More tax amnesty? State hopes to net a bundle from wayward taxpayers in 2005.

California legislators are proposing a tax amnesty program as part of the budget deal being negotiated with Gov. Schwarzenegger. If passed, this would be the first such amnesty program since 1984-85.

AB 2203 (Chu), which is becoming a budget trailer bill, would create an amnesty period from Feb. 1, 2005 through March 31, 2005 and would apply to tax liabilities due and payable for tax reporting periods beginning before Jan. 1, 2003. Amnesty would apply to tax obligations occurring after Oct. 1, 1996, but before Jan. 1, 2003. The program would cover sales tax, corporate filers and personal income tax.

In response to tax practitioner concerns, the FTB is considering requiring that only a simple notice form be filed during the initial period, with filing of tax returns or amended tax returns being required by a June deadline. Interest would be required to be paid, but penalties would be waived on amounts owed by taxpayers. Failure to participate in the amnesty program would subject those who are identified later to higher penalties and fines.

According to the bill's author, tax evasion and the underground economy place an unfair burden on law-abiding taxpayers and jeopardize funding for critical state education, health and public safety programs. Tax amnesty is an innovative and responsible way to increase state revenue to preserve vital state programs without proposing new tax burdens on business and working families, as well as to expose tax evaders operating in the underground economy.

In 1984-85, California's full-scale tax amnesty program produced $154 million in gross revenues. In 2003, Florida instituted its first amnesty program in 11 years and collected $268 million with nearly 57,000 tax amnesty agreements. In 2003, Illinois instituted an amnesty program that collected $532 million, making it the most successful amnesty program in U.S. history. In 2002, a New Jersey amnesty program collected $277 million in 2002, and amnesty programs in 1987 and 1996 brought in $359 million and $286.5 million, respectively. In 2002-03, New York's amnesty program collected $520 million.

The IRS estimates that the federal government loses $195 billion per year in revenue due to underground activity.

Tax Court

SB 1424 (Burton) and AB 2472 (Wolk) are essentially identical measures that would establish a Tax Court in California to hear income and sales tax appeals that are currently heard by the Board of Equalization.

The Tax Court would be composed of five judges appointed by the governor who would serve staggered 12-year terms. Historically, CalCPA has supported legislation to establish a tax court as long as CPAs were allowed to practice before the court. These bills as currently drafted would limit the ability of CPAs to continue that practice unless they are registered with the U. S. Tax Court or are enrolled to practice in the State Tax Court. Most CPAs do not routinely practice before the U.S. Tax Court.

The legislation will not be passed this year due to the estimated increased costs to state government. However, Assembly Member Wolk has promised that future legislation would allow CPAs to represent clients without additional testing.

E-Filing Fines

Current law requires that most tax preparers electronically file state tax forms beginning this year. Failure to comply could subject the tax preparer to a fine of $50 per return not electronically filed. AB 2480 (Campbell) would suspend the $50 penalty per non-e-filed tax form for a period of one year. It is an urgency statute that would take effect immediately upon signature by the governor.

Taxpayer Privilege

AB 1416 (Bermudez) would extend the sunset of California's taxpayer privilege. CalCPA sponsored legislation in 2000 that conformed California law to IRC Sec. 7525 that was enacted as part of the 1998 Taxpayer Bill of Rights. The California statute will sunset this year unless additional legislation is enacted to extend it or to remove the sunset. AB 1416 was introduced at CalCPA's request and is expected to pass.

FTB/BOE Trial De Novo 

SB 548 (Burton) would allow the Franchise Tax Board to bring a trial de novo proceeding in superior court after the State Board of Equalization had ruled in a taxpayer's favor. The proposal would expose the taxpayer to double jeopardy and unfairly tilt the playing field toward the FTB.

Under our current tax system, the FTB audits a taxpayer and proposes an assessment of additional tax. The taxpayer pays the additional tax or protests the FTB determination stating the grounds for the protest and requesting an informal hearing. If the FTB denies the taxpayer's protest, the taxpayer then may appeal to the BOE. The BOE reviews the facts and makes a determination. If the BOE rules in favor of the FTB, the taxpayer may then file an appeal with the superior court, but the taxpayer must pay all tax and penalties prior to the appeal. The taxpayer appeal is not a trial de novo, but a limited review of evidence presented during the appeal to the BOE.

SB 548 would make a BOE appeal meaningless because the FTB would be motivated to begin the entire process again in court. This could dramatically increase the length of time required to resolve tax issues and increase the cost to the state and taxpayer.

CalCPA and other interested parties were able to convince the author to abandon this approach last year, but the bill is still alive and is in the Assembly Revenue and Taxation Committee.

Bruce C. Allen is CalCPA's director of government relations.