ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – IS THE FTB’S “ME TOO” ASSESSMENT AN EXAMPLE OF GOVERNMENT THEFT?
By Robert S. Schriebman
When the IRS completes an income tax audit, and issues an assessment, the taxpayer is under a duty to notify the FTB within 6 months (R&TC Code § 18622(a)). As part of the notice process the taxpayer must also concede the accuracy of the final federal determination. If the taxpayer follows these rules, the FTB has only two years to issue its “Me Too” assessment that piggybacks on the IRS’ findings. If a taxpayer does not so notify the FTB, there is no time limit for the “Me Too” assessment. Sometimes, an IRS audit will assess penalties in addition to the underlying tax deficiency. This is usually the 20% accuracy-related penalty (formerly the negligence penalty) set forth in R&TC Sec 6662(b). Does the assessment of this penalty by the IRS automatically allow the FTB to assess its own version without first conducting an independent investigation to determine if the penalty was warranted or was there reasonable cause for the abatement or non-assessment of the penalty?
The Appeal of J. Reff
The Appeal of J. Reff (2022-OTA-076)
Reff was audited by the IRS for the 2009 taxable year. The IRS assessed additional income taxes as well as the accuracy related penalty (ARP) of 20%. Reff did not notify the FTB of the results of the IRS audit. Many years later, the FTB issued its “Me Too” assessment including its own version of the ARP. Reff objected to the assessment on the grounds that the FTB took an unreasonably long time to assess Reff. Reff also argued that the ARP should not be assessed. The Office of Tax Appeals (OTA) informed Mr. Reff that here was no time limit on the FTB’s ability to issue its assessment because Reff did not follow the rules set forth in R&TC § 18622(a). In other words, the FTB could take it sweet time. On the other hand, the OTA ruled that the ARP should not be assessed because Reff’s understatement of FTB taxes did not exceed the greater of 10% of the required tax to be reported, or a minimum understatement of $5,000. Reff’s understatement of tax amount only to $3,329. The ARP was thrown out.
Suppose, however, that Reff understated his FTB taxes by more than $5,000. Does this mean that the FTB can assess an understatement penalty by simply rubber-stamping the findings of the IRS and piggy-backing those findings onto an FTB assessment? Apparently, the answer is yes. So, the FTB can assess a punitive penalty without doing any investigation on its own, without doing it’s homework!
I am a strong believer that both the IRS and the FTB assess penalties without real justification and based upon a mechanical application of their respective statutes. If you receive an FTB “Me Too” assessment containing penalties, make sure you challenge the assessment by timely filing a Protest and putting the burden of proof on the government taxing agency to justify the penalty assessment. Never take a penalty lying down.
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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