How Much is Owed?

The FTB is trying to figure out exactly how much money is owed to about 24,000 individual tax filers and 3,000 businesses still eligible for refunds, and what it will cost the agency to process those claims, FTB Filing Division Chief Anne Miller told the board at its July 21 meeting:

These two interest calculations may impact a limited number of individuals and business entities that meet a set of specific and rare criteria. The criteria are centered primarily around overpayments being transferred or refunded from one particular tax year followed by an additional tax assessment on that same tax year. As a result, our systems may have overcharged interest.

Due to the complexity of the calculations, it’s been quite a challenge for us to determine the fiscal impacts. We estimate that if work was to be done manually on each of these individual accounts, it could take three hours per account. We have enlisted the help of our experts in the Economics and Statistical Research Bureau to help us with these calculations because they are so complex.

About 1,000 of the individual taxpayers are owed for more than one year, placing the total adjustments around 28,000. That equates to 40 FTB staffers working for a year to do the calculations, based on three hours per adjustment if an automated solution isn’t found.

“[W]e believe the adjustments could range from a very minor amount (a few dollars) to thousands of dollars for each account,” said the FTB in its Aug. 3 Tax News. The total amount owed could be in the millions of dollars, according to the California Taxpayers Association, which brought the problem to the attention of FTB management in March.

“CalTax is aware of millions of dollars in miscalculated interest based on what a limited number of taxpayers have told us,” said Gina Rodriquez, CalTax vice president for state tax policy. She continued:

In one case, the FTB overcharged interest by $1 million, and in another case $2 million.

In some of the cases that were reported to us, taxpayers asked the FTB to adjust the interest before their cases went final, i.e., before the taxpayer’s protest, appeal or settlement went final. Taxpayers who had already paid and subsequently discovered the error had to file refund claims to get the interest back if they already paid their assessments. In all cases reported to us, the FTB made the adjustment for the interest miscalculation without any argument, as they knew their calculations were wrong.

When I met with FTB management in the spring to discuss this issue, the FTB acknowledged that their computer system cannot properly calculate interest for taxpayers that fall into the two affected categories.

Origins of Miscalculation

The main category of miscalculation, potentially affecting 26,000 taxpayers, dates back to a lawsuit that May Department Stores Company won in 1996 against the United States for miscalculation of interest on the company’s tax underpayments a decade earlier. The IRS issued a notice in 1997 acquiescing to the court decision.

The complexity of the situation is evident on an FTB web page, which explains that you may be owed a refund under the May Department Stores ruling if:

• You filed an amended return for additional tax or received a deficiency assessment after the original return was filed for the same tax year, and
• On the original return, you elected an overpayment transfer to the subsequent year’s estimate tax, and
• On the subsequent year, the required first quarter estimate payment was less than the requested overpayment transfer amount. The maximum amount of the adjustment is one year of interest on the additional tax or deficiency amount.

The other miscalculation category, known as “corporation interest netting,” may affect about 1,000 businesses that have made a previous refund or payment transfer, then filed a subsequent deficiency or amended return for additional tax with interest for the same tax year.

Thus far fewer of those overcharged are aware that they are owed money. “We’ve received three written requests for interest adjustments as well as a few visits to our website,” Miller told the board. “But our contact center has not reported any phone calls on this issue.”

Time Running Out

The clock is ticking on taxpayers who want to receive refunds. The statute of limitations runs out four years from the date the return was filed if it was filed within the extension period, or one year from the date a payment was made.

FTB plans to avoid this situation in the future. “In order to better serve taxpayers who may qualify for the interest computation adjustments, we have trained our staff to proactively identify cases that meet this criteria as well as put procedures in place to ensure that cases that do meet the criteria proactively receive proper treatment,” said Miller.

FTB Chairwoman Betty Yee, who is also the state controller, was appreciative of Miller’s work. “Thank you for really responding with such a strong focus on just initially identifying the universe [of affected taxpayers], which I know was quite complex,” said Yee. “And now to try to put a fiscal impact around what’s been identified. We look forward to getting that information in September.”

In her capacity as state controller, Yee directed the FTB on April 8 to review the interest miscalculations. “These rulings deal with complex interest calculations that affect very few taxpayers. However, these taxpayers are entitled to receive refunds of allowed overpaid interest,” Yee said. “As chair of the FTB, I work to ensure the rights of taxpayers are protected.”

