ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – PENALTY ABATEMENT – THE TAXPAYER WINS ONE!
By Robert S. Schriebman
Two things I enjoy are when the Boston Red Sox win and the Office of Tax Appeals (OTA) decides a case in favor of a taxpayer.These days both do not happen very often. On November 5, 2019, Richard Reed convinced the OTA to throw out late filing and late payment penalties assessed by the Franchise Tax Board (FTB). This article will discuss the Reed case and also the basics for successful penalty abatement.
The Reed Case
In the Matter of the Appeal of Richard Reed, OTA Case No. 9034478, November 5, 2019.
Reed lived in Hawaii during 2016.He had no ties to California. Reed owed a 10% interest in an LLC that was taxable as a partnership.The LLC held no California assets until 2016 when it added income-generating assets in California.The LLC was supposed to file a California return in 2016 when it had income producing property, but it failed to do so. By law the LLC was required to give Reed a K-1 form for his 2016 tax return, and by law Reed was supposed to file a California non-resident return in 2016. He couldn’t do it because he did not have the required K-1 income information necessary for the California return. In fact, the LLC did not give Reed the K-1 until February 2018. On March 1, 2018, Reed filed a late 2016 return with the FTB. Because the return was late, the FTB assessed late filing and late payment penalties in the amount of $3,700 plus interest.
The 2016 FTB return should have been filed by April 15, 2017. Between March 2017 and February 2018, Reed sent the LLC at least 23 emails inquiring about when he would receive the K-1.The LLC kept putting him off.
Reed paid the FTB the $3,700 plus interest and filed a claim for refund which the FTB denied. (Refund claims are routinely denied by the FTB; maybe they figure the taxpayer will just walk away; many do walk away and that is sad.)
Pursuant to R&TC § 19131(a), California law imposes a penalty for the failure to timely file a return, unless it is shown that the late filing and late payment were due to reasonable cause. If you have read my articles on this website on penalty abatements, you will have learned that in order to establish reasonable cause, a taxpayer must show that his/her failure occurred despite the exercise of ordinary business care and prudence. Super human effort is not required. All this was established by the US Supreme Court in 1985 in the Boyle Case, 469 US 241. After Boyle the IRS and the states drafted laws, procedures and rulings establishing business care and prudence as the standard for abatement.
The OTA found that Reed, via email, for over one year, repeatedly asked the LLC when he could expect to receive the K-1 for 2016 necessary to tell him the amount of income he would have to declare on his California return. The emails indicated that Reed was unaware as to whether he would be receiving any California-source income and that such information was unavailable to him, despite his best efforts. Without this information, Reed was unable to reasonably determine whether he had a California filing requirement.
Reasonable cause may be found when a taxpayer is unable to acquire the information necessary to make a reasonably accurate estimate of a tax liability after prudent efforts to acquire such information.
The OTA found that there was reasonable cause for abating the late filing and late payment penalties. The taxpayer finally wins one!
Taxpayer victories in the OTA are few and far between. Reed would not have won his case but for his documented emails. This shows you how important documentation is to proving and winning your case. Ideally, your documentation should be so thorough and clear that the government lawyers are backed into a corner and have no sustainable argument against you.
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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