ASK THE EDD LAWYER – HOW TO AVOID REFUND CLAIM PITFALLS WITH THE FTB
By Robert S. Schriebman
This article is a companion piece with Article 274. In Article 274, I discussed some of the major pitfalls when making refund claims generally. I compared the basic refund rule of the IRS with that of the refund rules concerning the EDD. I also pointed out how tax professionals make the mistake of believing that the general IRS refund rules apply to California refunds as well; they do not.
It is important for you to know that there is no such thing as an oral refund claim. All refund claims must be in writing. The IRS refund rules call for making refund claims on income tax returns as well as using a dedicated refund claim Form 843.
Are there similarities between the IRS refund rules and the FTB counterpart? These rules are similar but they are not identical. There is a pitfall here. Many provisions of the California Revenue and Taxation Code (RTC) are virtually identical to those of the IRS. This is especially true in the area of federal and state income taxation. The basic IRS refund claim rules depend upon whether or not a tax return has been filed. When a tax return is filed the refund claim must be filed within 3 years from the time the tax return was filed or within 2 years from the time the tax was paid, whichever time period expires later. If no tax return is filed, the refund claim must be filed within 2 years from the time the tax was paid.
If a refund claim is not made within the statutory timeframe, Is it still possible to get a refund? Under IRS rules late claims are permitted under very limited circumstances, such as, death or serious illness of the taxpayer.
Does the FTB have any type of grace period for a late refund claim? The recent case of RTTEMPS, LLC provides some interesting insight.
In the Matter of the Appeal of RTTEMPS, LLC
This matter involved a hearing before the California Board of Equalization. The decision was rendered in 2015 but was released to the public on or about May 2017. The matter involved an admittedly late refund claim for the year 2005, but the claim was made because certain statutes involving LLC taxes were declared unconstitutional in 2008. Did this fact give the LLC more time?
The taxpayer, LLC, filed its 2005 California LLC return in early February 2007. It reported total income of close to $7.4 million, a limited liability tax of $800 and a limited liability fee of $0. The return should have been filed on or before April 15, 2006. It was late.
The FTB disagreed with the tax and fee reported by the LLC, and charged the LLC a fee of $11,800, as well as two late filing penalties of about $3,200 for a total balance due of about $15,000.
The LLC filed its 2006 tax return and sent payment of $12,000 with that return. The FTB transferred that payment to the 2005 tax year instead of applying it to 2006. In November 2007 the LLC paid an additional $3,000 to cover the FTB’s 2005 year assessment. So, as of November 2007, the 2005 tax liability had been paid in full.
In 2008 two California courts of appeal ruled that the LLC limited liability tax and fee was unconstitutional. The FTB issued Notices 2008-2 and 2009-04 advising taxpayers about the courts’ decision and how to go about filing claims for refund.
In mid February 2013, the LLC filed a claim for refund by filing an amended 2005 limited liability income tax return. In that return the LLC reported total income of only $323,000 instead of $7.4 million on the original return, a limited liability tax of $800 and a limited liability fee of $900. The FTB treated the amended return as a claim for refund. On the FTB books, the LLC had a credit balance of about $14,800. However, the FTB denied the LLC’s claim for refund on the basis that it was barred by the statute of limitations. The LLC filed an appeal with the Board of Equalization (BOE). The LLC lost.
A Short Side Lecture
Before discussing the BOE ruling, first a side lecture. I was disturbed by the FTB’s decision to apply the $12,000 paid with the filing of the 2006 return to the outstanding balance owed on the 2005 return. There are strict rules within the IRS that allows a taxpayer to tell the IRS how to apply a voluntary tax payment (see Rev. Procs. 2002-26 and 84-58). However, the FTB does not have established procedural guidelines for applying tax payments. What to do? Having said this, you should know about Civil Code § 1479 that allows a debtor to designate the placement of the payment on a debt. The designation must be on the check or other payment instrument. I do not think that the FTB acted properly.
General Refund Claim Rules of the FTB
The general statute of limitations for filing a claim for refund is set forth in RTC § 19306. Under that section, the last day to file a claim for refund is the later of:
- Four years from the date the return was filed, if filed within the extended due date;
- Four years from the due date of the return, without regard to extensions; or
- One year from the date of overpayment.
The essential difference between the IRS and the FTB rules is that the IRS has a three-year look-back period and the FTB has a four-year look-back period. The IRS has a two-year overpayment rule as opposed to the FTB’s one-year overpayment rule. These distinctions still cause confusion among some tax professionals.
The LLC filed its 2005 return in February 2007; it filed its refund claim in February 2013, well over four years. The LLC fully paid the FTB in November 2007 but filed the refund claim almost six years later. The LLC was late on both tests.
The LLC argued that because part of the LLC tax structure was ruled unconstitutional in 2008 that should have given them more time under principles of equity. The BOE however, ruled that the refund time limits must be observed to the letter of the law. The LLC was clearly late with its claim.
Refund claim statutes must be strictly observed and followed. Any extra time must be subject to statute and not loose principles of equity and fairness. As with Article 274, you can see that each taxing agency has its own unique rules when it comes to allowing refund claims.
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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