FTB Board Member Jerome Horton said, “I want to thank the department for being proactive on this and engaging. It’s very important. As always we have stepped up and done so.”

Miller is scheduled to provide an update at the board’s next meeting on Sept. 22.

Hertzberg commented on the study results, “California’s economy has changed from one that had been dominated by making goods to today where 80 percent is producing services.”

Hertzberg’s plan, Senate Bill 8, would tax services as part of a restructuring plan and raise an additional $10 billion in tax revenue.

In response to the study, Board of Equalization Vice-Chair George Runner said,  “I’d consider a broader sales tax only if it’s part of revenue neutral tax reform, such as abolishing California’s income tax and the Franchise Tax Board, along with other taxes that destroy jobs. … The last thing overtaxed Californians need is another tax.”

Runner opposes Hertzberg’s proposal.

There will be plenty of time to get into the debate over service taxes. However, it should be noted that the $122.6 billion the service tax could supposedly raise is not only larger than the current General Fund budget of $113 billion, but almost $10 billion larger. In other words, a tax on services as outlined in the study could replace the General Fund revenues and get the additional $10 billion that Hertzberg is looking for while eliminating the income tax, state sales tax and corporate tax.

Hertzberg’s proposal would not attach a service tax to all the items delineated in the BOE study, pointing out education and health care as tax-free services.

If not all services are taxed the door would be open for other services and industries to seek exemptions from the tax — a potential field day for the state’s lobbyists.

State Senator Bob Hertzberg, D-Van Nuys, who has ruffled the feathers of taxpayer groups with his proposal for a $10 billion sales tax on services, has introduced legislation to aid taxpayers in their battle with the state tax agency. Senate Bill 540 would extend and make permanent the Franchise Tax Board’s Taxpayer Advocate Relief Program, which has helped taxpayers obtain speedy tax relief since 2009.

Under current law, the Taxpayers’ Rights Advocate relief program is set to sunset on January 1, 2016. Hertzberg’s office says that would dissolve much-needed protections and benefits afforded to taxpayers.

Taxpayer Advocate offers free help to taxpayers

Back in 1988, the California Legislature enacted the “Katz-Harris Taxpayers’ Bill of Rights Act,” which among other provisions, created the position of Taxpayers’ Rights Advocate. Since that time, state taxpayer advocates have provided free assistance to taxpayers and businesses struggling to comply with the state’s complicated tax code.

“We help taxpayers who have been unable to resolve their tax problems through normal channels,” the Taxpayers’ Rights Advocate at the Franchise Tax Board explains on its website. “Our goal is to protect your rights and ensure that your tax problems are handled promptly and fairly.”

Although the office has assisted taxpayers for more than two decades, for much of its history, the office has lacked the power to issue refunds or waive penalties — even when the tax agency was clearly in the wrong. That’s why in 2008, the Assembly Committee on Revenue and Taxation, under then-Assemblyman Charles Calderon, amended the state Taxpayers’ Bill of Rights Act to give the office the authority to waive penalties, fees, additional taxes or interest when there was an error by the Franchise Tax Board.

The bill was extremely limited in scope and only applied in cases in which there was either:

1. Erroneous action or inaction by the FTB in processing documents or payments;
2. Unreasonable FTB delays; or
3. Erroneous written advice that does not otherwise qualify for relief.

According to a 2012 legislative analysis, “The advocate could only provide relief if no part of the error or delay could be attributable to the taxpayer, and when relief is not otherwise available.”

Sunset date on taxpayer assistance

If there weren’t enough caveats and limitations to that original legislation, Assembly Bill 3078 also included an automatic sunset date on January 1, 2012, which was later extended another four years with subsequent legislation in 2011.

Rather than extend the sunset date again, Hertzberg believes it’s time to make the tax relief program permanent. His office points to multiple cases in which taxpayer advocates have helped deliver speedy tax relief to taxpayers. In one case, 50 taxpayers received $1.1 million in tax relief due to bad advice contained in tax form instructions. Other taxpayers have received thousands of dollars worth in forgiven interest because of cases involving erroneous actions by the Franchise Tax Board.

“This program allows the Taxpayer Advocate to abate a taxpayer’s penalties, interest, and fees that occur because of erroneous actions by the Franchise Tax Board’s staff,” said Ray Sotero, Hertzberg’s communications director. “This bill would make improvements to the current program by removing a burdensome application process for taxpayers, removing the dollar limitation on the abatement amount, and by clarifying that the Chief Counsel approves each request.”

