FTB to Tighten Belt: FTB Executive Director Warns CPAs of Cutbacks.

"The state of the state isn't good. We will have to have cutbacks, and some will effect you," announced FTB Executive Director Gerald Goldberg at the annual FTB liaison meeting with CalCPA's Committee on Taxation in October.

California's shortfall for the budget year that begins July 1, 2002, is predicted optimistically to be between $7 billion and $10 billion, "assuming that the energy bonds float," said Goldberg. If they don't, another $10 billion could be added to the shortfall.

"This is the largest shortfall I've ever experienced," Goldberg said. As a result, he says the department of finance has directed the FTB to cut anything from its budget that does not directly result in revenues.

Possible FTB cutbacks

Possible cuts may include closing all district offices for public service, reducing phone service and eliminating many toll-free FTB contact numbers.

There are currently 16 FTB district offices throughout the state. Goldberg said that over time some may be relocated to lower rent areas as leases expire.

"We are trying to get more and more taxpayers to deal with us over the phone," said Goldberg. He gave no indication of when cutbacks may occur, but reiterated that it is a serious possibility within the coming year.

Cuts to the practitioner hotline and limiting general assistance in all call centers also may occur in the coming year. "This will literally force people who want tax assistance to go to a tax practitioner," said Goldberg, adding a positive spin to the group of CPAs.

Mandatory e-filing for preparers who do a large number (100 or more) of returns also may be a result of the agency's scale-down efforts. Goldberg added that this won't happen right away, but that it "likely will happen."

This caused a stir among some committee members who claimed that some returns are not conducive to e-filing.

"It's harsh for any government to impose any extra compliance burden on the public," said COT member Stuart R. Josephs, CPA who has a San Diego-based Tax Assistance Practice (TAP). "If the FTB wants to induce e-filing they should offer carrots, not sticks."

Goldberg says he welcomes CalCPA member views on the mandatory e-filing initiative as well as any ideas members may have to stimulate employment growth in California and the state's economy as a whole. Ideas may be faxed to FTB Taxpayer Advocate Debbie Newcomb at [phone].

Undoubtedly there will be an increase in audits and collections in response to the mandate to collect more revenue, said Goldberg, but he added that right now the board's focus is on cuts.

Innocent Spouse Relief

At the meeting, Laureen Philipp, manager of the FTB's Innocent Spouse Program, clarified a few program tenets and outlined a new provision.

Philipp said that for clients going through a divorce, it is essential that tax liability be a part of the settlement. A spouse attempting to claim innocent spouse status still must pay tax on his or her own income, and relief is not offered on taxes already paid.

Under the California Revenue and Taxation Code Sec. 19006(b) a spouse can obtain a Tax Revenue Clearance Certificate if their gross income is $50,000 or less and the joint liability is less than $2,500.

Philipp said the spouse must apply for innocent spouse relief before the divorce is decreed and the certificate must be issued during the divorce.

She noted that upon the FTB's receipt of an application for innocent spouse relief, collection actions will be stopped.

A new provision of the innocent spouse program, said Philipp, is that the FTB will accept sworn third-party statements in reviewing an application.

Philipp said the FTB would give strong consideration if the IRS grants innocent spouse relief, but added that the FTB acts independently and, in most cases, they receive requests that the IRS has not previously heard.

Educational materials will be mailed to practitioners and family law attorneys outlining how the innocent spouse program works, said Philipp, adding that a new Web site is in the works.

Integrated Non-filer Compliance System (INC)

A new addition to the FTB's INC Web site, www.ftb.ca.gov/inc, allows non-filers to file for one-month extensions, get questions answered and provide feedback to the FTB.

At the site, a non-filer who has received a notice can enter a special number provided only on the form they receive in the mail to access their information on the system. Cathy Cleek, director, filing compliance bureau, called the site "very secure" with 128-bit encryption in a secure socket layer.

Bankruptcy Code and the 11th Amendment

Under the 11th Amendment to the U.S. Constitution, states traditionally have enjoyed immunity from bankruptcy court lawsuits seeking to determine the validity of state tax assessments and related collection activities.

In the case of Goldberg v. Ellet, the 9th Circuit Court essentially reversed that, says Bill Hilson, tax counsel, FTB legal affairs bureau, and as a result, the FTB has filed a petition with the U.S. Supreme Court to reverse the 9th Circuit Court's decision.

"At this point it has become a constitutional issue and the 9th Circuit covers a lot more than California," explains Hilson. "It impacts all states in the 9th Circuit and, in fact, all states nationwide."

Deanna McCrary is a CalCPA editor/writer.