FTB tell-all: tax gap, filing procedures and legislative updates fill liaison meeting.

The annual CalCPA-FTB liaison meeting was held Oct. 25, providing the opportunity for candid inquiry and exchange between FTB staff and CalCPA members.

The New Executive Officer

Selvi Stanislaus, the new FTB executive officer, welcomed Committee on Taxation members and asserted her commitment to an open relationship with taxpayers.

She emphasized that the FTB is an open organization, interested in problem solving, and said that the 2006 filing season went smoothly, which was good news for preparers and FTB personnel.

Paper Returns Still Around

In spite of compulsory e-filing for preparers who prepare more than 100 personal income tax returns, and a greater awareness of e-filing by the general public, 6.5 million out of the 14.7 million personal tax returns processed were paper returns.

Of the 8.2 million electronically filed returns, 83 percent were filed by preparers and 17 percent by taxpayers.

The Tax Gap

Raphael Ixta, manager of the personal income tax audit section and chair of the Tax Gap Action Committee, presented a breakdown of tax gap sources: non-filers (11 percent); underpayment (12 percent); and under-reporting income or over-stating deductions (77 percent).

During the exchange that followed, many Committee on Taxation members expressed concern that much of the tax gap problem stems from the increasing lack of conformity between federal and state tax codes.

Though many FTB staff members agreed, they stated the matter is out of their hands as only the three-person FTB--director of the California Department of Finance, the state controller and the chair of the State Board of Equalization--may make recommendations to the Legislature. It was noted that if the board decided to recommend measures to increase conformity, FTB staff would to support such efforts.

FTB personnel added that they will publish more specific and useful information on the tax gap in FTB's "Tax News." Suggestions for tackling the tax gap should be addressed to Raphael Ixta at [e-mail].

CalCPA members also expressed concern that tax preparers who promote fraudulent schemes as well as taxpayers who commit fraud are contributors to the tax gap.

If you are aware of such activities, the FTB hotline to report fraudulent prepares is [phone].

Joint Returns for Registered Domestic Partners

SB 1827 provides for registered domestic partners to file their state tax returns using either the "married filing jointly" status or "married filing separate." The new law takes effect for tax year 2007, which taxpayers will begin filing in January 2008, and does not impact federal tax law.

FTB staff and CPAs know that there are scores of procedural matters yet to be resolved in the matter of joint returns for registered domestic partners. So, in light of recent changes in California tax law that gives registered domestic partners the same tax filing status as married couples, the FTB has formed an implementation team to review the various processes, forms and system changes needed for implementation by Jan. 1, 2008.

The FTB also is establishing a focus group of interested parties consisting of tax practitioners, the State Bar of California and domestic partner groups to discuss tax planning guidance for affected taxpayers and tax professionals.

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Questions about the filing status can be sent to [e-mail].

Filing Procedures Update

Anne Miller, CPA, chief of the Filing Division, provided the following update:

* The FTB is phasing in the ability to e-file all business tax returns.

* For filing season 2007, the FTB will communicate with about 200,000 taxpayers re "These are your estimated tax payments that we've received." The 200,000 recipients are those who historically have had problems getting their ES payments correct when they enter them on tax returns.

* Still in the concept stage: The ability to download state wage, withholding, and ES payments directly into a tax program.

Legislative Update

Patrice Gau-Johnson, assistant director of the Legislative Services Bureau, delivered an update of income tax-related measures enacted during 2006.

* The "tax clearance certificate" requirement has been eliminated for all business entities except for partnerships and limited partnerships.

* The 3.33 percent withholding requirement for real estate sales has been modified for sales occurring after Jan. 1, 2007. Sellers may elect to have the withholding based on the actual gain.

* There will be a worksheet on the FTB's website for computing the revised real estate sales withholding.

* The Teacher Retention Tax Credit has been suspended for 2006.

More information can be found at www.ftb.ca.gov/law.

By Leonard W. Williams, CPA

Leonard W. Williams, CPA is a Sunnyvale-based sole practitioner. A member of CalCPA's Committee on Taxation, the AICPA Tax Division and a former Peninsula Chapter president, you can reach him at [e-mail].