CA Tax: New Laws, Tools and Answers for CPA

California CPA magazine: December 2008

by Damien B. M. English
This year’s annual meeting between CalCPA’s Committee on Taxation and the Franchise Tax Board started with FTB updates and then delved into FTB officials responding to specific, and often complex, questions submitted by CalCPA members.
A full Q&A transcript will be posted to CalCPA's website before the end of the year.
FTB Executive Director Selvi Stanislaus opened the meeting by saying the board has been attempting to maintain a high level of service amid budget cuts. She has attempted to receive additional funding to increase staffing of the Practitioner’s Hotline and Taxpayer Services over the last several years to no avail.
The FTB has attempted to alleviate the staffing shortage and minimize practitioner wait time by routing calls to other FTB staff during peak hours. Stanislaus said the FTB is sensitive to practitioner needs and it is a top priority.
Estimated Payments Changed, Electronic Payments Now Required
Patrice Gau-Johnson, assistant director of the Legislative Services Bureau, provided a rundown of legislation enacted in 2008, including several budget trailer bills. One, SBX1 28, caught everyone by surprise.
A provision of the act changes estimate payment percentages on personal income and corporate tax payments to 30 percent of the annual tax liability for the first and second estimate payment installments, and 20 percent of the annual tax liability for the third and fourth installments.
Taxpayers may no longer make four equal payments. This is operative for tax years beginning on or after Jan. 1, 2009.
SBX1 28 also:
•    Accelerates the date for an LLC to estimate and pay its fee by a specific date for taxable years beginning on or after Jan. 1, 2009.
•    Eliminates the safe harbor of prior year’s tax to compute the required annual payment for taxpayers with AGI of $1 million or more ($500,000 in the case of a married individual filing a separate return). Some CPAs expressed concern that, because of this, penalties will be assessed on information received too late in the year and require too much speculation.
•    Requires corporate taxpayers that are not required to make a first installment to pay 40 percent, 30 percent and 30 percent for their remaining installments due.
•    Imposes a 20 percent penalty on corporations with an understatement of tax of $1 million or more. Taxpayers are allowed to file an amended return within the statute of limitations by May 31, 2009, to avoid the application of the penalty on tax returns previously filed.
Another reported potential pitfall is a provision in AB 1389, signed into law Sept. 30, that requires individuals to make payments electronically once one of the following thresholds is met: any installment payment of estimated tax in excess of $20,000, any extension payment in excess of $20,000 or if the total tax liability exceeds $80,000. This applies to taxable years beginning after Jan. 1, 2009. Once individuals meet the mandatory e-pay threshold, they are required to make that payment and subsequent payments electronically, regardless of the amount, type or taxable year. The penalty for failure to comply is 1 percent of payment.
The FTB will notify those who will be affected by this law change, which is estimated to be about 30,000 taxpayers.
AB 1389 also expands the group return provisions to include single nonresident members of partnerships, LLCs or corporations, and nonresident members
of flow-through entities with taxable income in excess of $1 million.
Other notable legislation mentioned included:
•    SB 1055: Provides partial conformity to federal mortgage debt relief, but is limited to $250,000 in debt ($125,000 married filing separate). Effective periods and debt maximums vary from federal law.
•    AB 1452: Suspends net operating loss deductions for tax years beginning in 2008 and 2009. It extends the NOL carryover period for 20 years and allows taxpayers to carry back for two years NOLs from 2011 and later. It also requires LLCs to estimate the LLC fee and pay it 10 months prior to the due date of the tax return. This is effective for tax years beginning in 2009. For a calendar year LLC, the 2009 fee would be due June 15, 2009. There is a 10 percent underpayment penalty but it can be abated for reasonable cause.
For more legislated tax changes, visit the FTB online.
FTB to Delay Asking for Payments Until After Process Payments
Anne Miller, FTB filing division chief, took the COT through a recap of the 2008 filing season and shared what to expect in 2009.
Miller said the FTB received more than 10 million personal income tax (PIT) e-file returns in 2008—more than 1 million more than the previous year (33 percent of the total PIT returns filed were paper). She said more than 80 percent of PIT e-file returns were filed by the more than 80,000 tax practitioners in the e-file program.
