Caltaxletter | FTB: Finance Director Arduin articulates taxpayer concerns at FTB meeting

Finance Director Articulates Taxpayer Concerns at FTB Meeting

Finance Director Donna Arduin became the first director in a number of years to attend a Franchise Tax Board meeting and, at the June 10 meeting, articulated concerns of taxpayers on key items on the agenda. During a discussion of the "tax gap," she told staff she wanted to know the marginal cost and benefit of hiring each new auditor when a budget change is proposed. Additionally, she said staff needs to distinguish between tax cheats and those who are just struggling to pay.

On a proposal to require taxpayers to file 1099 information returns not required by the IRS, she expressed concerns, suggesting that staff needs to consider the cost of the plan to the industry and the state. She also said the state needs to simplify reporting for taxpayers.

Ms. Arduin also voiced opposition to the proposals in the budget conference committee to impose fees on specified services now provided by the Franchise Tax Board, and to a short-lived plan to begin independent contractor withholding.

The three-member FTB is chaired by the state controller, Steve Westly, and includes the state's finance director and the chair of the State Board of Equalization, Carole Migden. Normally, the finance director is represented by a deputy at FTB meetings.

Highlights of the June 10 meeting:

Legislation to Require State-Only Information Reporting. A staff proposal to require specified taxpayers to file 1099 information reports not required by the IRS was opposed by taxpayers. The proposal targets real estate escrow companies and companies involved in check cashing who would be required to file 1099s on real estate commissions and people who frequently cash business receipts and checks.

Cal-Tax's David Doerr objected to the imposition of the mandate when it is not required for federal purposes. Craig Page, representing the California Land Title Association, said escrow companies don't have the information the state needs, such as Social Security numbers of brokers, and don't want to violate privacy rights to obtain them. He also said the state would be flooded with up to 1.6 million additional pieces of paper. Gina Rodriquez, representing Spidell Publishing, also objected to the proposal.

The board asked staff to work with taxpayers to develop a compromise.

Tax Gap Ideas. FTB staffer Frank Lauza presented a laundry list of possible ideas to shrink the size of the "tax gap" of amounts of taxes owed but not reported and paid. He said he will bring back budget proposals to implement the ideas at a subsequent meeting. Among the ideas: allow the FTB to order a withholding increase when a taxpayer is chronically underwithholding (potential $30 million), use information from the Alcoholic Beverage Control Department, gas sales information, and local business license information to find people who did not file (up to $9 million), and use new technology to develop a model to find non-filers (up to $40 million).

Prior to the board meeting, Controller Westly announced to reporters that his proposals would be discussed at the board meeting. He said he wants to crack down on withholding fraud and expand efforts to track phony tax shelters, resulting in collections of $92 million in unpaid taxes. "The first step in closing the budget gap should be collecting the taxes already on the books," Mr. Westly said in a press release.

Legislation to Pay Tax Snitches. A staff proposal to submit legislation to pay informants to provide the board information on taxpayers who might owe taxes was approved on a 2-1 vote. Mr. Doerr spoke in opposition, saying it would compromise confidentiality of tax returns, because people who got paid would know the taxpayer they identified had a tax problem and could spread the word to the taxpayer's neighbors, business associates, etc. Ms. Arduin, who voted no, said the idea is distasteful from a societal perspective.

Regulation to Narrow "Strong Centralized Management" Definition of Unitary Business Taken off Calendar. A proposal by staff to submit to the symposium process a regulation to narrow the definition of strong centralized management for determining a unitary business (Regulation 25100) was taken off the calendar.

Millions for Defense in Hyatt Suit. The board approved a $3,760,000 contract for three years with a Nevada law firm to defend itself in a lawsuit filed by inventor Gilbert Hyatt of Las Vegas. Mr. Hyatt claims board staff committed intentional torts in their audit concerning his residency. This issue went to the U.S. Supreme Court, which last year sided with Mr. Hyatt on the issue of allowing the suit to go forward under Nevada law. FTB staff said the trial will begin in 2006.

Under questioning from Oakland attorney Richard Harris, staff said the state has already spent upwards of $5 million in legal costs by the Attorney General, the Nevada firm and internally. Mr. Harris told the board that it needed to prevent these kinds of situations in the future by applying principles of tax administration.

E-File Name Change Approved. Under a threat of a lawsuit, the board agreed to change the name of its controversial e-filing program from "NetFile" to "CalFile." A company called West Coast Online already had a product named "NetFile," and they said they were prepared to pursue litigation to protect their copyright.

TaxAmnesty Bill Supported. The board on a 2-0 vote supported AB 2203 (Chu), establishing a two-month tax amnesty program with added provisions increasing interest rates for underpayments only and increasing the accuracy-related penalty from 20 percent to 50 percent. Mr. Doerr, Ms. Rodriquez and Vicki Mulak, representing the Society of Enrolled Agents, spoke against the proposal. They objected to the increase in interest rates and new penalties that will apply to all taxpayers, not just those contributing to the "tax gap." Ms. Mulak also said the projected February and March dates of the amnesty cause problems for tax prepares. Traditionally, the Department of Finance does not take positions on bills at FTB meetings.

Regulation on Water's Edge Election Group Approved for Symposium. The board approved a staff request to place proposed amendments to Regulation 25110 into the symposium process. FTB attorney Ben Miller said if there is not interest in a symposium, the proposal will be place in the formal regulatory process. Mr. Miller described the proposal as picking up for inclusion in the water's edge "effectively connected income," and providing for the federal deductions.

Regulation Allowing a Single Return for a Combined Report Moves Forward. The board approved a staff proposal to place proposed Regulation 25106.5-11 into the formal regulatory process, following a symposium on the subject. The regulation would codify current staff practice to allow taxpayers of the same combined reporting group to file a single group return.

Child Support Project. FTB staff said it was trying to get its massive automated child support system finished in the fall of 2005, rather than early 2006, to save the state the costs of the penalty the federal government is imposing for not having such a system.

New FTB Budget Director. Ann Miller is replacing Titus Toyama as the FTB budget director.

Budget Conference Committee Fee Proposal. The board discussed the fees for certain FTB services that the budget conference committee is considering. FTB staff pointed out the idea came from the Legislative Analyst's Office and raised concerns about some of the effects. As noted above, Ms. Arduin voiced opposition to the idea. Ms. Mulak compared the proposed fees to "going to a restaurant and having to pay for the napkins."

Caltaxletter June 11, 2004