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Franchise Tax Board Protests – Requirements of a Valid Protest

The California Revenue and Taxation Code provides that a taxpayer who disagrees with additional tax assessment can file with the Franchise Tax Board a written protest against the proposed additional tax. Protest letter must be filed with FTB within 60 days after notice of additional tax was mailed by FTB to taxpayer. Please note that clock starts ticking from the date of the notice mailing, not when taxpayer receives it. This letter notice is called the Notice of Proposed Assessment (NPA), and it contains a description of procedures to file a protest.

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California Employment Development Department (EDD), like FTB, offers its own Offer in Compromise Program. Article 8, Sections 1870-1875 of the California Unemployment Insurance Code (CUIC) governs the EDD’s Offer in Compromise program. This law permits the EDD to receive applications for Offers in Compromise that may enable a qualified tax debtor to eliminate an employment tax liability at less than full value.

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To fill out the form applicant will need social security number and EDD number. Applicant will need to provide reasonable offer and explain why offer should be accepted by EDD. Additionally, the form requires full financial disclosure, including information about community property. The application must be accompanied by cash, cashiers check or money order equal to amount offered. If applicant cannot pay the full amount at the time of offer, EDD may permit to pay the agreed amount in installments within no more than five-year period. When applicant submits payment with application, in the event an offer is not accepted, the amount will either be applied to the liability or refunded, at the discretion of the applicant submitting the offer. A determination by the EDD that it would not be in the best interest of the State to accept partial payment in satisfaction of a tax liability will not be subject to administrative appeal or judicial review. A separate application must be submitted for each EDD account to be compromised.

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California EDD offers taxpayers tax settlement program, where EDD and taxpayer can settle a claim for less than the amount owed. EDD can settle if it evaluates costs and risks associated with the litigation of the case and determines that it is better and less expensive for EDD to settle for lower amount than to litigate in court. The Settlements Program allows an employer the opportunity to enter into a settlement agreement to also avoid the cost of prolonged litigation associated with resolving a disputed employment tax matter.

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Sometimes a Notice of Proposed Assessment may require corrections when new information is received from taxpayer. After a Notice of Proposed Assessment has been issued, and the taxpayer submits supplemental information leading to correction of the assessment, the FTB makes the correction. Depending on the circumstances, the assessment may be corrected by a second Notice of Action or a Notice of Revision; it may be withdrawn and a new NPA (Notice of Proposed Assessment) issued; or in the case of protested NPAs, it may be restored to protest status.

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California streamlined offer in compromise process where now a single application can be used for three different agencies The Board of Equalization (BOE), Employment Development Department (EDD) and Franchise Tax Board (FTB). The application is located at https://www.edd.ca.gov/pdf_pub_ctr/de999ca.pdf. Just like before, taxpayers can apply for offer in compromise program when they are unable to pay their full tax liabilities to the state. The program allows taxpayers to negotiate a reduced amount of their non-disputed tax liabilities. The state will consider an Offer In Compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. However, previously California taxpayers had to submit a separate form to each of the three agencies. Now, they can submit a single interagency application with the state, and all three agencies will coordinate offer in compromise process among themselves. The form is available online at the California Tax Service Center (www.taxes.ca.gov), as well as at each of the three tax departments’ Website’s (BOE www.boe.ca.gov, EDD www.edd.ca.gov, FTB www.ftb.ca.gov). The individual agencies must still negotiate each Offer in Compromise separately for their respective taxes. For example, FTB will negotiate with taxpayer a state income tax liability and Board of Equalization will negotiate a sales or use tax liability.

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California EDD offers taxpayers tax settlement program, where EDD and taxpayer can settle a claim for less than the amount owed. EDD can settle if it evaluates costs and risks associated with the litigation of the case and determines that it is better and less expensive for EDD to settle for lower amount than to litigate in court. The Settlements Program allows an employer the opportunity to enter into a settlement agreement to also avoid the cost of prolonged litigation associated with resolving a disputed employment tax matter.

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The prior audit percentages of error (PAPE) program involves the use, under certain circumstances, of a percentage of error developed in a prior audit for the sales or accounts payable portion of a current audit. It can be a valuable tool in streamlining the audit process. It is designed to reduce the time it takes to complete an audit and minimize the burden on taxpayers. When planning the audit, CDTFA supervisors and auditors evaluate whether the taxpayer is eligible for the use of a PAPE. This evaluation is conducted whether or not the taxpayer has already requested the use of a PAPE. If the taxpayer is eligible for the use of a PAPE, the auditor discusses the PAPE with the taxpayer as soon as possible rather than wait for the taxpayer to request using a PAPE. To qualify for the PAPE, the taxpayer must have at least one prior audit and must meet the number of conditions. One of the conditions is consistency of business operations during prior audit and current audit. Minor changes are generally ignored. It is important to remember that the use of a PAPE is limited to the current audit period as a PAPE cannot be used in two subsequent audits.

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