FTB Penalties and Reasonable Cause Relief

Like the Internal Revenue Service (IRS), the Franchise Tax Board (FTB) imposes penalties on personal and corporate income taxpayers when they fail to comply with their tax obligations. But when this happens, it does not mean that the taxpayer is without recourse to challenge the penalty. For example, some of these penalties may be abated if a taxpayer can demonstrate reasonable cause. "Reasonable cause" in the context of penalties means that the taxpayers exercised ordinary business care and prudence in meeting their tax obligations but nevertheless failed to comply. Taxpayers may go to ftb.ca.gov and search for law summary reasonable cause for our law summaries which describe the circumstances that generally constitute reasonable cause.

Penalties imposed on both personal income and corporate income taxpayers that can be abated for "reasonable cause" include:

  • Delinquent/Late Filing Penalty. R&TC Section 19131.
  • Late Payment Penalty (also known as the Underpayment and Monthly penalties). R&TC Section 19132.
  • Notice and Demand/Failure to Furnish Information Penalty. R&TC Section 19133.
  • Accuracy-Related Penalty. R&TC Section 19164.
  • Electronic Fund Transfer (EFT) Penalty. R&TC Section 19011.
  • Dishonored Payment Penalty. R&TC Section 19134.
  • Withholding Liability for Tax and Withholding Penalties. R&TC Section 18668.
  • Partnership/S-Corporation late filing penalties. R&TC Sections 19172 and 19172.5.

Some of these penalties may require an additional component of "good faith" or that the act triggering the penalty was not due to "willful neglect." For a comprehensive list of all the penalties in the R&TC, go to ftb.ca.gov and search for FTB 1024 or penalty chart. This chart also lists the available defenses to the penalties.

If a taxpayer thinks there are facts or circumstances that would justify abatement of a penalty for reasonable cause, the taxpayer may be able to obtain a pre-payment waiver of the penalty or if the taxpayer has paid the penalty, the taxpayer may file a timely claim for refund.

Pre-payment Request for Waiver

A taxpayer who receives a bill with a penalty should contact FTB if the taxpayer believes there are facts or circumstances that would constitute reasonable cause for the penalty abatement. If a taxpayer representative calls on the behalf of a taxpayer, the taxpayer representative must have a Power of Attorney (FTB 3520; go to ftb.ca.gov and search POA) on file with FTB for the tax years at issue so that FTB can discuss the taxpayer's account with the representative.

The best point of contact with FTB is by a telephone call to the phone number provided on FTB's bill or notice. The taxpayer should be prepared to discuss why they believes that the penalty should be abated and be ready to provide additional information or documentation (if needed) to show that reasonable cause exists. In many cases where the taxpayer calls FTB, FTB should be able to make a decision on the day of contact. If the matter is complex or needs supporting evidence to establish reasonable cause, a taxpayer may need to provide additional information by letter or fax. For example, if the taxpayer states that the IRS waived the penalty for reasonable cause, FTB will ask for documentation of the IRS penalty abatement (generally a letter from the IRS) to confirm the IRS abated the penalty for reasonable cause.

While the law permits FTB and the IRS to abate penalties for reasonable cause, the IRS also has a policy of abating timeliness penalties when a taxpayer has a good filing and payment history for prior years. FTB does not have authority to abate penalties because of a taxpayer's good filing and payment history and thus, cannot follow the IRS if it abates under this policy. However, if the IRS abates a penalty for reasonable cause, FTB will follow that IRS determination and abate the corresponding FTB penalty if the circumstances are the same.

Post Payment Relief/Claim for Refund

If a taxpayer pays a penalty, the taxpayer may request abatement of the penalty by way of a claim for refund. A claim for refund must be made in writing to FTB. The claim must include a signature, specific reasons for the claim for refund and a list of tax year(s), and issues for which the taxpayer is claiming a refund, as well as any supporting evidence or information.

FTB is preparing a form for taxpayers to use to claim a refund of a penalty based on reasonable cause. This new form will assist taxpayers to provide the information FTB needs to evaluate a reasonable cause defense to a penalty. We anticipate the form will be available in September 2014.

It is important to remember that a taxpayer may request a refund or credit of a penalty already paid so long as the request is filed within an open statute of limitations. R&TC Section 19306 specifies that a claim for refund or credit must be filed no later than (a) four years from the original due date of the return, or (b) four years from the date the return is filed if the return was filed within the "automatic extension" period. Additionally, a claim for refund or credit is timely with respect to payments made within one year of the claim filing date (the "look back" provision). The postmarked date of the claim is the date it is considered filed, and the taxpayer has the burden of proving the claim is timely filed.

FTB makes every effort to administer the tax laws fairly and accurately. If a taxpayer has a valid reasonable cause argument for abatement of a penalty, the taxpayer should contact FTB, and we will gladly consider the facts and circumstances of the case.

Jozel Brunett
Chief Counsel

as published in Tax News

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