Busy year ahead: tax amnesty program and pro forma pilot among year's challenges

California CPA, Dec, 2004 by Jerry Ascierto

Gerry Goldberg, executive director of the Franchise Tax Board, recently described the FTB's workload as "mind-boggling."

Opening the CalCPA Committee on Taxation's annual liaison meeting with the FTB Oct. 28, Goldberg reported that in addition to a new tax amnesty program, revised pro forma system and an ongoing Voluntary Compliance Initiative, the FTB will consolidate many offsite locations into a centralized campus over the next eight months.

2005 Amnesty Program

The state's budget deficit is the impetus for the 2005 amnesty program, Goldberg said.

"We did not close the deficit last year and there's continual pressure to bring in additional revenue," he said. "I don't see any tax increases, but we will enhance our enforcement capabilities."

Noting that the 2004 amnesty program, which targeted nonfilers, netted a surprising $1.4 billion in revenue, Goldberg said, "We will work with you. The whole purpose of the amnesty program is to get people into the system. The purpose of this amnesty, unlike the last amnesty, which was to increase the number of nonfilers coming in, is to accelerate money."

Carol Williams, the FTB's amnesty project manager, said the program is a limited opportunity for individuals and businesses to pay past-due income, sales or use taxes and related interest for tax year 2002 and prior, and avoid most penalties, fees and criminal prosecution.

"Amnesty is open to all individuals and businesses, except taxpayers under criminal investigation or prosecution on tax-related matters, and abusive tax shelter transactions that were eligible for relief under California's Voluntary Compliance Initiative or the 2003 IRS Offshore Voluntary Compliance Initiative," she said.

The accuracy penalty will increase from 20 percent to 40 percent for post-amnesty assessments, however, the increase does not apply to a taxpayer in audit, protest, appeal, settlement or litigation as of the start of amnesty, or understatements relating to tax shelter items.

The FTB is mailing 2.2 million letters in December and January as part of its outreach efforts, and will launch an aggressive media campaign to bring in participants.

More information on the program can be found at www.ftb.ca.gov/amnesty/faq.html.

California Tax Commission

Goldberg also spoke about the the California Performance Review's recommendation to establish a California Tax Commission.

The proposed move would consolidate the DMV's vehicle licensing fee collection arm, EDD employment tax arm and FTB into one California Tax Commission, while retaining the Board of Equalization.

In the near term, "there's a very good chance that the status quo remains. It certainly is going to be a topic of controversy this next legislative session," said Goldberg, who also noted that he foresees the FTB becoming the lead agency for tax activities now undertaken by the EDD and DMV.

"I think it will happen, but the timing is unclear," he said.

Ready Return Pilot

The FTB will begin a pilot system for pro forma returns called Ready Return to reduce taxpayer burden. The program targets single filers with one employer and no dependents who may otherwise be non-filers or miss out on refunds.

The FTB will complete and send a tax return to selected pilot users, who then may choose to accept the return as presented, make minor modifications or ignore the FTB's invitation.

"There have been successful variations of pro forma filing in several countries already, such as Germany, Japan, Denmark and Sweden, but it's novel in the U.S.," said Cathy Cleek, chief of the FTB's Filing Division. "We'd like to have 10,000 participants to make this a statistically valid survey, and to do that, the FTB may invite up to 50,000 taxpayers to participate."

Cleek noted that in the future, the program will provide more taxpayers and their representatives with online, secure access to wage and withholding data.

Cleek also provided an e-filing update, and said that California is second in the nation with 51 percent of all returns being e-filed. And while a majority of eligible practitioners complied, the FTB sent reminder letters and made phone calls in late-October to noncomplying practitioners.

Abusive Tax Shelters

Debbie Langsea, a manager in the FTB's General Tax Audit Program Bureau, discussed the FTB's efforts to crack down on abusive tax shelters, including the Voluntary Compliance Initiative, detection and enforcement.

"The FTB is coordinating with the IRS to combat abusive tax shelters," Langsea said. "California is creating a database of all identified taxpayers and promoters and seeks to identify those who fail to comply with disclosure and registration requirements."

Langsea noted that the FTB and the IRS differ over assessing penalties, such as California's frivolous return penalty and an interest-based penalty, but that the FTB is studying conformity to the federal bill.

"Our legislature may question why we need things that Congress has decided weren't necessary, like the noneconomic substance penalty and the automatic requirement to provide a list of investors," Langsea said.