One improvement proposed by Hertzberg is the elimination of the $7,500 cap on the amount of relief that may be granted. In lieu of a limit, the bill requires the chief counsel and executive officer to sign-off on claims of more than $500. Those claims, which would include an explanation of the agency’s mistake, would be public records retained by the tax agency for a year.

Senate Bill 8: Hertzberg’s plan for sales tax on services

Hertzberg’s proposal to provide tax assistance may come as a surprise to many taxpayer groups. As CalWatchdog.com has previously reported, the former Speaker of the Assembly has introduced Senate Bill 8, which would extend the state’s sales tax to services. The new tax on services would generate $10 billion in revenue by applying the sales tax to accountants, lawyers, hair stylists and yoga instructors.

“Taxing services is a bad idea for California,” Jon Coupal, president of the Howard Jarvis Taxpayers Association, wrote in opposition to Hertzberg’s sales tax on services. “First, such a levy would have a depressing effect on California’s service economy. It is a simple fact of economics that when you tax something you get less of it.”

Hertzberg says the changing global economy requires a reevaluation of what’s considered subject to sales and use taxes. He believes California needs a permanent solution to raise revenue when Proposition 30, a temporary sales and income tax increase of $7 billion passed by voters in 2012, begins to expire next year.

Unlike the sales tax on services, Hertzberg’s legislation to permanently extend the taxpayer relief program is expected to sail through the Legislature.

For any taxpayers in need of assistance, the Taxpayers’ Rights Advocate has more information on its website, where you can also obtain a copy of “Your Rights as a Taxpayer.”

Reported the Sacramento Bee, “Hyatt, who moved from Southern California to Las Vegas after obtaining his patent, won a nearly $500 million judgment seven years ago over how he’s been treated by investigators from the California Franchise Tax Board.”

The FTB has been relentless in pursuing him into the desert. The latest: U.S. District Judge Garland Burrell Jr. said the FTB can continue its pursuit of the $50 million it says Hyatt owes the state.

Harassed in and out of court

The origins of the dispute go back another 20 years even before that — to the early 1970s. As AllGov described the race to patent the first microchip:

“Intel claimed victory in 1971, patented its creation and was generally regarded as the inventor of the microprocessor upon which the desktop computer industry was built. But in 1990, the U.S. Patent and Trademark Office reversed its decision and awarded that recognition to Gilbert Hyatt of La Palma, California, who had submitted a microprocessor patent application in 1970.

“In anticipation of earning millions for his invention, Hyatt moved to Nevada, where the tax laws were more favorable, and in 1991 he received a $40 million payment for licensing his patent. The Franchise Tax Board (FTB), which claimed Hyatt had been a citizen of California at the time of his windfall, audited him and in 1995 said he owed substantial taxes and a huge penalty payment for fraud.”

So began a series of claims, counterclaims and appeals that ensnared not only the FTB but the Board of Equalization, the agency roped in when taxpayers challenge the FTB’s determinations.

Hyatt alleged the FTB engaged in a campaign of harassment and abuse to muscle him into paying what they believed he owed. The FTB argued it couldn’t be sued in Nevada court, but federal and state courts disagreed. On remand from the U.S. Supreme Court, a Nevada district court awarded Hyatt some $400 million in damages.

As Steven Greenhut reported at Reason, the FTB appealed, leading Hyatt to claim in court the case against him should be dropped because of its extraordinary length and harassing nature:

“‘Specifically, because of the 20 year delay Hyatt can no longer obtain a fair and full adjudication of whether he owes state taxes to California,’ according to his lawsuit. ‘During this time, material witnesses have passed away, memories of witnesses have faded, and documents relevant and important to Hyatt are no longer available.’ The board keeps assessing penalties, so he says it has every reason to keep delaying. He suspects the tax board is waiting for him to die so that it can go after his estate.”

Unprecedented delays

The fight over Hyatt’s $50 million bill isn’t the only part of his epic legal battle. According to Bloomberg, Hyatt has been waiting 43 years for the U.S. Patent and Trademark Office to decide “whether his electronic signal to control machinery should be granted a patent. The patent-approval process takes 28.3 months on average. His idea for liquid crystal displays? That’s been sitting in the Patent and Trademark Office for 35 years.”

