ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – A FRIVOLOUS CLAIM FOR REFUND LEADS TO A HUGE FTB PENALTY
By Robert S. Schriebman
Mr. Reed filed two 2017 income tax returns with the FTB showing no taxable income, but requesting a refund over $1,800 for allegedly withheld income taxes. He did not file a W2, instead he filed a substitute version. When he filed his first return the FTB informed him that it was a frivolous return and requested that he file a return listing his true income and attached a true W2. In response to this request, Reed basically resubmitted his original return and his request for an $1800 refund, again without submitting a valid W2. The FTB informed him that if he did not file a valid return within 30 days, they would impose a $5,000 frivolous return penalty, pursuant to R&TC § 19179.
When the FTB refused to refund anything to him, Reed filed a refund petition before the Office of Tax Appeals (OTA). In the Matter of the Appeal of S. Reed, 2021-OTA-326P, Sept. 28, 2021. The FTB argued that Reed never filed a valid claim for refund and, therefore, the OTA had no jurisdiction to entertain the claim. The issues before the OTA were as follows:
- Did Reed file a valid claim for refund?
- Is Reed entitled to a refund?
- Can the OTA throw out the FTB’s frivolous return penalty?
Did Reed File a Valid Claim for Refund?
What constitutes a valid claim for refund? In a nutshell, the claim must be clear enough so that a 6-year-old can understand what you want. There are no specific forms for an FTB refund claim. A valid claim should have the following elements:
- The taxpayer’s name and address.
- The Social Security number or the federal EIN.
- The tax year involved.
- The amount the taxpayer is seeking as a refund and the date of payment.
- An explanation of why a refund is warranted.
- The claim must be signed and dated.
The OTA ruled that the tax returns filed by Reed had all of the above elements and were considered valid claims for refund as far as the elements were concerned. The OTA had jurisdiction to consider Reed’s claim.
Is Reed Entitled to a Refund?
Reed’s refund claim met all of the basic elements but he was not entitled to a refund. The OTA held that it was legally impossible for Reed to have “W2 withholdings” without declaring any taxable income.
Can the OTA Throw Out the FTB’s Frivolous Return Penalty?
R&TC Sections 19179 imposes a penalty of $5,000 for a frivolous return. This provision is echoed in the IRS Code specifically section 6702. The OTA did not have jurisdiction to hear any argument regarding this penalty because it was imposed after Reed filed his appeal with the OTA and was not part of his claim for refund. Therefore, the penalty was not properly before the OTA.
I have always been a firm believer in the motto that “tax protesters should get no breaks.” If you go on the IRS website, there is quite a discussion of this subject as well as showing the various arguments used by tax protesters over the years. In reading Reed’s case it was clear to me that he was a tax protester who tried to get a phony refund without declaring his taxable income. In other words, he wanted his cake and he wanted to eat it too. See IRS Website: The Truth About Frivolous Tax Arguments – Section III.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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