Closing the gap: transparency, ease-of-use, tax gap are 2006 priorities.

Franchise Tax Board Interim Executive Officer Will Bush kicked off CalCPA's 2005 FTB Liaison meeting by outlining his vision for 2006, which includes making the FTB's rulemaking processes more transparent and its services more user-friendly.

Bush also wants the FTB to adopt new procedures to solicit more input from stakeholders in shaping new regulations. He'd also like to transform the FTB's services into a "one-and-done" process by bolstering its responsiveness to taxpayers and shortening the time frames of the audit, protest and appeals processes.

He noted that while the FTB has unveiled a number of initiatives aimed at reducing the tax gap, it will now focus on correcting its root causes.

"For me, the tax gap has been an ongoing issue for the last two to three decades," Bush said. "This is the first time the FTB, or perhaps any tax organization, has done strategic planning focused on the tax gap. Planning sessions have begun with a goal of having a report to our board by February."

Amnesty Update

Cathy Cleek, prior chief of the FTB's filling division, discussed the 2005 Tax Amnesty Program, which brought in about $700 million and $3.5 billion in protective claims.

Of the 832 taxpayers involved, 111 were corporations, accounting for $3 billion of all protective claims.

The program was enacted by SB 1100, but "there were some unintended consequences of the bill," she said. "We went back to the author of the amnesty legislation, Judy Chu, and worked with her on an amnesty clean-up bill."

The recently passed AB 911 addresses such unintended consequences, by:

* Allowing underpayments for amnesty-eligible years to be offset by overpayments from other years for purposes of computing the amnesty payment;

* Establishing a 20-year statute of limitations to collect income of franchise tax balances due from taxpayers, and thereafter extinguish the liability to pay such balances by abating the tax;

* Allowing the FTB to extinguish certain inactive taxpayer debts;

* Repealing the provision that requires taxpayers who participate in amnesty to pay any tax due for the 2005 and 2006 taxable years to avoid having the benefits of amnesty revoked and the penalty imposed; and

* Making technical clarifications of certain amnesty provisions.

Additionally, the FTB's collections department implemented a four-month pilot program Sept. 1 "to allow individuals to go into an installment agreement if they're able to pay the debt within five years. Our current practice is three years," Cleek said.

Legislative Update

Jana Howard, assistant director of the FTB's legislative services bureau, detailed some 2005 bills affecting the profession, including AB 115, the federal conformity bill; AB 911, the amnesty clean-up bill; and SB 14, which provides an exception to the estimated tax underpayment penalty that results when a law change retroactively increases a taxpayer's estimated tax payment.

Howard said that the FTB is looking to shape an additional amnesty clean-up bill, and sought input on the following six proposals that may be included in the next bill:

* Eliminate the amnesty penalty for post-amnesty deficiency amounts that are in excess of a taxpayer's tax deposit made to avoid exposure to the post-amnesty penalty;

* Eliminate the amnesty penalty for taxpayers under audit, protest, appeal, settlement negotiation or litigation prior to Feb. 1, 2005;

* Provide chief counsel the authority to waive the amnesty penalty in some cases;

* Convert the amnesty penalty to interest;

* Provide amnesty penalty relief for post-amnesty changes in law; and

* Adjust the interest rate paid to corporations on overpayments made in lieu of amnesty to the rate of interest paid on underpayments.

Abusive Tax Shelters 

California's tax shelter audits have spanned about 900 cases, netting approximately $1 billion, said Debra Petersen, tax counsel IV in the FTB's legal division.

"We want to close down the sale of abusive tax shelter, so we would like to focus on promoters," Petersen said. Additionally, as part of the tax gap initiative, the FTB is looking at offshore transactions.

AB 115, the federal conformity bill, repealed the previous tax shelter registration rules and instead adopted the federal material adviser disclosure provision, mandating disclosure of reportable transactions.

CPE 

The FTB is retroactively offering CPE for California CPAs who attended 2005 IRS/FTB e-file seminars. The FTB also will offer state credits for CPAs who, on a going-forward basis, attend FTB e-file presentations and seminars.

E-file Errors

Chris Beach, manager of the FTB's filing methods section, listed the most common reasons e-filed practitioner returns are rejected. Two of the first three reasons are duplicate return issues.

No. 1 on the list is reject code 902: The Declaration Control Number has been used on a previously accepted return. At No. 3 was a similar issue, reject code 900: The taxpayer Social Security number has been used on a previously accepted return.

"If we accept the state return, but the IRS rejects the federal return, don't retransmit the state return," said Beach.

Jerry Ascierto is CalCPA's managing editor. You can reach him at [e-mail].