With his life already upended by the Franchise Tax Board, Hyatt decided, why not sue the PTO as well? In January, he did. USA Today reported, “[S]eeking a final decision on the applications he submitted in 1971 and 1972 for a device he calls a square-wave signal processor. He said the device converts analog and digital signals in control systems on machines, including those that make circuit boards and integrated circuits.”

Since the patents have been in process for so long, patent law places the PTO under a virtual gag order. With the cases confidential, they can’t be discussed by the government.

But Hyatt, 76 years old this month, has no interest in keeping quiet. The longer his saga drags on, the more attention seems to gather around it. Even if the FTB and PTO prevail, they face the prospect of an adverse ruling in the court of public opinion active in a place Hyatt’s invention made possible: the Internet.

California’s Franchise Tax Board is taking too long to complete audits and resolve taxpayers’ refund claims, protests and appeals, costing businesses hundreds of millions of dollars, according to the California Taxpayers Association.

Gina Rodriquez, vice president of state tax policy for CalTax, voiced her concerns last week at the FTB’s annual Taxpayers’ Bill of Rights hearing. The Bill of Rights, which was enacted by the state Legislature in 1988, spells out the rules and procedures for tax audits and taxpayer protests and appeals of those audits. The protest is the first step in the audit appeal process.

The FTB has consistently shortchanged taxpayers by not following its own guidelines, according to Rodriquez. “CalTax brought this to your attention last year,” she told the tax board. “However, the FTB seems to have fallen a bit short in addressing our concerns. I want to go through this with you again this year.

“Taxpayers’ liabilities should be determined within a reasonable timeframe. Once determined, any overpayment should be returned to them as quickly as possible. The FTB’s high compliance backlog seems to violate the spirit of the Taxpayers’ Bill of Rights. The FTB must do more to avoid any conflict between protecting revenue and providing due process to taxpayers.”

FTB guidelines require the agency to resolve tax protests in two years. But in 2013 it was taking FTB auditors nearly twice as long, 44 months, to close out protest cases, according to Rodriquez.

Report

The 2014 annual report to the Legislature by the FTB’s Taxpayers’ Rights Advocate Steve Sims has also noted the problem. “For the past several years, I have raised concerns about the additional time and resources required for taxpayers to protest an assessment,” said Sims in the report.

“I am pleased that the focused efforts by our Legal and Audit Divisions to resolve older protests resulted in a 200 percent increase in the number of cases resolved, and an overall reduction of 12 percent in the total number of protest inventory cases. Yet, for the business-entity, docketed protests resolved by our Legal Division for FY 2013/14, only 47 percent of the tax at issue was sustained. This once again raises concern about the number of revisions to assessments that occur once a business entity taxpayer elects to file a protest.”

The FTB has also fallen short in responding in a timely manner to taxpayers’ claims for refunds, said Rodriquez.

“The FTB has in its inventory more than 500 refund claims that are more than three years old,” she said. “This is an unacceptable number, as it means hundreds of millions of dollars – and maybe more, we don’t have a real good handle on the dollar amount – [withheld from] the taxpayers’ working capital, stifling economic advancement.”

CalTax doesn’t know how many hundreds of millions of dollars in potential refunds are being tied up by the FTB’s delays because “the FTB does not have a complete picture of its refund claim inventory,” said Rodriquez. “[FTB] staff is unable to tell CalTax whether the inventory has increased since the 2008 enactment of the Large Corporate Underpayment Penalty, also known as the LCUP.

“The 20 percent LCUP is quite punitive. So punitive, in fact, that taxpayers are forced to file their original returns with an overpayment to avoid the imposition of the penalty. Then they subsequently have to file refund claims for legitimate issues. The LCUP does ultimately increase government and taxpayer costs due to the increased workloads in the returns. The legislative purpose in enacting the LCUP in the 2008 budget negotiations was to raise revenue. And I ask: Has that goal been reached?”

No interest

Adding insult to injury, the FTB does not pay interest on the refunds, potentially allowing the state to use the money for years, itself accruing interest, without any compensation to the taxpayers.

Noting the IRS resolves federal tax refund claims much quicker, Rodriquez asked, “Why can’t the FTB have a dedicated staff to work those refund claims? We know we have a problem; let’s address it with some resources.”

FTB is also dragging its heels on audits, according to CalTax.

