxpayer
have sufficient annual income during the succeeding
five-year period following the date of the compromise.
When BOE and FTB determine that a taxpayer concealed assets
or falsified, withheld, destroyed, or mutilated any book,
document, or record relating to their financial condition,
they may reestablish all compromised liabilities and the
taxpayer may be found guilty of a felony crime, fined up
to $50,000, and imprisoned.
In 2007, the Legislature expanded the program to allow BOE
to accept offers in compromise for businesses currently in
operation, as many taxpayers were surprised when BOE audits
uncovered transactions that the taxpayer didn't know were
taxable, so they never charged consumers the tax (AB 2047,
Horton, 2008). Additionally, for many firms, paying the
entire liability would cause the business to close. The
bill allowed BOE to accept offers from operating firms
when:
The final tax liability arises from transactions
for which the BOE finds no evidence that the taxpayer
collected sales tax reimbursement or use tax,
The person liable is the successor to the business,
or
A consumer has a use tax liability.
When the Legislature expanded the program to include
businesses in operation, it applied a sunset for existing
businesses, but left the authority to compromise with
defunct ones intact. BOE wants to remove the sunset.
Proposed Law
Senate Bill 1548 removes the sunset on the BOE's authority
to accept offers in compromise from firms currently in
operation. The measure applies to the Sales and Use Tax
Law, Cigarette and Tobacco Products Law, Use Fuel Tax Law,
Alcoholic Beverage Tax Law, Emergency Telephone Users
Surcharge Law, Fee Collection Procedures Law, Diesel Fuel
SB 1548 -- 2/24/12 -- Page 3
Tax Law, and the Oil Spill Response Prevention and
Administration Fees law.
State Revenue Impact
According to BOE, SB 1548 results in revenue increases of
$286,034 per year.
Comments
1. Purpose of the bill . According to the Author, Offer in
Compromise programs are mechanisms that government agencies
use to help taxpayers settle outstanding tax liabilities
that they could not pay in full without having to declare
bankruptcy. The goal of establishing an OIC program is to
incentivize taxpayers to negotiate with the government
agency to pay a reduced amount to settle their tax
liability. This approach allows the taxpayer to keep their
business open, which creates further economic development.
At the same time, OIC programs increase the likelihood that
tax liabilities will be collected, even if for a reduced
amount. Both the Internal Revenue Service (IRS) and the
California Franchise Tax Board (FTB) operate OIC programs
for both taxpayers and businesses. In 2002, Assembly Bill
1458 (Kelley) was signed into law which allowed the BOE to
create an OIC program. The program authorized by the
legislation only applied to discontinued or successor
businesses that inherited tax liabilities. Only business
owners who had tax liabilities from uncollected taxes or
fees were allowed to participate in the OIC program.
Businesses that collected the fee or tax but never remitted
them to the BOE were ineligible from participating in the
OIC program. In addition to having tax liabilities, the
business must show that if they were forced to pay the
liability in full it would cause the business to cease
operation and declare bankruptcy. With this information on
hand, the BOE and the business work together to find an
appropriate amount that should be paid to release the
liability. The program expanded in 2008 with the passage
of AB 2047 (Horton) to include active businesses. When
passed in 2008 it was estimated that total revenue
collected by the BOE would increase by $2.5 million because
of these OIC programs, with $1.4 million going to the
general fund. When enacted, AB 2047 contained a sunset
SB 1548 -- 2/24/12 -- Page 4
date of January 1, 2013. If the OIC program is not
extended it will sunset and cease to exist. SB 1548
extends the operation of the Offer in Compromise (OIC)
program maintained by the California Board of Equalization
(BOE). The Offer in Compromise program allows the BOE to
work with businesses to reduce certain tax liabilities that
would have forced the business to cease operation and
declare bankruptcy."
2. So, how did we do ? When the Committee on Revenue and
Taxation, the predecessor to this Committee, approved AB
2047 in 2008, it inserted a sunset to review the authority
granted by the bill to accept offers from firms still in
operation. According to BOE, they have accepted a total of
eight offers from firms that were not defunct when they
made the offer, seven of which are still in operation.
The total amount collected was $532,668, and the BOE
forgave approximately $357,000 when accepting those offers.
The Committee may wish to consider whether the amounts
forgiven are sufficiently consistent with sound tax
collection practices to merit sunset removal, another five
year sunset extension, or terminating the authority.
Support and Opposition (4/19/12)
Support : State Board of Equalization (Sponsor), BOE Member
George Runner, Los Angeles Area Chamber of Commerce, Orange
Chamber of Commerce, Grass Valley/Nevada Chamber of
Commerce, Industry Manufacturing Council, California
Taxpayers' Association; California Chamber of Commerce.
Opposition : Unknown.