Employment Development Department |  State California Tax  |  Franchise Tax Board Payments

Consequences of California back taxes and resolution options

In the state of California, several tax agencies manage the administration and tax collection. These departments include the Franchise Tax Board, the Employment Development Department (EDD), the State Board of Equalization, and the California Department of Tax and Fee Administration. In the year 2017, the California Department of Tax and Fee Administration (CDTFA) started operating when the State Board of Equalization was broken into three different entities: the State Board of Equalization, the office of Tax Appeals, and CDTFA.

The FTB is responsible for managing the state income tax and the EDD manages state employment tax. CDTFA is responsible for State sales and use tax along with other special taxes and fees.

Process of enforcement and income tax collection

Once the tax assessment is finalized, FTB will send mail to the taxpayer about the notice and ask for payments. The taxpayer then has to make full payment within 15 days from the date of notice. If in case, the taxpayer does not make full payment or contact the FTB to make some other arrangements, the FTB then starts different collection actions. At this point, FTB initiates assessing penalties, collection fees, and interest. If, still the tax liabilities are unpaid, the FTB files tax liens.

Orders to Withhold (OTW)

FTB keeps the power to take spontaneous collection actions, like bank, asset levies, or wages. The FTB makes use of Orders to Withhold for seize money or assets from those individuals or businesses who have not paid their taxes. This Order to Withhold are one-time order and when FTB issues OTW on your bank account, the bank freezes the funds for about 10 days before sending them to the state.

Continuous orders to withhold

In general, FTB utilizes orders to Withhold for collection of unpaid taxes from payments that are continuous such as rents, installment payments, or commission from assets or sale of property. Here, FTB can collect 100% of the funds up to the due amount. The FTB also can attach a Continuous order to withhold for one year up to 25% of the amount of payments or funds because of taxpayers and most typically it is applicable for those who are self-employed.

The law in California needs the taxpayers to get the specific notice before FTB filing a notice of state tax lien or before they take any kind of action for collection. In the case of tax lien filing, the law in California needs the FTB to send a notice to the taxpayer via mail, a minimum of 30 days before the date of filing, stating the authority through which they are filing the tax lien and the processes available for the taxpayers for prohibiting the filing of the tax lien.

In the case of a tax lien, California law only needs the FTB to offer notice in writing a minimum of 30 days before taking a levy action. If you are given a California FTB tax levy, you can go through the detailed guide on the elimination of FTB lax levies.

Earnings Withholding Order for Taxes (EWOT)

The FTB can also issue an Earnings Withholding Order for Taxes or EWOT. It's the same as wage garnishment, where it is sent to your employer, and then they might withhold a part of the paycheck for sending to the FTB.

You are issued EWOT in situations like

• You have not given any response to the payment demand
• You committed to pay but failed to do so
• You have a previous history of making late payments
• You have not made complete disclosure of your financial situation
• You have defaulted on an installment agreement

Generally, FTB asks your employer for withholding up to 25%. If in case, FTB wants more or if the agency wants to collect wages from a non-liable spouse, they have to get court approval. You need to keep in mind that private creditors always require court approval for wage garnishments, but the FTB does not require court approval for garnishment of 25% or even less.

You can be free from OTWs if in case, you succeed in proving that you are going through some financial hardships or it was issued in error. If you successfully establish financial hardship, the FTB will review all your details once every month to see if there are any changes.

You can obtain OTWs and COTWs release by making payment of full tax liabilities. For removing EWOT, you have to make full payment or you need to prove that your social security number is not correct, you have not received due process, the order is not correct for some reason or the wage garnishment is causing you some financial hardship.

What options are available for people with back income taxes?

You can make payment of California taxes online either through mail or over the phone or you can obtain information on how to make payment of CA taxes. Taxpayers owing aberrant income taxes to the state of California and who are not able to make payment in full can opt for several options such as:

• Installment Agreement (Payment Plan),
• Offer in Compromise,
• Establish a Financial Hardship (Currently Not Collectable, "CNC")
• Penalty Abatement
• Innocent Spouse Relief

FTB in California provides an Installment Agreement also called a payment plan. Through the Installment Agreement, the taxpayer in California can make payments in several monthly installments until delinquent tax liabilities such as penalties, collection fees, and interests are paid in full.

With an offer in compromise, the taxpayer and the FTB agree to settle down delinquent tax liabilities, for an amount less than what the taxpayer owes. The establishment of financial hardship or CNC is simply obtaining a hold on spontaneous collection actions for some time. Similarly, penalty abatement is like a written request for asking the FTB for a waiver, of some or all assessed tax penalties.

