Franchise Tax Board Business Collections
Voluntary Case Resolution Procedure
FTB has established special procedures for business tax collections. FTB issues notices to business entities with tax issues. These notices provide business entities repeated opportunities to voluntarily meet their tax obligations. FTB notices educate business entities of their legal rights and responsibilities, and provides them with FTB contact information. Notices are used as a method to gain compliance, minimize enforcement costs, and ensure due process. FTB must notify business entities in writing about outstanding tax issues, and allow reasonable time for the business entity to comply.
The most common notices are:
- Request for Past Due Tax Return
- Official Demand for Past Due Tax Return
- Single Period Return Information Notice
- Consolidated Return Information Notice
- Notice of Balance Due
- Past Due Notice
- Formal Demand Notice
- Final Notice Before Levy
- Notice to File Tax Returns
- Final Notice Before Suspension or Forfeiture
- Final Notice Before Contract Voidability
- Demand for Tax Return
- Notice of Proposed Assessment
The names of the notices may vary for different entity types.
The FTB must issue a notice prior to action to ensure due process. FTB’s failure to provide notice before taking action may rise constitutional issues. Notices are generally issued for unpaid tax, unpaid penalty or unpaid interest. Beginning February 2001, new tax year liabilities are entered at FTB the Business Entities Accounts Receivable Collection System (BE ARCS) from the Business Entities Tax System (BETS). The purpose of the BE ARCS billings is to advise business entities of their legal rights and responsibilities, and provide them a way to contact FTB for additional information. FTB staff must review an account’s billing history and verify that a BE ARCS notice has been issued.
To resolve some tax accounts FTB’s desk collectors transfer the accounts to field collectors. This occurs because some business entities evade tax collection, while others ignore it. FTB field collectors visit business entities, encourage compliance, verify income activity, document asset
information, and identify assets for possible seizure (this includes identifying when warrants
are needed). Following types of cases will be referred to field collectors:
1) Active businesses with valid addresses.
2) Accounts with viable assets, including multiple real estate properties.
3) Verified non-compliance cases.
4) Businesses that repeatedly pay filing enforcement assessments without filing tax
returns.
5) Businesses that repeatedly refuse to file their tax returns or pay their tax balances.
6) Businesses that routinely abandon one business and start a new one to avoid tax
liabilities.
Before referring cases to field collections FTB staff must exhaust other collection actions, mainly notices. The exception is when an account is at risk, such as a business entity liquidating assets to avoid collections, or the business entity has a significant non-compliant history. Internal FTB manual requires that there must be a viable asset in existence to justify field collection, such as a likelihood of income or a known physical asset. An internal field transfer request must demonstrate that field action has a realistic potential to resolve an account.
When an account is determined to be uncollectible, it is removed from the FTB’s automated
billing cycle and is considered discharged. Basically, it happens when FTB determines that it is not cost effective to pursue collection of this particular liability. Upon discharge, the liability still remains due but collection action ceases. Once a year, accounts in collections will receive an annual notice, to advise taxpayer entities of missing returns and unpaid liabilities.
Franchise Tax Board Business Collections
Notice Of Proposed Assessment (NPA)
When an adjustment to a tax return results in additional tax, a Notice of Proposed Assessment (NPA) is issued. These NPAs are issued to business entities on the basis of:
- Additional tax due based on an audit of an original or amended tax return.
- Internal Revenue Service information.
- Missing year tax returns.
The purpose of the NPA is to inform the business entity of the adjustment and to allow time to protest the assessment. Entities have 60 days to protest the validity of the NPA. After 60 days, the NPA becomes final; a Notice of Balance Due is then mailed stating that the tax, penalties, and interest assessed are considered due and payable 15 days from that notice date. Usually FTB generates a Notice of Balance Due (also known as the NPA final bill) within 30 days after assessment protest period.The purpose of the Notice of Balance Due (NPA final bill) is to inform the entity that the assessment is due and payable 15 days from the notice date. FTB staff must ensure that this process has occurred prior to taking collection actions.
Currently, there is no provision in the Revenue and Taxation Code for extensions of time for payment of tax due for a business entity. However, business entities may be faced with a financial hardship and be unable to pay in full all at once. FTB may consider payment deferral to allow business entities an opportunity to pay their debt in full. Business has to request it, and after reviewing the account history, Franchise Tax Board (FTB) staff will determine on a case-by-case basis if a request for payment deferral will be granted. If payment of the full balance due will create a financial hardship, FTB staff may allow payments. If a deferral is granted, involuntary collection actions should cease during this period, which may include a case hold.
