Franchise Tax Board Tax Problems
While the Internal Revenue Service enforces federal income tax obligations, the California Franchise Tax Board (“FTB”) enforces state income tax laws.
Most discussions of tax collection policies and politics are focused on the Internal Revenue Service. However, the Franchise Tax Board (“FTB”) can be a tough, quick, and destructive enforcer of California income tax debts.
If the IRS is a whale, the FTB is a bull shark. It is fast, aggressive, and extremely efficient in its collection enforcement. The FTB acts much faster than the IRS, leaving a path of liens, levies, and wage garnishments in its path without hesitation. Our San Francisco Tax Attorneys point out that many of the FTB’s proposed assessments are generally overstated and based on very creative assumptions. Yet, this does not mean that these actions are entirely unreasonable or illegal. In fact, the FTB has numerous procedures to safeguard taxpayers’ rights. For example, the FTB protects taxpayers by allowing a maximum 25 percent garnishment limit, which is much kinder than the IRS’s nearly 90 percent garnishment allowance.
The FTB has more weapons in its collection arsenal than its big cousin, the IRS. The FTB has an active imagination and often presents delinquent filers (including retirees and low-income residents) with inflated bills. Again, this is all legal and potentially correct, but most of the time it puts most defenseless taxpayers into difficult situations with the State of California that can last decades. The IRS has a 10-year collection statute, but the FTB prefers its own 20-year statute (which may be extended under certain circumstances). Our San Jose tax attorneys are currently dealing with tax bills going back to the 1990s.
The FTB can deploy liens and levies, but it’s also much more willing to seize vehicles and retirement accounts than the IRS. While the IRS can revoke passports as part of federal tax collection efforts, the FTB can revoke professional licenses (e.g., contractors’ licenses), as well as drivers’ licenses for some non-compliant taxpayers. The FTB also suspends corporations and LLCs who are delinquent on their taxes, exposing the business owners to personal liability. Sometimes the FTB even resorts to public shaming through its Delinquent Taxpayers Top 500 List.
Franchise Tax Board Wage Garnishments
What Is an FTB Wage Garnishment?
A wage garnishment is an intrusive method of collecting a tax debt directly from a taxpayer’s paycheck. This is a common tool that the IRS and the FTB use to collect back taxes through the filer’s employer. Once a garnishment is filed, the employer is required to collect and send 25 percent of each paycheck to the FTB. Unlike other creditors, the FTB does not require a court order to garnish your wages. I’ve consulted with multiple clients who have attempted to confront their employer about the garnishment, but as a tax attorney in San Jose, I can tell you that this will be a fruitless effort. A release must be negotiated directly with the State.
How Much Can the FTB Take from My Salary?
California tax agencies such as the FTB, the Employment Development Department, and the California Department of Tax and Fee Administration can only collect up to 25 percent of the taxpayer’s disposable wages through a wage garnishment. Within the California garnishment framework, child support payments get priority over tax garnishments.
Additionally, a taxpayer may be subject to both IRS and FTB garnishments simultaneously. It does not take long before basic living expenses go unpaid and California taxpayers find themselves at the complete mercy of the tax agencies.
How Long Does an FTB Garnishment Last?
Unlike a levy, which is a single seizure of your bank or other accounts, an FTB garnishment continues until the debt is paid, a resolution is negotiated, or the claim is withdrawn. An Offer in Compromise, an installment agreement, or a proof of financial hardship are the most common methods of resolving garnishments. Garnishments are also released if the debt is paid off or proven incorrect.
How Can Tax Helpers Stop the Garnishment?
A wage garnishment signals CODE RED. Dealing with the tax garnishment is the first step in our representation. However, once the FTB issues a garnishment, they are generally reluctant to release it. In such cases, a modification (lower amount) is generally negotiated. Of course, the modification of the wage garnishment is just a start. The tax bill still needs to be addressed.
FTB Tax Liens
FTB liens generally work the same as IRS tax liens. Once a lien is recorded in a specific county or, for businesses, with the Secretary of State, future creditors are made aware that they cannot collect until the FTB has. California seems to be more aggressive and quicker with their liens than the IRS. California has a much lower balance threshold for filing liens, compared to the IRS.
It may be possible to delay or avoid a state tax lien if an acceptable short-term repayment is negotiated and the balance is paid down to a specific amount.
Late FTB Taxes
Unfiled Tax Returns
Compared to the IRS, California tax agencies are more efficient in addressing unfiled returns. According to our tax attorneys, the FTB will usually remind the taxpayer about the missing tax return less than two years from the missed due date. About 30 to 60 days from the notice, the FTB will propose a bill and move forward with enforcement soon after.
The FTB assessments are often inflated. The IRS usually bases its proposed assessments on reported income, such as a W2 or 1099 form. California casts a much wider net in determining who owes taxes, thus making creative assumptions for the proposed assessment. For instance, residents with business or professional licenses (medical, legal, real estate, etc.) are presumed to have earned a specific level of income even if they did not work. Persons with reported mortgage payments are presumed to have earned three-to-five-times the amount of the mortgage payments. If you don’t respond to the FTB’s request for a tax return, it will file the return for you and assess various delinquency penalties. The California income-tax penalty list includes the draconian failure-to-furnish-information penalty. The penalty is calculated on the original tax balance, not just the balance owed. Even the IRS does not have such harsh civil delinquency consequences. Once the tax bill is finalized, the FTB will move forward with collections as described earlier.
The taxpayer can file their own return and correct the assessment.
However, the taxpayer will only have four years from the due date or one year from the payment (whichever comes later) to get a refund of any overpayment. It is devastating to see a client pay large sums of money in assessed taxes only to find out that they overpaid and be unable to reclaim the overpayment.
Once a tax debt is final, the state will move aggressively in collecting. The FTB assumes that the balance is correct and will enforce it with all its might. Most levies are sent out by computers, and the amounts are based on available asset and income data.
California audits tax returns in the same manner as the IRS. Yet, California has less procedural and appeal safeguards than the federal government. The FTB also implements specific industry audits.
Many FTB tax audits are not truly tax audits at all. Rather, the FTB simply uses IRS tax audit results and creates a California assessment using shared information. Therefore, if you are already being audited by the IRS, the data will be forwarded to the FTB. In this case, the taxpayer would have to win the IRS audit to overturn the corresponding California assessment. An Offer in Compromise that resolves the IRS debt has no effect on the California debt. California has its own robust Offer in Compromise program. However, the FTB’s acceptance rate for compromises is much lower than the IRS’s.
FTB Penalty Relief
The FTB has a long list of penalties for errors, delinquency, and other failures to comply.
Unlike the IRS, California does not provide a first-time penalty abatement, and penalty protests are based on “reasonable cause”.
When to Contact a Tax Attorney
It is easy to get lost in California’s complex tax appeal system. If you have concerns or questions about an FTB or IRS notice, or any other tax issue, it is in your best interest to promptly consult with an experienced California FTB attorney.
We offer free consultations and help to
- Prepare and file missing tax returns
- Address wage garnishment issues
- Settle back taxes
- Design the best response strategy
- Avoid levies or liens on your accounts and property
- Manage FTB and IRS tax problems