Discussion:California's horrible demand penalty

That's in addition to the failure to pay penalty and the failure to file penalty. Why is it so high? Because for repeat non-filers California imposes a demand penalty on the tax without taking any credits or estimated tax payments into account. No other state in the country is believed to impose such a penalty. The calculation of the penalty was dropped in 2001 after screaming by tax practitioners, but was reimposed in 2003 for repeat offenders only. I think it's absolutely outrageous. With penalties and interest, the total owed on a 2004 return with tax of $8,500 is now over $25,000. If the calculation were not imposed in this manner, but used the normal method counting credits and payments, the penalty would have dropped by nearly 75% as the total tax was $51,000 and $42,500 had been paid by the due date of the return.

In addition, the penalty is discretionary on the part of the FTB, and can be abated if the circumstances justify it. For example, if the previous or current offense occurred because the FTB mailed notices to a wrong address, when it had the taxpayer's correct address (and this does happen, more often than we like), you should be able to get the penalty abated.

Before the FTB changed its approach to this provision (in 2001 -- the 2004 change in the regulation reflected the FTB's administrative practice after the uproar in 2001), I also found it unreasonable as applied to first offenders. However, I don't have a whole lot of sympathy for taxpayers who repeatedly fail to file returns or furnish necessary information after formal notice. It's not a penalty for failure to pay the tax; it's a penalty for failure to file a return or furnish information. Respect is a two-way street.

I doubt this taxpayer had a good excuse for not filing. So it is time to pay up. But, if there is a good excuse, it's time to plead to the FTB.

JAD, look at Steve's second post. His client was a repeat nonfiler (which means he had been through this gyration, or something similar, at least once within the previous 4 years). When the return was prepared and filed, it showed a total tax liability of $51,000, of which $42,500 had been paid through withholding or estimated tax payments before the original due date of the return, leaving a balance due of $8,500. The amount of the FTB's filing enforcement NPA (based in the information the FTB had available) was $17,000, which means the total tax liability as calculated by FTB was $59,500 ($42,500 plus $17,000). The demand penalty is 25% of the tax liability (not reduced by prepayment credits). So the original penalty on the NPA would have been about $14,900 (25% of $59,500). Filing the return reduced the total tax liability, the balance due and the penalty accordingly.

If you want to be even further outraged, consider the fact that if the return as filed had shown an overpayment, the demand penalty would still have applied, again based on the total tax liability reported. For example, suppose the return as filed showed a total tax liability of $40,000. Steve's client would have been owed a tax refund of $2,500. However, he would also have been subject to a demand penalty of $10,000.

But remember, the penalty applies only to repeat offenders. This is the kinder, gentler FTB <G>. They used to apply it to everybody.

just joking (somewhat)

I would hope that this t/p will have learned their lesson and not put themselves in this situation again. That is one heck of an expensive lesson.

I asked the CTFB to tell me what part of the tax code defines the demand penalty (of over ten times of my tax due). I was told 19133 (which refers to 19087).

May I remind people that the definition of fraud is taking property by means of deception.

In 19133: "...the Franchise Tax Board may add a penalty of 25 percent of the amount of tax determined pursuant to Section 19087 or of any deficiency tax assessed by the Franchise Tax Board concerning the assessment of which the information or return was required."

So this says 25 percent of amount tax defined in Section 19087 or "any deficiency tax" assessed by CFTB.

In 19087: "...the Franchise Tax Board...may make an estimate of the net income, from any available information, and may propose to assess the AMOUNT OF TAX, interest, and penalties DUE. All the provisions of this part relative to DELINQUENT TAXES shall be applicable to the tax, interest, and penalties computed hereunder."

The law is clear, the penalty is 25% of the AMOUNT OF TAX DUE, and is relative to DELINQUENT TAXES. I believe California's deception and fraud is in their tax manual which calculates the penalty on the amount of tax before credit and withholding. I believe California has either redefined the words "due" and "delinquent" or has written their tax manual in direct contradiction of the law.

[1]

The board of equalization has made decisions upholding CTFB's manual in their decisions. It is time for the law to be interpreted by a judge and the manual modified to be in conformance with the law. I believe the CTFB's calculation of penalty against tax paid is corruption contrary to the law.

[2] 19133. If any taxpayer fails or refuses to furnish any information requested in writing by the Franchise Tax Board or fails or refuses to make and file a return required by this part upon notice and demand by the Franchise Tax Board, then, unless the failure is due to reasonable cause and not willful neglect, the Franchise Tax Board may add a penalty of 25 percent of the amount of tax determined pursuant to Section 19087 or of any deficiency tax assessed by the Franchise Tax Board concerning the assessment of which the information or return was required.

[3] 19087. (a) If any taxpayer fails to file a return, or files a false or fraudulent return with intent to evade the tax, for any taxable year, the Franchise Tax Board, at any time, may require a return or an amended return under penalties of perjury or may make an estimate of the net income, from any available information, and may propose to assess the amount of tax, interest, and penalties due. All the provisions of this part relative to delinquent taxes shall be applicable to the tax, interest, and penalties computed hereunder.

  (b) When any assessment is proposed under subdivision (a), the

taxpayer shall have the right to protest the same and to have an oral hearing thereon if requested, and also to appeal to the board from the Franchise Tax Board's action on the protest; the taxpayer must proceed in the manner and within the time prescribed by Sections 19041 to 19048, inclusive.