Establishment of financial hardship

The taxpayer might be in a situation where they may not be able to afford an installment agreement and on the other hand eligible for an Offer in Compromise. In such situations, the taxpayer can request a Status like currently not collectible. To apply, you need to file FTB form 3561. In many cases, the FTB also needs the taxpayers to complete this form while applying for monthly payment plans.

If the FTB agrees, they will append forceful collection from taxpayers for some specific time. You can receive guidance from a tax pro on how to apply or qualify for such kind of temporary relief. Such relief is only a temporary fix and cannot do anything to reduce or resolve delinquent tax liabilities. Furthermore, the penalties and the interest will accumulate and tax liens remain filed. Such options are for those taxpayers who need time to qualify for more suitable forms of tax resolutions.

Other available options

If in case, the taxpayer has a planned assessment for extra income tax due because of an FTB audit, they can protest the proposed assessment. Here the taxpayer can do the submission online through MYFTB or can go for written post-filing. The taxpayer should make the filing of the protest letter by the "protest by date" that is shown on the front part of the proposed assessment notice. The process of protest is not formal and is conducted by a hearing officer within the FTB. Taxpayers can also request for oral hearing even though not required. The FTB will issue of notice of action to inform the taxpayer about how they determine the taxpayer's protest.

If a taxpayer fails to reach any agreement with the FTB audit protest office, they can appeal to the Office of Tax Appeals. The taxpayer can put this request within 30 days from the Notice of action. Office of Tax Appeals is an administrative and judicial body that functions in a formal courtroom setting. While a taxpayer can represent themselves in OTA or the Office of Tax Appeals, it is often recommended to hire a licensed attorney or any skilled tax professional having good experience in practicing in OTA.

Bankruptcy

Bankruptcy, same as other tax resolution services, are costly endeavor. That's why this option is best for those taxpayers who have substantial personal liabilities. The proceedings of the bankruptcy can discharge some of the state tax liabilities. Taxpayers must look for some advice from an experienced tax and bankruptcy attorney when they want to consider such an option.

The California Tax Amnesty program

The state of California has performed several tax amnesty programs. At present, this program is known as the voluntary Disclosure program. It is open to qualified entities, beneficiaries, partners, shareholders, etc. It inspires the aberrant taxpayers to become current through a waiver of some penalties for those who are filing and completely make payment of their delinquent tax liabilities. Several delinquent business taxpayers must take into consideration the benefits of this program. California and the FTB have run the same programs in the past for individual taxpayers.

Appeal rights

The law in California does not offer taxpayers the right to appeal determinations of the FTB about tax liability collections. However, there are many practical tips that a taxpayer can consider for reaching a good resolution.

At first, do not get afraid of escalation of combative issues to a manager within the FTB. Most often an authority, fresh eyewitnesses along with the experience of a supervisor can assist in resolving the matter.

Secondly, if you find that the case manager is not properly following California law or is discriminating against you, then you can file a request for help with the Taxpayers Rights Advocate Office. The Taxpayer's rights advocate office holds authorization for helping in resolving issues or complaints that can't be solved with proper channels.

FTB Lien Releases

The FTB releases state tax liens post-payment of tax liabilities, which also include all penalties, interests, and collection fees. They also release them through an offer in compromise or penalty abatement.

Statute of Limitations

A vital factor that a taxpayer can consider before pursuing a resolution relates to the legal rights under California law of the taxpayer about the Statute of Limitations rules for tax liabilities collections.

The law in California also prevents the FTB from carrying out collection action on delinquent tax liabilities that is over 20 years from the date of assessment or most commonly referred to by the FTB, the Statutory Lien Date. Under California law, the SLD is the time when the tax liabilities are "due and payable". For practical purposes and also for maximum taxpayers, this time is the due date when FTB issues the first assessment notice.

Taxpayers should keep in mind that there are some circumstances, that can click the "stop the clock" of the period of Statute of Limitations". Such circumstances are known as "collection stays". Here are a few examples:

• The taxpayers file for bankruptcy
• The taxpayer is on an approved installment agreement
• The taxpayer is in the military zone
• The taxpayer is in child support collection

FTBs capability for collections has been suspended by presidentially declared disaster or any military actions. In such situations, the elapsed time does not count towards the 20-year collection expiry date.