ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – THE OTA DENIES A REQUEST FOR ABATEMENT OF LATE PAYMENT PENALTY
By Robert S. Schriebman
In the closing days of 2021, the Office of Tax Appeals (OTA) decided the Matter of the Appeal of L. Rougeau (LR) 2021-OTA-335P. LR wanted to buy a new home. Her current home was listed for sale but had not sold. In order to put a down payment on the new home LR took out $435,000 from her IRA. This generated an FTB tax liability of $39,551. LR worked with her accountant to develop a 2-stage strategy to pay the taxes, but both plans fell through and she did not remit her tax payment until September 5, 2020 instead of the due date of July 15, 2020. The FTB assessed a late payment penalty together with interest. LR appealed to the OTA to have the penalty abated and to have the interest abated as well.
R&TC Sec. 19132 imposes a late payment penalty if the taxes are not paid by the statutory due date. Due to Covid-19 the payment date was extended from April 15th to July 15th. However, LR did not pay until September. The late payment penalty may be abated for reasonable cause. To establish reasonable cause a taxpayer must show that the failure to make a timely payment occurred despite the exercise of ordinary business care and prudence. The taxpayer bears the burden of proving that an ordinarily intelligent and prudent business person would have acted similarly under the circumstances. (Appeal of Triple Crown Baseball, 2019-OTA-025P)
The OTA held that LR’s plans, developed with her accountant, did not constitute reasonable cause just because they fell through. When the monies were taken from the IRA, LR knew what the taxes would be and she should have taken out additional funds to pay those taxes. One of LR’s plans involved receiving an inheritance from her mother’s estate. She expected the inheritance within two months after her mother’s death, but the OTA ruled that her timeframe was not realistic.
LR also sought to abate interest on the assessed penalty. The OTA ruled that interest is not a penalty but is compensation to the FTB for a taxpayer’s use of money that should be paid to the state. There is no reasonable cause exception to the imposition of interest. To obtain abatement a taxpayer must prove an unreasonable delay on the part of the FTB or a wrongful act administratively. LR could show neither factor. Therefore, there was no abatement of interest.
The best made plans of both mice and men have no impact for sympathy for the OTA. It is always a good idea to check the Internal Revenue Manual’s Chapter 20 (IRM) for a list of usual factors that constitute reasonable cause. Even though LR’s case involved the FTB, they too use IRM to determine whether a taxpayer has reasonable cause for the abatement of penalties.
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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