“Delayed audits have led to unfair audit practices,” said Rodriquez. “FTB is not completing many multi-state and high-level audits in a timely manner. In addition, CalTax members have reported a growing trend among auditors not to process overpayment issues before the audit closes. Some auditors request that taxpayers file a claim for a refund to address the overpayment issue for the same year that it’s under audit. This not only violates the published audit guidelines, but it worsens the high [backlog] inventory problem we have with refund claims.”

In addition, the FTB is taking too long to resolve appeals, she said. “Taxpayers deserve to have their appeals heard within a reasonable time frame. As years pass with a pending appeal, interest accrues, the audit file becomes stale, taxpayers die, key witnesses move on or become unavailable. Additionally, taxpayers lack any guidance for the years subsequent to the years under appeal.”

Concerns

Sims acknowledged CalTax’s concerns, but said the FTB is working to improve its performance, despite not having enough staff members. “[M]any of those issues have been raised in my annual report to the Legislature,” he said. “But I also want to talk to the effort the department has made in terms of trying to fix some of the problems. I’ve been working with our audit and legal division on this issue for more than the two or three years it’s been raised – more like five years. And I do want to say a lot has been done in terms of improving the process.

“One of problems regarding the protest inventory – she’s correct, it’s taking too long, in my opinion. But at the same time, they have reduced the volume of protests. I don’t know that we would have been able to do both at the same time because of the limited resources. Resources are somewhat limited. There is a resource issue that really needs to be addressed.”

Another reason for tax disputes taking longer to resolve is that they tend to be more complex than in prior years. “Taxpayers are becoming a lot more sophisticated,” he said. “The issues that are getting filed on these claims, they are full-blown audit-type issues. They require experienced resources. The department has taken certain steps to involve attorneys in the process a lot earlier to try to assist in handling these types of issues.”

Issues

Board Member Jerome Horton would like more information on the causes of the delays. “Why don’t we set up a meeting so I can have an opportunity to take a look at these in a little more detail,” he said. “I would like to have the department delineate those items that are systemic, those that are institutional and then those that are resource-type issues. If we are having a resource issue, we should consider requesting additional resources to be able to address those.”

A tax concern was also raised by Lynn Freer, president of Spidell Publishing, which provides publications and seminars for tax professionals. She said California tax law differs from federal tax law concerning the Affordable Care Act, which she dubbed “the Accountants’ Crying Act.” That lack of conformity can complicate taxes for self-employed filers who receive an insurance premium credit in 2014 only to find out they have to pay the credit back in 2015 because their income turned out to be too high to qualify for the credit.

“There are all sorts of technical issues involved,” said Freer. “So we would like to request guidance. We would like a rapid resolution. But one step further, it would be nice to have conformity. If we were to automatically conform to federal law, it would be much easier for these taxpayers. Unfortunately, folks who are involved in this premium credit are typically going to be lower-income taxpayers. They are least able to afford to pay folks to figure these things out, or least able to handle problems when they arise later.”

The FTB board did not respond to her request for Obamacare tax clarification.

California’s Franchise Tax Board spent thousands of dollars over five years in the futile pursuit of a Redondo Beach septuagenarian for $392. For more than half of that time, FTB staff lost the taxpayer’s records and didn’t inform him of it.

Willard Christine appealed the FTB’s tax ruling to the state Board of Equalization. The BOE granted it, 3-2, on June 24. Two board members criticized FTB’s handling of the case.

“It just drives me crazy that for $392 worth of tax there was this ongoing discussion with this taxpayer, a loss of his records for 33 months,” said George Runner. “If anything I think this is a time for us to send a message saying, ‘At times, FTB, you just need to do a better job.’”

Diminishing returns

The FTB sent two attorneys to the seven-hour hearing, prompting Runner to wonder about a point of diminishing returns in pursuit of small tax disputes.

“I can’t imagine there isn’t some path to try to provide a resolution to this,” he said. “I mean, we spent that much money in attorneys – more, we probably spent three times that amount of money – in attorney fees sitting here today.”

BOE Chairman Jerome Horton was also critical of FTB’s treatment of Christine.

“I just feel compelled to say something about this,” he said. “A loss of records for 33 months is a significant error on the part of the department. As human as the error may be, I happen to believe that there are a whole lot of faults that may have occurred in that process.

“But it is indicative of a larger concern, I think. And could be reflective of the cause for the inaction on the part of the taxpayer or inability to act on the part of the taxpayer subsequent to those 33 months, because of the frustration of not being able to have the information.”

