ASK THE EDD ATTORNEY- IS IT POSSIBLE TO ABATE INTEREST ON CALIFORNIA TAX ASSESSMENTS
by Robert S. Schriebman
What do I mean by interest abatement? The word “abatement” means to reduce or eliminate. Both terms apply in tax law when we are discussing the interest abatement process. Interest abatement on taxes had its origin in § 6404(e) of the Internal Revenue Code. Under federal law, interest could be abated on income tax as well as estate and gift tax assessments under certain conditions set forth in section 6404(e). The Franchise Tax Board adopted the same process and used the same standards for abating interest on California income taxes only. My research has shown that in California interest can only be abated on personal and business income tax assessments. In other words, the California interest abatement rules do not apply to portions of EDD assessments such as disability (DI), unemployment (UI), and education training taxes (ETT).
Rev. & Tax. Code § 19104 is the primary code section dealing with the abatement of California assessed interest. While abatement may not apply to portions of ETT assessments stated above, interest abatement procedures do not appear to apply to sales and use tax assessments, although the ultimate authority on abatement of interest lies with the State Board of Equalization.
In this article we will review the basic rules for abating California personal income taxes (PIT).
THE BASIC RULES
Interest is required to be assessed by the FTB from the date when the payment of tax is due, through the date it is paid (Rev. & Tax. Code § 19101). Interest on PIT assessments is mandatory; the interest portion of the assessment is not a penalty. Interest serves as compensation to the FTB for the taxpayer’s use of money after it should have been paid to the FTB. Unlike the assessment of penalties, there is no “reasonable cause” exception to the imposition of interest.
Under Rev. & Tax. Code § 19104, for tax years beginning on or after January 1, 1988, the FTB may only abate or refund interest as follows:
[T]o the extent that interest is attributable in whole or in part to any unreasonable error or delay by an officer or employee of the Franchise Tax Board (acting in his or her official capacity) in performing a ministerial or managerial act. (Rev. & Tax. Code, § 19104)
The terms “unnecessary error or delay” are not defined in the Rev. & Tax. Code or its commentaries. We may be able to spot an unnecessary error such as a computational error or an error in an FTB Proposed Notice of Assessment (PNA). For example, if the FTB issues a PNA assessing taxes and interest without taking into account allowed itemized deductions or credits, we are entitled to have both the assessment and interest reduced or abated fully.
On the other hand, what constitutes an unreasonable delay? An unreasonable delay can be found in the legal doctrine of “laches.” We have discussed laches with regard to the EDD’s attempting to collect on ancient debts (Please see the articles on this topic). In deciding whether or not to apply the doctrine of laches, courts usually look at the following two factors: (1) an inexcusable delay or lack of diligence by the FTB, and (2) prejudice to the taxpayer caused by reliance on the actions or inactions of the FTB. There are no current cases decided by California courts on what constitutes laches in a California tax assessment. Guidance can be found, however, in decisions issued by the U.S. Tax Court.
Further, the error or delay can be taken into account only if no significant aspect is attributable to the taxpayer, and the error or delay occurred after the FTB contacted the taxpayer in writing about the underlying deficiency. (Rev. & Tax. Code, § 19104).
What does the words “ministerial act” mean? The definition is found in Rev. & Tax. Code § 19104 as follows:
A procedural or mechanical act that does not involve the exercise of judgment or discretion, and that occurs during the processing of a taxpayer’s case after all prerequisites to the act, such as conferences and reviews by supervisors, have taken place. A decision concerning the proper application of federal tax law (or other federal or state law) is not a ministerial act.
What does the words “managerial act” mean? The FTB does not have its own version of the words “managerial act,” so the FTB uses the same test found in the Internal Revenue Code.
[A]n administrative act that occurs during the processing of a taxpayer’s case involving the temporary or permanent loss of records or the exercise of judgment or discretion relating to management of personnel. A decision concerning the proper application of federal tax law (or other federal or state law) is not a managerial act.
THE FTB OFTEN FOLLOWS THE ACTIONS OF THE IRS
If the IRS has abated all or a portion of interest originally assessed against the taxpayer, the chances are very good that the FTB will also go along with the IRS and abate California interest, too. Some people call this a “me-too abatement.” However, you have the duty of informing the FTB that the IRS has abated interest. Taxpayers in general have a duty to notify the FTB at the conclusion of each and every IRS income tax audit. Failure to do so may result in very long delays before the FTB issues an assessment on the IRS matter. If you do not notify the FTB timely, you have no grounds to use the doctrine of laches to abate interest
Rev. & Tax. Code § 19104, subdivision (a)(3), provides that, where the IRS has abated interest under IRC section 6404(e) based on an error or delay which occurred on or before the issuance of a final federal determination, the FTB may also abate interest accruing on a related deficiency based on a final federal determination of tax, for the same period of time that the IRS abated interest.
PROCEDURE FOR ABATING FTB INTEREST
If you believe that interest on your FTB assessment should be partially or wholly abated, your first step should be to make a written request for abatement to the FTB. Send your request so you have proof that it was received by the FTB in a timely manner such as the use of certified mail with return receipt requested or a private carrier such as Federal Express.
If the FTB turns down your request you may file an appeal to have your matter heard before the State Board of Equalization. However, there are strict time limits for your written appeal: (a) thirty days in the case of any unpaid interest, or (b) ninety days in the case of paid interest.
You will be given an oral hearing before the State Board of Equalization.
For more information see Rev. & Tax. Code § 19104 and IRC § 6404(e).
An EDD lawyer, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States.
As a trusted EDD attorney, Robert S. Schriebman has successfully dedicated more than 30 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 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 and 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.