This article is from Cal-Tax Digest, published
by the California Taxpayers' Association.
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Will taxpayers disputing their tax liability achieve some measure of protection from currently unrestrained Franchise Tax Board auditors? State Board of Equalization Chair Claude Parrish, who also sits as one of three votes on the FTB this year, vowed to work for consensus regulations. State Controller Kathleen Connell, the FTB chair, also says the issue will be high on the 2001 agenda.

The fate of protest regulations was a primary topic at the 75th annual Cal-Tax Members' Meeting on April 18 at the Sacramento Convention Center.

Background: Last year, two of the three FTB members - Dr. Connell and Dean Andal, then chair of the BOE - approved protest regulations providing protections for taxpayers who appeal their tax levies. However, Governor Gray Davis' administration rejected the regulations, refusing to add more board auditors in the 2001-02 state budget so the FTB would resolve all tax disputes within 24 months. Critics, including Senate President Pro Tem John Burton, said the proposed rules favored "tax cheats" who would escape paying tens of millions of dollars in taxes. He was critical of proposed restrictions on FTB audit powers and urged the governor's administration to reject them, and it did so (see For the Record in the April issue of Cal-Tax Digest).

At the annual Cal-Tax Breakfast with the Board of Equalization, Mr. Parrish said he sees "a lot of good" in the rejected regulations and vowed to pursue changes that would appeal to critics while giving taxpayers at least "half a loaf." He cautioned that the compromises required may result in regulations less friendly toward taxpayers, but certainly better than having none at all.

Deputy Controller Marcy Jo Mandel, representing Controller Connell, said the protest regulations issue will be back. She did not say when the debate would resume, because the FTB has yet to meet this year and no meeting had been scheduled as of this writing. The controller sets the agenda and calls meetings.

Also participating at the Cal-Tax event were BOE Vice Chair John Chiang and Mr. Andal, who continues to advocate a 24-month deadline for dealing with protest cases, a move that he said will enable the state to collect more than $1 billion in currently disputed taxes.

Mr. Parrish said, "I looked at the regulations that were rejected and there's a lot of good stuff in there - not just the 24 months (the proposed limit for acting on a dispute). When I first looked at this, I said, 'What is this replacing?' The fact is, it is replacing nothing. There are no guidelines at all. There are no limits at all. There are no protections for taxpayers. There's nothing."

Without revealing details, Mr. Parrish said that as a new member of the FTB he thought he would come up "with some of my ideas. I'd like to be a consensus-builder. My thoughts were, 'Is there any way to salvage this?'

"I will no doubt be accused of gutting the regulations, cutting out the heart of them," he said. "I don't know if she (Dr. Connell) will support me There is so much good (for taxpayers) in these regulations that I personally feel there may be some room for give and take You must remember there are no rules, no protections at all. These new rules offer protections. These rules have deadlines and time limits that are really taxpayer-friendly."

Mr. Parrish continued: "There will be hearings. I'm the eternal optimist. I believe something can be done."

Mr. Andal, a driving force behind the protest regulations during his tenure at the FTB, said "restructured protest regulations that do not go quite as far may work."

Ms. Mandel noted that last year's protest regulations were "greatly misunderstood in various quarters." Structure and guidance is necessary, she said, noting that the project was started by FTB staff because "they recognized the need."

Mr. Parrish said he sees "a lot of good" in the rejected regulations and vowed to pursue changes that would appeal to critics while giving taxpayers at least "half a loaf."

(In related action, the Legislature's budget-writing subcommittees on April 16 and 17 agreed to hold up action on the FTB's 2001-02 budget to gather more information on Mr. Andal's proposal to have the Legislature adopt budget control language giving the FTB six months to resolve all tax disputes older than two years. Mr. Andal said such action would accelerate collections of more than $1 billion in taxes, generally from corporations involved in disputes that are six years old on average.)

On the issue of e-government and filing tax returns electronically, Mr. Chiang, chair of the BOE's technology committee that is working on e-filing of sales taxes at the BOE, addressed the separation-of-power issue. "You want to create a taxpayer-friendly Franchise Tax Board to assist taxpayers You want to assist taxpayers yet you really ought to have separation."

Commencing in May, Mr. Chiang said the BOE will have interested parties meetings in each of the four BOE districts on the most complicated forms used in filings. Do California tax administrators "want to offer a service or have the service offered where there is a cost charged" that may differ from other states? "It raises significant issues. There is the public-private concern. Should the state engage in entrepreneurial exercise or not?"

Turning to the subject of Internet taxation, Mr. Andal, who served on the national task force the past two years, predicted further deadlock in Congress this year. He noted that his proposal for a uniform nexus structure for income and sales taxes has been introduced in the U.S. Senate. However, a rival bill for a simplified tax system - which he called "anything but simple" - also has been introduced. He said the nation is about evenly divided - East and West Coasts versus the vast middle of the country - "so I believe it will be unresolved."

Also last week, FTB Executive Officer Gerald Goldberg, Chief Counsel Brian Toman and Multi-State Tax Bureau Chief Ben Miller spoke at a luncheon meeting of the Cal-Tax Board of Directors. They touched on topics that included:

E-Filing. Mr. Goldberg said 30 percent of Californians are filing electronically in a number of different ways, and the FTB is committed to e-filing as the way of the future. He said it will involve a larger and larger share of taxpayers. It cannot be used by everyone, of course, and the ceiling for the number of taxpayers who will use e-filing is not yet known.

Just what is the FTB's role? Mr. Goldberg said the issues - such as the role of government providing services that compete with the private sector - will be resolved over the next four or five years. California has taken a conservative approach, he said, with regard to how much government can do for taxpayers.

He said he could not imagine that the FTB will get into the tax preparation software business for one very significant reason: Liability. "If something went wrong and it did not favor the state, I can assure you what the (consequences) would be," he said.

Audit Practices. Mr. Toman told of progress in developing an audit practices regulation. Although no final decisions have been made, current thinking includes audit deadlines of four years of filing or two years after the commencement of the audit. In addition, provisions allow the taxpayer and the FTB to agree on a signed agreement on an audit work plan with both parties bound to the provisions.

SETTING IT STRAIGHT. The For the Record coverage of March 6 local election results in the April Cal-Tax Digest erred by reporting that voters rejected two tax measures in Hercules (Contra Costa County). As John Wolfe of the Contra Costa Taxpayers Association notes, the 10 percent hotel occupancy tax and the surcharge on sporting and entertainment event tickets were approved with majority-vote support. Because the revenue would go into the city's general fund, they are not special taxes requiring two-thirds approval. By the way, neither tax is being imposed because the city has no hotels and no sports or entertainment facilities (theatrical or sports events at schools are exempt). Hercules city fathers are betting that some day they will have these revenue-raising activities, and they'll be prepared to tax from the get-go.

(Editor's Note: Items in 
FOR THE RECORD were previously reported in Caltaxletter, 
a Cal-Tax newsletter published 40 times 
a year.)