Taxtalk highlights: taxpayer permission, Hawaiian refunds, EDD Q&As and more.

Loose lips sink ships. This old World War II expression meant that "the walls have ears," and things said could be heard by the enemy.

An adage taught to children was "Of these five things beware: Of whom you speak, to whom you speak, how, when and where."

The practical aspects of these sayings came home to roost in recent months when a CPA visited the Franchise Tax Board's website to get the estimated tax payments of a client's former spouse. The ex-spouse was not a client, and had not given the CPA permission to access the information.

The purpose was innocent enough--it was a recent divorce, and the CPA wanted to double check that they both weren't claiming the same estimated taxes on their separate returns.

But it's not permissible to access such information, even for one's client, without that taxpayer's permission.

The likelihood of one's client complaining to the authorities is remote, but a non-client probably will do so when made aware.

This particular CPA virtually guaranteed a complaint since during a subsequent meeting among all of the parties, the CPA volunteered that information and, to compound it, accused the non-client ex-spouse of incorrectly claiming estimated tax payments.

By now, you can foresee the resulting disaster. In broad strokes, so as not to betray anyone's privacy, the CPA is being sued, and the California Board of Accountancy has started license revocation proceedings.

An early refund of Hawaii income tax withheld on a real estate sale

Hawaii has a provision, similar to California's, of withholding 5 percent of the amount realized on the disposition of Hawaii real estate.

The provision, called HARPTA (Hawaii Real Property Tax Act), is only applicable to nonresidents. But unlike California, it is possible to apply for a tentative refund of the withholding if it exceeds the likely tax amount.

This is done by submitting Form N-288C, obtainable from the Hawaii Dept. of Taxation, www.state.hi.us/tax/tir/tir/2002-02.htm.

EDD Q&As

Jim Counts, CalCPA's Employment Development Department Liaison, has compiled six pages of questions submitted to the EDD and the answers received. Only the highlights can be covered here. A complete set of the questions and answers can be obtained by contacting Cindy Kuhlman at [e-mail] or [phone].

A few short Q&As include:

Are there plans to allow payroll taxes for household employees to be remitted via the employer's personal income tax returns, such as the Form H on the federal return?

Brief answer: No.

Regarding the exemption from SDI for a corporation's sole shareholder, may the spouse also be exempt if paid by the corporation?

Answer: Yes, both spouses may claim the exemption from SDI as long as both are shareholders. Both spouses must file the exemption (DE 459) separately for both to claim the exemption.

May CPAs submit questions to EDD via [e-mail]?

Answer: No. There apparently has been a rumor in professional circles that the EDD would answer questions submitted to the above e-mail address, but that is incorrect. The purpose of that address is to allow the public to comment on proposed regulations.

Questions on other topics, comments or suggestions about the EDD website should be addressed by using "Ask EDD," which can be accessed through the "Contact Us" webpage at www.edd.ca.gov/mcaccs.htm.

The package compiled by Jim Counts contains three pages of Q&As devoted to LLC members' payroll taxes, and will be the subject of a future column.

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Statute of limitations case

More than four years after a taxpayer filed state and federal personal income tax returns, the IRS determined that the taxpayer's federal tax liability was greater than reported, and the taxpayer failed to notify the Franchise Tax Board of the federal adjustment.

In such a case, the board could give a notice of a deficiency assessment at any time.

The four-year statute of limitations in Revenue and Tax Code Sec. 19057 does not apply when the IRS adjusts a taxpayer's federal tax liability. (Ordlock v. Franchise Tax Board; June 8, 2006. 2006 SOS 2913. The judgment of the Court of Appeal was reversed and the case was remanded for further proceedings consistent with this opinion. The full text is at www.metnews.com/sos.cgi?0606%2FS127649).

U.S. Supreme Court decision on procedural aspects of a tax sale by a state

When a mailed notice of a tax sale is returned unclaimed, a state must take additional reasonable steps to attempt to provide notice to the property owner before selling their property, if it is practicable to do so (Jones v. Flowers, U.S. Supreme Court; April 26, 2006).

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For the states' guidance, the decision lists possible reasonable steps.

Thanks to Chuck Rettig, JD and Jim Counts, CPA for their contributions.

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].