FTB apology

FTB Public Affairs Officer Denise Azimi blamed the missing records on “human error.”

“I apologize to Mr. Christine for the long delay on his case,” she said. “We strive to provide timely attention and resolution to all taxpayers’ disputes or concerns. We certainly did not meet his or our own expectations in this instance.

“We provided the only remedy FTB could allow under the law; we abated the interest for the time period that the case was missing. In regards to our processes, we are striving to be more diligent so this does not occur in the future.”

History of the dispute

There actually was no dispute for two years after Christine filed his 2006 tax return, according to the BOE appeal filing. He and his wife reported and paid a tax liability of $1,965 on California taxable income of $68,018.

But at some point the IRS informed the FTB that the couple had improperly claimed some deductions on their Social Security income, the taxable portion of which was higher than they had reported.

That created a $14,738 increase in their taxable income, and a resulting additional tax owed of $1,168 plus interest, the FTB informed Christine on July 8, 2009.

He filed a protest, arguing that the language on the tax form “was incomplete, flawed and misleading,” according to the appeal.

And Christine received vindication. In a March 2010 phone conversation, the FTB informed him it had received “additional information from the IRS substantiating the amount of itemized deductions claimed on [his] California return.”

That left a tax owed of $392 plus interest. But shortly thereafter – from April 1, 2010 through Jan. 9, 2013 – the FTB lost Christine’s records. In that time nothing happened in the dispute, with neither side contacting the other.

Having found the records, the FTB sent letters to Christine on Jan. 14, Feb. 14 and March 14, 2013 discussing the issues in the case and setting a date for his protest hearing.

Christine responded via email on March 25, 2013, “expressing his concern and dismay regarding the missing file and delay in the protest proceedings,” according to his appeal.

The FTB apologized and agreed to delete the interest that had accrued on his tax liability during those 33 months. Then on June 27, 2013 it denied his protest, affirming that he owed $392 plus interest. As of Nov. 4, 2013 the interest totaled $74.42, creating a total liability of $466.42.

‘Undue delay’

In his appeal, Christine did not dispute the remaining tax liability. But he argued that the FTB had forfeited its right to collect it due to its negligence in allowing a 33-month “undue delay” in the case.

“It has been botched every step of the way,” Christine told the BOE board. “Losing a set of records for almost three years. What’s a taxpayer to think when he receives no information whatsoever, not even a postcard, from the tax board over that period of time? At some point wasn’t I at least owed a courtesy letter from the tax board apprising me of this extraordinary development?

“More than once I looked at the sheaf of records pertaining to this tax return and wondered whether the whole kit and caboodle should be relegated to the round file. Then when my case belatedly resurfaced when a video hearing was scheduled in April of last year, I was asked to furnish Leslie Cardoza my talking points in advance of the hearing. I did so in a detailed letter that was sent to her office in Rancho Cordova.

“But when I appeared at the hearing in downtown Los Angeles, she said over television that she hadn’t received the letter. To call this case ‘The Gang That Couldn’t Shoot Straight’ would not be an exaggeration.”

Repeat of 2004 tax dispute ‘nightmare’

Christine said his current dispute is similar to one he had with FTB over his 2004 tax return.

“I was victimized by bureaucratic mumbo jumbo, clerical ineptitude, wheel-spinning of the first order,” he said. “That case, I think, was a microcosm of why the state’s fiscal morass has persisted over these many years.”

Christine won that dispute when the BOE board granted his appeal in 2010.

“After my statement before this board in 2010, [Board Member Michelle Steel] characterized my experience as a ‘nightmare,’” Christine said. “She went on to say that as she read the sorry details of my case she was actually laughing and feeling sorry for me at the same time because of my plight.

“Mr. Jerome Horton complimented me for being a well informed taxpayer while making the point that if I was confused by the rules and regulations ‘millions of other Californians would also be at risk.’ There were urgings from your board that day that, if you will pardon the expression, the tax board should clean up its act and be more user friendly to taxpayers.”

In reference to his current dispute, Christine told the BOE, “I feel that it’s a sad state of affairs that we are here today debating the merits of a return from eight years ago that has gone from a four-figure past-due amount to only a few hundred dollars. Your time and effort are more valuable than this.”

FTB: taxpayer was ‘made whole’

FTB lawyer Karen Smith responded by noting that Christine does not dispute that he has a tax liability, and that the FTB is not charging interest for the 33 months that “the file was misplaced.” She dismissed Christine’s argument that that delay had forfeited FTB’s right to collect his tax.

