ASK THE EDD LAWYER – HOW TO BEAT AN FTB “ME TOO” ASSESSMENT BASED ON A PRIOR IRS AUDIT
By Robert S. Schriebman
July 7, 2015
The California Franchise Tax Board (FTB) has the right to issue a corresponding tax assessment based upon a prior IRS audit. In California the FTB statute of limitations to audit an income tax return remains open unless you take the initiative by timely notifying the FTB of the results of a final IRS determination. This rule only applies to the FTB. It does not apply to either the EDD or the BOE.
Very few attorneys and accountants are aware of obscured statutes in the Revenue and Taxation Code requiring that the FTB be timely notified. If the FTB is timely notified, it must issue its “me too” assessment. In issuing this assessment, the FTB usually follows the results of the IRS audit but it does not have too.
The St. Geme case illustrates the importance of timely notifying the FTB of the final IRS determination. In the Matter of the Appeal of: PETER ST. GEME AND POLLY PLUMER ST. GEME Case No. 693089.
The St. Geme Case
On June 24, 2015 the California State Board of Equalization issued a decision in favor of Peter and Polly St. Geme against the FTB. It was close case because Peter, Polly and their representative were sloppy when they notified the FTB.
For the 2000 tax year Peter and Polly reported California taxable income of $558,755 and paid an FTB tax of $48,455. Subsequently, the IRS conducted an audit of their income tax returns for the years 1997 through 2003. Of all these years only an additional federal income tax liability was assessed for the year 2000.
The IRS audit was concluded on April 6, 2006. On August 17, 2006 Peter and Polly submitted the Revenue Agent Report (RAR) to the FTB. Things got lost within the FTB. The FTB clocked-in the RAR on September 13, 2006.
On September 10, 2008 the FTB issued a Notice of Proposed Assessment (NPA) to Peter and Polly proposing to assess them an additional tax of almost $915,000!
Peter and Polly challenged the 2008 FTB assessment on the grounds that it was barred by the statute of limitations for assessment.
The BOE ruled in favor of Peter and Polly and threw out the $915,000 proposed bill.
Why did Peter and Polly win? The answer is explained below.
Important FTB Code Sections
Revenue and Taxation Code (R&TC) sec.18662(a) provides that if the IRS conducts an income tax audit and issues an assessment that would increase one’s personal or corporate income tax liability, the audited taxpayer is required to notify the FTB of the results of the IRS audit within 6 months after the date of the final federal determination. The taxpayer must concede the accuracy of the IRS audit or explain why it is erroneous. If the taxpayer timely notifies the FTB, the FTB is required to issue its “me too” assessment within 2 years of the date of notification. (See R&TC section 19059.)
Unfortunately very few attorneys, CPAs, or other qualified representatives know these rules.
How Did Peter and Polly win?
Peter and Polly won because they produced a letter from the FTB dated July 13, 2007 acknowledging the receipt of the RAR. Peter and Polly’ representative sent the RAR by fax showing that it was sent on August 17, 2006. I do not subscribe to notification by fax as the fax transmittal information, usually stated at the very top of a sheet of paper, can be omitted by the simple mechanics of the workings of photocopy machine. In my opinion Peter and Polly got lucky.
Peter and Polly proved that they notified the FTB on August 17, 2006. The FTB issued its “me too” assessment on September 10, 2008, more than 2 years past the date of notice.
I make it a practice to notify the FTB of the results of my clients’ IRS audits through either certified mail, Fed Ex or similar carrier. If I use certified mail I make sure that the Post Office “round-stamps” my white receipt so I can prove the date of mailing. The date of mailing is the crucial date, not the date it was received by the FTB as things tend to get lost internally. I rarely use a fax notice, but if I do I follow it up with a certified duplicate notification duly round-stamped
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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