FTB staff will verify the following when reviewing file for deferral option:
- Account information (e.g., address, bank, telephone number, status)
- All tax returns have been filed?
- If additional balances have been discharged
- Pending Notices of Proposed Assessment (NPA)
- Any recent involuntary collection actions
FTB may also allow installment agreement in cases of financial hardship. Beginning January 1, 2005, a service fee of $20.00 will be added to the taxpayer’s account. For installment agreement FTB staff will verify the following:
- Business activity and type of business
- Account information (e.g., address, bank, telephone number, status)
- All tax returns have been filed?
- If additional balances have been discharged
- Pending Notices of Proposed Assessment (NPA)
- Any recent involuntary collection actions
- Financial Statements (e.g., bank, profit/loss, accounts receivable, credit denial
letter)
- Liens filed (or document why a lien was not filed)
- Notify the business entity that a lien may be filed
Upon approval of an installment agreement, the collector must inform the taxpayer about $20 fee and issue business entity an Installment Agreement Acceptance Letter. The Business Entities Installment Agreement Financial Statement is now online in a “fillable” format. If taxpayer defaults on agreement the FTB staff must issue an Installment Agreement Cancellation Notice. This notice must precede all involuntary collection actions by FTB.
- Franchise Tax Board Business Collections – Involuntary Case Resolution
Orders to Withhold
FTB can use involuntary means of delinquent tax collection if voluntary means do not work. For example, an Order To Withhold (OTW) is a one time legal order seizing 100% of the available
funds from a financial institution or escrow company. Potential payors for an OTW include California banks or escrow companies holding funds (e.g., checking or savings account, or proceeds from a sale of property or another asset) of a business entity. An OTW can not be issued to a financial institution where no branches are located within California. Prior to remitting funds to FTB, banks are required to hold funds for 10 days from the date the OTW was received.
Miscellaneous payor sources for OTW may be, but are not limited to the following:
- Rental income
- Escrow companies
- Oil and gas rights
- Use of patents
- Movie and television rights
- Copyrights/literary works
- Stock
FTB must ensure due process by sending notice to business entity before issuing OTW. FTB can skip-trace to find new payors not listed on account yet. Enforcement of an OTW that attaches to non-cash assets, (stocks, securities, safe deposit boxes, etc.) is seized and sold at public auction per FTB warrant procedures. Any recipient of a levy failing to withhold and send to Franchise Tax Board (FTB) the amount due may be liable for the amount due, even if recipient is not related to taxpayer entity. It is not necessary for FTB to issue an assessment against the payor, which failed to honor the levy, before taking an involuntary action. The liability must be established and the non-complying party must be given notice and an opportunity for a hearing. In the case of a financial institution, if an OTW is mailed to the branch where the account is located or principal banking office, the financial institution is liable for a failure to withhold only to the extent that the accounts can be identified by information maintained at that location.
To establish if levy was not complied with FTB can issue Subpoena Duces Tecum or simply a regular demand for information to any involved party. FTB can examine various documents, including:
- Accounts payable records
- Cancelled checks
- Checking or savings account statements
- Deposit slips
- Escrow closing statements
- Promissory notes
- Rental, installment, or lease agreements
Once FTB staff verifies payments were not sent to FTB, a letter to the non-complying party
must be sent. The “Response to Order to Withhold Tax”, FTB form 4931, is sent to a non-complying party liable for the amount of the levy. The letter must be personally served or mailed via certified mail, return receipt requested. The non-complying party may request a hearing within 15 days from the date form FTB 4931 was issued. If there is no payment received, and there is no hearing requested within 15 days, or if at a hearing the non-complying party cannot substantiate a valid reason for failing to honor the levy, FTB issues an OTW against the non-complying party. Collection actions against the non-complying party’s assets are taken as if the actions were being taken against the original debtor.
A Continuous Order To Withhold (COTW) is a legal order seizing funds from a miscellaneous payor and remains in effect for up to a year from the date the COTW was issued. A COTW attaches rents, commissions or scheduled payments from a sale of property or any other type of asset where continuous multiple payments are made. COTW payors do not include funds held by a bank or escrow company. A COTW attaches 100% of the available funds at the time they are received, but does not exceed the amount due on the order. COTW is valid until the amount on the order is withheld in full or the twelve months has expired. The total amount due includes the total tax, penalties, fees and interest to the date of the COTW. Applicable tax years are all tax years with liabilities receiving due process that are due and payable.
