ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – WHAT YOU NEED TO KNOW ABOUT THE FTB’S “ME TOO” ASSESSMENT – PART 1
By Robert S. Schriebman
Every California taxpayer concluding a matter with the IRS whether the matter be an audit, Tax Court decision or a decision by the federal court, is required to notify the FTB. If the taxpayer fails to give a timely notice or to timely amend a tax return, there is no statute of limitations on the FTB’s issuance of its corresponding “me too” deficiency assessment based upon the federal adjustments. A “me too” assessment means that the FTB is allowed to levy a tax that it would otherwise never get because the statute of limitations for an audit assessment had long expired.
The Nguyen and Armstrong Case
Nguyen and Armstrong invested in a limited partnership tax shelter. The managers of the shelter signed a settlement agreement with the IRS for income tax adjustments relating to an audit for the year 2007. These adjustments caused income to be recognized on their 2015 IRS tax return. They eventually received an FTB Notice of Proposed Assessment (PNA) for disallowed intangible oil drilling costs and itemized deductions. They challenged the PNA and eventually filed a petition with the Office of Tax Appeals (OTA). The only argument raised during the OTA hearing was procedural, in that the settlement agreement between the partnership and the IRS should not be binding on them because they did not vote or consent to be bound by the federal assessment. They also argued that the statute of limitations for assessment had expired. The OTA rejected their arguments because the IRS and the partnership executed waivers extending the statute of limitations and these extensions were binding on the partners as well. Nguyen and Armstrong never notified the FTB of the final IRS determination as required by R&TC § 18622(a). Nguyen and Armstrong, California OTA, Dec. 16, 2021; release Feb. 2022 407-577.
FTB Audit Statutes of Limitations
The statute of limitations for issuing an assessment for personal income tax is normally four years after the return was filed (R&TC 19057). The statute of limitations is six years if the taxpayer omits an amount in excess of 25% from gross income stated in the return (R&TC 19058). However, when the IRS enters the taxpayer’s life, the statute of limitations for assessment is suspended indefinitely until the conclusion of the IRS matter and until the taxpayer provides notice to the FTB.
R&TC § 18622(a)
R&TC § 18622(a) requires that any changes or corrections to an IRS tax return be reported to the FTB within 6 months after the date of the final federal determination. If the notice to the FTB is timely made, the FTB only has two years to make its “me too” assessment. This notice must be sufficiently detailed to allow the FTB to make an accurate assessment. If no notice is given, the FTB has no statute of limitations for its “me too” assessment. The FTB can wait until Johnny Mathis’ hit song, “The 12th of Never.”
In my practice, I am surprised how few tax professionals know this rule and how few of them comply with the law.
In Part 2, I will discuss the requirements for notifying the FTB of the final IRS audit determination. For further information, see my book entitled California Taxation Practice and Procedure, published by Commerce Clearing House (CCH) copyright 2005.
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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