ASK THE EDD ATTORNEY – HOW TO ABATE FTB INTEREST
By Robert S. Schriebman
September 17, 2015
The recent SBE decision in the Matter of the Appeal of Joy A. Clark gives us guidance in the procedures involved for compelling the FTB to abate accruing interest on a personal income tax assessment. This is not an easy thing to do. You can expect that the FTB will not go along with your initial request and you will be forced to bring your matter before the State Board of Equalization (SBE). The SBE has jurisdiction over sales and used taxes as well as personal and corporate income taxes.
Joy A. Clark (Clark) came before the SBE with a weak and strange case. She lost her appeal and the SBE refused to abate accruing interest charged by the FTB. However, in its decision, the SBE provided important guidelines when you seek to have your FTB interest abated in whole or in part.
The Clark Case
Joy Clark was a retired school teacher. In April 2009 when preparing her 2008 FTB personal income tax return, she chose to use what was then the FTB’s new CalFile online tax program. Clark claimed that she followed the CalFile instructions to the letter and, if those instructions were wrong, it’s the fault of the FTB requiring the abatement of interest.
Clark reported her non-retirement income in the amount of $62,000 on the computer screen. She also claimed to have properly reported her pension income in the amount of $35,000; but when she hit the key to enter all of her calculations, somehow the pension income failed to come through on her computer. Clark admitted she did not double-check her entries.
In February 2013 the FTB caught the omission of the pension income and sent Clark a Notice of Proposed Assessment (NPA). The NPA assessed additional taxes, penalties and interest. Clark paid the bill and filed a claim for refund part of which was the demand that the FTB abate almost 3 years of accruing interest. Clark’s argument for abatement was a malfunction in the CalFile program. Clark claimed that she enter the amount of the pension income but that CalFile put it on the wrong page and the program did not properly calculate her initial tax bill. Clark also argued that the FTB allowed 3 years to pass before it caught the error, thus subjecting Clark to 3 years of unnecessary interest. The FTB denied the refund claim and Clark appealed to the SBE.
FTB Interest Abatement Rules – The Basics
The FTB rules for abatement of interest are essentially a carbon copy of IRS interest abatement rules set forth in IRC § 6404(e). The FTB rules are found in R&TC § 19104. These are the basic rules:
- There must be an error or delay in the performance of a ministerial act by the FTB;
- The error or delay must have occurred after the FTB had contacted the taxpayer in writing about the deficiency or payment;
- No significant aspect of the error or delay can be attributed to the taxpayer involved.
The taxpayer must meet all three of these rules.
Clark contended that the CalFile error constituted a ministerial act. According to Clark a ministerial act means an error on the part of the FTB including “systemic glitch” by CalFile. Clark was not aware of any ministerial error until she received the additional assessment via FTB’s NPA.
The FTB argued that, for the abatement of interest to be allowed under R&TC section 19104, there must be an unreasonable error or delay in the performance of a “ministerial act” or “managerial act.” The FTB contended that there was no unreasonable delay caused in the performance of a ministerial or managerial act by an FTB employee. The FTB further contended that, because it timely issued the NPA, it did not commit an error or delay.
The FTB concluded its argument by stating that even if errors or delays were made, no interest can be abated because all of the delays occurred prior to the FTB’s first written contact with Clark. That first written contact was the issuance of the NPA.
What the SBE Decided
The first issue decided by the SBE was whether or not the NPA was timely issued. The FTB has 4 years from the date a personal income tax return is filed to issue an NPA. (The IRS rules are 3 years.) The time starts from April 15 of the year in issue, or when the returns are actually filed, whichever time period occurs last. Clark filed her 2008 return in April 2009. The FTB had until April 15, 2013 to issue an NPA. Clark’s NPA was issued in February 2013, making it a timely assessment. Clark loses round 1.
The second issue decided by the SBE was the beginning of the interest abatement period. The SBE ruled that it was precluded from abating any accruing interest prior to the FTB’s first written contact with Clark. That written contact was the issuance of the NPA in February 2013. Therefore, any interest accruing between the time Clark filed her return in 2009, to the date of the NPA, was not abatable. Clark loses round 2.
The third issue decided by the SBE was whether Clark made a sufficient showing that the error was caused by the tax software and not due to user error. The SBE concluded that Clark failed to prove any fault within the CalFile system. Clark loses round 3.
The fourth and final issue decided by the SBE was whether any error in the CalFile instructions constituted a ministerial error. Clark claimed she followed the instructions to the letter. Believe it or not, the SBE held that a taxpayer should not regard such informal publications as instruction pamphlets as sources of authoritative law that give rise to compelling the FTB to abate interest even when those publications contain misleading. Clark loses the fourth and final round.
There are parts of the Clark decision that I strongly disagree with. However, the laws, as written by both the State Legislature and the US Congress, essentially protect both governments. Interest abatement cases are rare and most taxpayers lose on a technicality. The best lesson to learn from the Clark case is to be diligent when receiving written communication from either the FTB or IRS. Save all written communication because the interest abatement process begins with the very first written communication.
The EDD does not have any interest abatement rules or procedures.
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.
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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