FTB “has taken all of the actions allowed by law to make the appellant whole,” she said. “There is simply no provision under the law to abate any further interest or the tax as requested by the appellant.”

Christine responded by asking the board to consider if the situation were reversed.

“Suppose a taxpayer lost his records for three years and never wrote a letter,” he said. “Would the government be as forgiving as the taxpayer is being required to be in this case? It’s a rhetorical question, we all know the answer.

“Also in the brief filed by the government it says that I wasn’t harmed. Well, I had high blood pressure when this started, and I still have high blood pressure, and I’m taking medication for it. I consider that harm. Maybe not financial harm, but certainly physical harm.

“And there’s been some mental harm: the stress, the aggravation, the frustration, the angst. No remorse or apology, not one iota. I think the taxpayer is owed better in this case.”

Azimi could not say how much FTB staff time was spent during the tax dispute. “We do not have this information readily available,” she said.

FTB doesn’t cut its losses

But despite spending thousands of dollars trying to collect $392, the FTB does not recognize a point of diminishing returns. CalWatchdog.com asked Azimi whether FTB has a policy on when to cut its losses.

“The answer is no,” she said. “Our job is to administer the state’s income tax laws in a fair and impartial manner to ensure that all taxpayers meet their obligations to file and pay the proper amount owed. All taxpayers, regardless of the amount owed, are entitled to exercise their due process rights in disputing their tax assessments before we finalize those tax liabilities.

“Due process means that taxpayers are given an opportunity to be heard and to present any claims or defenses they may have. These actions include the right to protest, have an oral hearing and, if needed, appeal their tax assessments. When any taxpayer decides to exercise these rights, we will participate, regardless of the amount of disputed taxes at issue.”

The two BOE members who voted to deny Christine’s appeal, Betty Yee and Deputy State Controller Marcy Jo Mandel (representing Controller John Chiang), did not comment on the case. Yee is running to replace Chiang as state controller.

Of course you should. And the dealer must refund you the money, or face fraud charges.

Not so the California government. If it takes from you a tax later found to be illegal, it doesn’t have to give back your money. No joke.

Board of Equalization Member George Runner is sponsoring legislation to end that and refund your money. According to his office:

“Two identical measures, AB 2510 (Wagner) and SB 1327 (Knight), would require the state to provide a full refund to all individuals who paid a tax later declared unconstitutional or illegal.”

Runner himself said:

“It is criminal that the State of California can keep money it illegally collects from its citizens. Anyone who in good faith pays what ends up being an illegal tax should get their money back. It’s as simple as that.”

It really is criminal, as he says. In fact, what’s needed is another law stipulating that, if the government takes a tax from you illegally, you don’t have to pay any taxes for the rest of your life. After all, private-sector crooks like Bernie Madoff get life in prison. Why not turn it around and help the government’s victims — for life?

He said the phony “profits” the Ponzi-scheme master promised vanished into thin air. But before that, the “profits” were taxed by California, which now refuses to return the tax assessments to state victims.

Anderson proposed Senate Bill 797, which would align California law with federal income tax law. The IRS lets theft losses from Ponzi schemes and con artists be counted against past and future income, something California currently does not allow for state income taxes.

This would be an alternative to immediately giving the tax money back to the Ponzi victims.

“The state of California kicked you while you were down, and hit you with a tax bill on money you never received,” Anderson explained about the victims.

Madoff’s scheme, the most notorious in U.S. financial history, unraveled in 2007. It cost 16,000 investors $64.8 billion in paper wealth, and at least $17.5 billion in cash losses, according to the New York Times. 

Victims vs. criminals

While well known victims included Steven Spielberg, Kevin Bacon, Ringo Starr and Elie Wiesel, most victims were common people.

Anderson lamented of his reform that there was “no stomach for it in the Legislature.”

“My goal is to punish criminals, not victims, and many of these innocent victims were not wealthy,” he said. “They were teachers, welders and small business owners, saving every penny they could toward their retirement. And it’s not fair the state is taxing them on this fictitious money that was stolen from them.

“We need to protect these victims whose finances and futures have been destroyed by scam artists. Together, with the passage of SB797, we can ensure the state doesn’t re-victimize these innocent Californians. The state should not profit from criminal activity perpetuated against law-abiding citizens.”

