Ask The California Employment Tax And Payroll Tax Attorney – How The Irs Works With The Ftb To Catch Unreported Income – The Starr/mcconnell And Propert Cases
By Robert S. Schriebman
2023
Introduction
It is no secret that the IRS and the states have agreements and memorandums in place to mutually inform each other of taxpayers’ unreported income usually from 1099 reporting. The IRS and the FTB have had such a working relationship for many years. The recent Office of Tax Appeals (OTA) decisions in Starr/McConnell and Propert are clear illustrations that the IRS-FTB information sharing system is alive and well. In this article I will discuss both the Starr/McConnell and Propert OTA decisions.
The Starr/McConnell Case
In the Matter of the Appeal of G. Starr and R. McConnell, 2023-OTA-303
Starr/McConnell timely filed a 2017 FTB resident personal income tax return. Subsequently, the FTB received information from the IRS indicating that Starr’s federal taxable income was increased by over $32,000 for unreported pension income, and unreported dividend income of over $1,700. This information was obtained from the filing of 1099s. Based on the federal adjustments, the FTB issued a Notice of Proposed Assessment (NPA) to reflect the unreported pension and dividend income.
Under California law, a taxpayer is required to concede the accuracy of federal changes to the taxpayer’s income or state where the FTB’s determination is incorrect; RTC §18622(a). The taxpayer has the burden of proof in these types of “Me Too” assessments.
Starr/McConnell asserted that they never received an explanation for the adjustments, had no idea how they could be liable for additional taxes to the FTB, and requested an explanation from the FTB. The OTA pointed out that both the NPA and the FTB’s hearing brief fully explained how and why the FTB increased their taxes. Basically, the adjustments relate to the receipt of pension and dividend income, which they failed to report when they filed their 2017 FTB return. Because Starr and McConnell were residents of California during the 2017 tax year, both the pension and dividend income were properly included in their California taxable income: R&TC § 17041 and 17071.
The FTB has the same definition of taxable income that is found in Section 61 of the IRC. This section states, in substance, that taxable income includes income from whatever sources derived including pension and dividend income. All income is taxable unless specifically excluded by statute. The pension income was earned from employment in Virginia. If Virginia assessed a tax on this income, the taxpayers would be given credit on their California return.
In Conclusion the Starr/McConnell case is one clear example of how the IRS communicates with the FTB to catch unreported income on state returns.
The Propert Case
In the Matter of the Appeal of N. Propert, 2023-OTA-297SCP
Propert filed her California non-resident or Part-Year Resident Income Tax Return for 2017. She moved to Oregon at the end of September 2017. She reported wages of over $76,000 and pension income of over $37,000. Thereafter, the FTB received information from the IRS that disallowed a deduction of $178 of student loan interest and a notice that she failed to report an additional almost $9,000 in taxable pension income. She did not report these changes to the FTB. The FTB issued an NPA for an additional tax of $987 plus interest. Ms. Propert filed an appeal with the OTA.
When the IRS changes or corrects a taxpayer’s federal tax return, the taxpayer must either concede the accuracy of the IRS determination or state how the determination is erroneous; RTC § 18622(a). If the taxpayer does not challenge the IRS determination, it is presumed correct, and the taxpayer bears the burden in an FTB proceeding of proving the IRS wrong.
Ms. Propert was a part-year California resident. As such, she is taxed on her world-wide income earned during the period of her residency. As well as on all income derived from California sources while being a non-resident; RTC § 17041.
The IRS furnished the FTB with a CP2000 Data Sheet and an IRS Account Transcript. These showed additional taxable pension distributions of close to $9,000 that was not included in the calculation of Propert’s FTB return. The FTB treated this additional income as California-source income because Propert resided in California until the end of September 2017. Any income she received between January 1, 2017 and the end of September 2017 is California-source income. Propert did not provide any argument or evidence indicating that she received the unreported income solely while residing in Oregon. Accordingly, the OTA concluded that the FTB properly applied taxes on the information received from the IRS.
Conclusion
Some of the adjustments furnished by the IRS in both of the above cases were small, especially the disallowed deduction of $178 in Propert’s student loan interest. This is also true in regard to the unreported dividends of $1,680 on Starr/McConnell’s return. The IRS catches the smallest amounts and the FTB issues its “Me Too” assessment.
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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 50 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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