The FTB received more than 200,000 business entity e-file returns in 2008, which is a 250 percent increase from the previous year. The largest business entity e-file return filed was more than 64,000 pages long.
A new “third-party designee check box” will be available on 2008 return forms filed in 2009. The designee will be limited to processing the return, inquiring regarding the status of a refund or payment, and responding to the FTB regarding math errors, offsets and return preparation.
The designee is not authorized to receive a refund check, bind the taxpayer to anything (including additional liability) or represent the taxpayer before the FTB. The third-party authorization automatically ends no later than the due date for the 2009 return, April 15, 2010.
Also new in 2009, is the “notice release extension pilot,” which will extend the balance due and return information notices for individual returns release period to early June and allows for the processing of a majority of timely payments prior to generating notices.
Allen Wilson, tax forms development and distribution manager, also added that there will be changes to single member LLC filing in 2009.
Based on feedback from the practitioner community, single member LLCs will only be required to file Schedules B and K if any item of income or loss is $3 million
or greater. They are also required to be attached if Schedule K, line 21, is equal to or greater than $3,000, or equal to or less than $3 million.
This should save smaller single member LLCs the additional cost of duplicating data contained on the members’ return on Form 568 Schedules B and K.
The “My FTB Account” feature on the FTB website will gain some new features for 2009. Users will be able to view the FTB-issued 1099 G and 1099 INT forms from the current year and the previous two years. Users also will be able to view California wage and withholding information for the current year, as well as the three years prior for up to 30 employers per taxpayer. A survey has also been added for user feedback.
Other updates for 2009 include eliminating the Package X and adding more staff to the practitioner hotline group: two permanent additions and six to 10 part-time additions during peak operating times. Miller said the FTB will revamp the Practitioners’ Hotline so more calls can be placed in the queue without receiving a busy signal.
FTB Expects to Give Practitioners Access To Client Information with EASE
The FTB plans to unveil External Authentication for Secure E-services program in July 2009. The program will be designed to provide practitioners easy, online access to client information; enable one logon process, which will in turn provide access to all e-services; and enable users to self-manage their passwords.
The FTB took the liaison meeting as an opportunity to mine the COT for ideas on how to implement this program, specifically:
•    Is it beneficial to have your clients’ tax data available online and what kind of information, specifically, would you like to see?
•    Do your clients need to give you permission to access their data, and what is the best way to do that?
A somewhat lively discussion followed regarding the access to information question, and how to prevent unauthorized access.
CPAs present expressed concern about receiving information that the client has not yet authorized access too, which could cause an issue for the practitioner even if the access was provided to them erroneously or without their knowledge.
If you would like to provide the FTB with input on this topic, contact Alison Adams via e-mail or  call (916) 845-3559.
All Things Audit
Debbie Langsea, FTB audit division chief, briefly overviewed FTB audit activities. Unsurprisingly, she said 61 percent of audit revenue raised came from corporations, 17 percent came revenue agent report audits and only 2 percent came from head of household audits.
Audit programs by volume of audits broke down into head of household audits accounting for 45 percent, revenue agent report audits accounting for 42 percent and corporation audits accounting for 1 percent.
A discussion of these stats followed as to whether this was the best use of FTB resources. Langsea indicated that the amount of time spent on the head of household audits was minimal compared to that spent on corporate audits, therefore creating a reasonable relationship between resources spent and revenue raised.
Langsea said emerging issues for the audit division include incorporating self-compliance into audits, streamlining audit practices and collaborating with other agencies.
Can We Ever Conform?
“The state is out of conformity with the federal government, and it becomes more and more so every year,” said Brian Putler, legislative services bureau director.
Putler reported that conformity bills failed to pass in the last two legislative years. Putler urged all in attendance to contact their state legislators and let them know this is an important issue. He said without contact from CPAs, conformity is even less likely to happen during this upcoming session.
However, he did express that the FTB is strongly in favor of conformity and will continue its efforts to bring that about. The FTB is anxious to work with CalCPA as a partner to bring about a conformity bill. 
Damien B.M. English is CalCPA’s managing editor.