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Uncertain future: budget, regime change will pose challenges.

"Some of you might be aware that we had a recall," Franchise Tax Board Executive Director Gerry Goldberg joked, as he began the CalCPA Committee on Taxation's annual liaison meeting with the FTB in mid-October.

While the impact of the recall election on California's budget crisis remains to be seen, the state's record deficit will continue to cast a shadow on the future.

The regime change probably means California is "not going to have any tax increases in the immediate future," Goldberg said. "And I think we're going to see the VLF [vehicle license fee] increase go away, and that creates a hole."

That hole amounts to roughly $4 billion, which is what tripling the license fee is expected to raise.

"We're either going to be borrowing a whole lot of money or cutting an awful lot of the budget," Goldberg said.

Budget Cuts Hit FTB

The FTB is feeling the pinch of those cuts, as it must trim its budget by $27 million. These cuts will require the FTB to eliminate certain workloads and redeploy staff to "Provision One" positions, which are revenue-producing jobs in the audit and accounts receivable management divisions.

The budget cuts may affect the FTB's ability to buy new equipment and force the agency to significantly reduce travel and personal service expenditures, Goldberg said.

Not Out of the Woods

Relying on a combination of heavy borrowing and spending cuts, the state budget still will fall at least $8 billion short next year, and $8 billion short each year through 2007, said Phil Spillberg, director of the FTB's Economic and Statistical Research Bureau.

"There is a continuing, structural deficit built into our system that is about $8 billion a year, and that assumes the restoration of the full VLF," Spillberg said. Without the $4 billion the VLF will bring in, the deficit will only increase.

Spillberg added that the solutions adopted for the current year's budget are comprised mainly of borrowing.

Abusive Tax Shelters

The FTB, coordinating its efforts with the IRS, is working to combat abusive tax shelters, said Winston Mah, chief of the FTB's audit division.

"We're looking at 400 taxpayers, with a potential of (collecting) $850 million," Mah said. "We're focusing on earlier years--1999 and 2000--and we're just beginning to look at 2001."

Mah also spoke about the Voluntary Compliance Initiative, part of a set of tax shelter laws enacted during the recent legislative session. The tax shelter laws:

* Create a variety of penalties and reporting requirements;

* Permit a taxpayer to file an amended return and pay the tax and interest associated with an abusive tax shelter and avoid the assessment of a variety of penalties;

* Extend the statute of limitations from four to eight years to make tax assessments related to abusive tax shelter investments;

* Expand the department's ability to issue a subpoena related to abusive tax shelters;

* Expand the rules to obtain an injunction against those who market abusive tax shelters in California; and

* Increase the interest rate on amended returns filed to reverse abusive tax shelter transactions.

E-Filing Update

Lisa Crowe, chief of the FTB's filing division, updated the audience on e-filing.

Crowe said that the mandatory e-file letters sent to qualifying practitioners shouldn't be the only determination of whether or not a practitioner must e-file.

"Just because you didn't get a letter doesn't mean you're off the hook," she said. "We may have missed you."

While conceding that the FTB hasn't defined what constitutes "reasonable cause" to opt out of e-filing, Crowe stressed that the opt-out provision was only intended as an option for an individual taxpayer who was uncomfortable with using an electronic method of filing a tax return.

"If it becomes clear that we're not getting sufficient levels of compliance, the opt-out form may disappear," Goldberg said.

The e-file Help Desk number can be reached at (916) 845-0353.

The call center, which can be reached at (800) 852-5711, has reduced its hours to 7 a.m.-7 p.m., Monday through Friday. Because of the cutbacks, Crowe emphasized that tax preparers use the FTB website,, as a resource.

There also have been a few changes to some tax forms, Crowe said, including a new line for real estate withholding credit (line 40) and a new line for the use tax (line 51) on Form 540. There is also a new Schedule W for scannable returns.

As in the past, the FTB's Tax Practitioner Hotline staff is available to help from 8 a.m.-5 p.m., Monday through Friday.

Use Tax

Questions from the audience arose regarding the under-reporting of the use tax, and whether the preparer would be held accountable.

Debbie Newcomb, taxpayer advocate at the FTB, spoke with the Board of Equalization after the meeting and found that there is no provision in the code to allow for a penalty to be assessed against the preparer of a return for under-reporting of the use tax.

Jerry Ascierto is CalCPA's associate editor. You can reach him at
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Title Annotation:California Tax
Author:Ascierto, Jerry
Publication:California CPA
Geographic Code:1U9CA
Date:Dec 1, 2003
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