BILL ANALYSIS �
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Date of Hearing: April 28, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 2754 (Committee on Revenue and Taxation) - As Introduced:
March 24, 2014
Majority vote. Fiscal committee.
SUBJECT : Franchise Tax Board: administration: dependent
credit: electronic filing.
SUMMARY : Requires that the dependent's tax identification
number be included on a return when claiming a Dependent
Exemption Credit, and requires a business entity that prepares a
return using tax preparation software to file the return
electronically. Specifically, this bill :
1)Provides, beginning on or after January 1, 2015, that a
Dependent Exemption Credit exemption shall not be allowed
unless the identification number, as defined in Internal
Revenue Code (IRC) Section 6109, of the dependent is included
on the return.
2)Provides that a taxpayer shall have the right to claim the
credit or refund of adjusted amounts within the statute of
limitation.
3)Requires, beginning on or after January 1, 2014, that a
business return be filed using electronic technology if the
return was prepared using a tax preparation software. The
return shall be filed in a manner prescribed by the Franchise
Tax Board (FTB). This provision applies to returns required
to be filed on or after January 1, 2015.
4)Provides that a business entity required to file a return
electronically under this section may annually request a
waiver of the requirement from the FTB for a taxable year.
The FTB may grant the waiver if it determines that the
business entity is unable to comply with the requirements due
to technology constraints, where compliance would result in
undue financial burden, or due to circumstances that
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constitute reasonable cause, and not willful neglect.
5)Provides that a business entity that is required to
electronically file a return and fails to comply shall be
subject to a penalty of $500 for each failure unless the
failure is due to reasonable cause, and not willful neglect.
This provision applies to returns filed for taxable years
beginning on or after January 1, 2016.
6)Provides that the FTB shall conduct a robust education program
advising businesses of the new electronic filing requirements
and shall liberally interpret and grant waivers of the penalty
to minimize unnecessary adverse impacts to businesses that
experience difficulty complying with these requirements.
7)Defines an "acceptable return" as an original or amended
return that is required to be filed by a business entity other
than the return for unrelated business taxable income.
8)Defines a "business entity" as a corporation, including an "S"
corporation, an organization exempt from tax, a partnership,
or a limited liability company.
9)Defines "tax preparation software" as any computer software
program used to prepare an acceptable return or for use in tax
compliance.
10)Defines "electronic technology" to include, but is not
limited to, the Internet, cloud computing, or an electronic
information delivery system.
11)Defines "technology constraints" as an inability of the tax
preparation software to electronically file the acceptable
return as required by this section as a result of the complex
nature of the return or inadequacy of the software.
EXISTING FEDERAL LAW :
1)Mandates e-filing for the following:
a) Large corporations with $10 million or more in total
assets;
b) A partnership with more than 100 partners;
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c) Certain large tax-exempt organizations with total assets
of $10 million;
d) Private foundations and charitable trust regardless of
their size; and,
e) Tax preparers that file at least 250 returns, including
income tax returns, exempt organization returns,
information returns, excise tax returns, and employment tax
returns.
2)Allows exceptions and hardship waivers from the e-filing
requirement. A taxpayer may request a waiver if the taxpayer
is unable to meet e-filing requirements due to technology
constraints or where compliance with the requirements would
result in undue financial burden on the taxpayer.
3)Provides that a failure to file penalty is generally five
percent of the tax owed for each month, up to a maximum of
25%. If the return is over 60 days late, the minimum penalty
for late filing is the lesser of $135 or 100% of the tax owed.
4)Requires that the (Taxpayer Identification Number) TIN of the
dependent be included on the federal return to take advantage
of the dependent exemption.
5)Provides that a TIN is an identification number used by the
Internal Revenue Service (IRS) in the administration of tax
laws. A social security number is issued by the Social
Security Administration whereas all other TINs are issued by
the IRS.
EXISTING STATE LAW :
1)Requires income tax preparers who prepare more than 100
California individual income tax returns annually or prepare
one or more using tax preparation software to e-file all
personal income tax returns.
2)Imposes a failure to e-file penalty of $50 per return filed on
paper that should have been e-filed, unless it is shown that
the failure to e-file is due to reasonable cause and not due
to willful neglect.
3)Prohibits the disallowance of the Dependent Credit if the
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return lacks a TIN. This provision was added in 1997
following the IRC change that required the TIN of dependents
on the personal income tax return in response to concerns
about obtaining a TIN for newborns in time to include the TIN
on the return.
FISCAL EFFECT : The FTB estimates that the e-filing requirement
will not have an impact on General Fund (GF) revenues. The FTB
estimates that the inclusion of dependent taxpayer
identification numbers on tax returns will increase GF revenues
by $10 million in fiscal year (FY) 2014-15, $10 million in FY
2015-16, and $11 million in 2016-17.
COMMENTS :
1)The Purpose of E-Filing . If the return of a business entity
is prepared using tax preparation software, but a paper return
for that business entity is filed, the FTB must process that
return using costly manual data capture methods that lack the
accuracy and efficiency associated with e-filing. This bill
would require a business entity that files an acceptable
return that was prepared using tax preparation software to
file the return by electronic technology in a form and manner
prescribed by the FTB, unless the business entity, upon
request, is granted a waiver. Requiring a business entity to
e-file a return when a taxpayer uses tax preparation software
would result in the FTB processing returns more quickly, which
would expedite approved refunds and utilize cost-effective
technology to meet operational goals. E-filing a return
lowers the initial cost of processing returns. The FTB
estimates that the average cost to the department to process a
business entity paper filed return is $6 (includes complex and
smaller taxpayer returns), as opposed to $0.36 (primarily
based on smaller taxpayer returns) for an e-filed return.
2)The Purpose of Requiring a TIN . Not requiring a TIN for each
dependent be included on the state tax return precludes the
department from validating Dependent Exemption Credits during
return processing, which delays the correction of erroneous or
duplicated dependent credits and increases the cost of
correcting these errors for taxpayers and the department.
This bill would allow the FTB to confirm that a dependent's
TIN is used only once, which would increase the integrity of
the returns, reduce inaccurate returns, and erroneous
dependent credits. This bill would also increase the
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timeliness of the FTB's compliance efforts, and decrease the
amount of incorrect refunds issued to taxpayers.
Additionally, this bill would allow the FTB to create an
automated versus manual method for examining dependent credits
that could reduce departmental cost.
REGISTERED SUPPORT / OPPOSITION :
Support
Franchise Tax Board (Sponsor)
Opposition
None on file
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098