Two investment scheme victims phoned in and told their stories of devastating financial loss, and of wrestling with the Franchise Tax Board over the phantom investment gains.

Bernice Tingle, 68, was defrauded of $1 million by a criminal swindler, but she has not yet paid taxes on the phantom investment proceeds. The Franchise Tax Board claims she now owes the state $135,000 after penalties were assessed on her original $84,000 tax bill.

Tingle intended to appear in person, but was rushed to the hospital on her way from Oakland to Sacramento. “The federal government went back and forgave 85 percent of my tax bill,” Tingle said via phone. “I’ve worked too hard to be out on the streets.”

Velma (no last name given), 70, was driving with Tingle to the hearing, and went to the hospital to give Tingle support. By phone, Velma said she lost everything, including all of her retirement money, to another con artist. “I’m in a financial situation right now,” Velma said. “I had to pay taxes on that money.”

Velma said the IRS was finally able to refund her tax money. Yet when she shared the same documents with California’s Franchise Tax Board, it refused to refund her $28,250. “I had to pay the tax bill,” she said.

SB797

Immediately following the press conference, Anderson presented SB797 in the Senate Governance and Finance Committee. But it was evident from the outset several committee members were not on board with him.

Anderson said the Franchise Tax Board’s attitude is, “If you are taxed on phantom profits from a Ponzi scheme, we won’t return the money or forgive the tax bill.”

He added, “Bernice lost $1 million. Now she has to worry about wolves at her door.” Anderson said the state tax board should not keep the “blood money.”

Anderson said other states return Ponzi-scheme tax money. “I went for neutral ground,” he explained, knowing two similar bills addressing the same problem had failed in the Senate Governance Committee – one bill in 2010 by former Sen. Dean Flores, D-Shafter, and the other bill by Anderson in 2011.

You’re on your own

Committee Chairwoman Sen. Lois Wolk, D-Davis, said the issue has come before her committee before, and they’ve never passed the bills. “It’s really offensive to sit up here and hear words like ‘blood money,’ when people make investments that fail,” said Wolk. “There were many people affected by this.”

Wolk added, “It’s not the role of the state Treasurer” to solve the investors’ problems. Wolk recommended a “no” vote by all of the committee members.

Anderson was not dissuaded. “Just say, ‘I am a money-grubbing legislator and I don’t want to give the money back,'” Anderson mocked. “They didn’t lose their money to poor investments; they were scammed. Money was stolen. They are crime victims.”

Anderson asked of the legislators, “Do you feel good at night knowing someone has to fend wolves at the door? We are sending out people from the state to do asset reviews,” meaning they’re preparing the seize the people’s property. “This is about victims. This is the second time I’ve brought this before your committee; it’s the righteous thing to do.”

The bill failed on a 4-2 vote. Reconsideration was granted, and SB797 will be heard again and voted on Wednesday, Jan. 15 in the same committee.

By Chris Reed

There’s finally some mainstream media coverage of the astounding decision of the Franchise Tax Board to rewrite a tax break and go after profits accumulated by some business owners that date back to 2008. The U-T San Diego story by Chris Cadelago only makes the money grab seem all the more outrageous in that it is depicted as something that was conceived of and executed solely by FTB bureaucrats, without the knowledge or consent of elected officials.

“SACRAMENTO — About 2,000 small business owners and investors across California are being forced to retroactively pay the state four years of assessments totaling $120 million plus interest, based on a decision by the Franchise Tax Board.

“In December, the state agency that administers personal income and corporate taxes ended a nearly 20-year-old tax incentive designed to spur investment in startup companies and small businesses, citing a court ruling. The benefit allowed small business investors who sold their stock at a gain to exclude half the profits from their income taxes. …

“The decision was made at the staff level, not by the three members of the Franchise Tax Board — John Chiang, state controller; Jerome E. Horton, chairman of the Board of Equalization and Ana Matosantos, state finance director.”

The article notes that Sen. Ted Lieu, D-Torrance, and Assemblyman Jeff Gorell, R-Camarillo, are upset with the FTB and may seek a reversal of the ruling, but where’s Jerry Brown?

For more than a year, our governor has sold himself as a critic of bureaucracy and mindless regulation and a champion of a business-friendly state government. He did so again in his State of the State address.

The FTB money grab is an acid test of whether it’s just more Moonbeamian hot air or whether the governor really believes what he says.