FTB staff may modify or withdraw an OTW/COTW to ensure the fair and reasonable collection of tax revenue and to assure funds are not over collected. Franchise Tax Board (FTB) staff may modify or withdraw an OTW/COTW for the following reasons:
- Account balance indicates liability is lower than amount on the order
- Delinquent/amended returns have been processed and decreased original balance due
- Adjustments/corrections/errors reduce liability
- Received certified funds
- Verifiable funds allocated for payroll
- Lack of due process
- Liability is paid in full
- Financial hardship
- Agreement is made with the debtor allowing additional time for payment
FTB staff is required to thoroughly review and verify all supplied documentation prior to modifying the order. When modifying or withdrawing an OTW/COTW, FTB staff must document the basis of the action, and cite all supporting documentation. FTB staff should fax a copy to the bank and follow up by sending the hard copy via first class mail.
- Franchise Tax Board Business Collections – Involuntary Case Resolution
Assessments
Missing year assessments are usually defined by which type of entity they are. For non-qualified in California corporation, missing years are created when a business entity does business or derives income during a tax year but doesn’t file a tax return. For California qualified corporations – any time a qualified franchise tax filer doesn’t file a return. Business activity and income do not determine the filing requirement for a corporation who has qualified through the California Secretary of State. Missing year assessments enable FTB to assess taxes due in the absence of a tax return. Missing year assessments can be set up by FTB’s automated system or manually by its staff. FTB staff must evaluate the cost effectiveness of setting up a missing year assessment if there is no indication of company’s business activity, income, or transferee assessments.
FTB staff will contact a business and will verify the following:
- Is the business entity actively doing business (in or out of California)?
- What kind of business does the entity conduct?
- What were the entity’s gross receipts for the certain year(s) of ?
- Does the entity have any other locations?
- Verify all active addresses.
- Gather asset info (bank, accounts receivable, property, etc.).
- Does the entity use a Doing-Business-As (DBA) name? This information is important if
a lien or levy is required.
If a missing year assessment is justified, FTB staff must notify the business entity by mailing form FTB 4960 Notice to File Tax Returns. Then the FTB fills out the missing year assessment form FTB 6923A to determine the income basis of the assessment. The following income sources are listed in priority order by the FTB:
- Taxpayer information
- Board of Equalization (BOE)
- Prior year return
- Industry income average
- FTB determination
Jeopardy Assessments (J/A) are issued when it is determined by FTB that the collection of a tax or deficiency for any year, current or past will be jeopardized. J/As may be issued to a business entity, transferee (a party to whom taxpayer transferred property), or assumer (someone who assumed obligations of taxpayer). A J/A is due and payable at the time assessed and collection action may commence at once. FTB considers that the collection of tax might be in jeopardy if one or more of the following is established:
- Entity received income from illegal sources and has assets that are in immediate danger of attachment (attachment of third party’s claim to assets) or assignment (assigned rights away to another person or business).
- There is evidence that the entity is assigning and/or placing assets in the name of a third party for the purpose of concealment.
- Entity is selling business and has not filed tax returns.
- Entity has a previous history of collection difficulty or is a non-filer of tax returns; and the entity has access to a large amount of cash or escrow funds and it is the last verifiable asset of the entity.
- Entity has unpaid liability from tax return(s) filed.
Taxpayer is then sent a Notice of Proposed Assessment, but unlike with regular NPA the taxpayer has:
- 30 days to protest that collections was not in jeopardy
- 60 days to protest on the grounds that the assessment was incorrect
FTB can send jeopardy assessment in conjunction with demand to pay for delinquencies for all years for which liens were placed on taxpayer’s assets or/and Order to Withhold for all years’ delinquencies for which liens were not placed. To stay collections actions the entity must post a bond for 125% of the amount of jeopardy assessment by FTB, or show substantial evidence that the funds are not in jeopardy.
The following is the income basis for jeopardy assessments:
- Taxpayer information
- Board Of Equalization (BOE)
- Prior year return
- Industry income average
- Collection Filing Enforcement (CFE) basis
FTB must send a taxpayer letter explaining what information FTB relied upon in issuing the assessment, detailing method of computation. Also, FTB must prove a reason why it determined that the collection of tax assessed would be jeopardized by delay.
Assumer Assessments
An assumer is an individual or business entity that accepts legal responsibility for another business entity (takes owe its tax obligation) when requesting a tax clearance. Usually it occurs when taxpayer entity changes its form, gets merged or seizes to exist. Franchise Tax Board form FTB
3555 Request for Tax Clearance initiates this process. Once this form is accepted and the entity has completed the dissolution, surrender, cancellation, or merger process, the assumer becomes responsible for the entity’s taxes and/or unfiled tax returns. All returns remain subject to audit until expiration of the normal statute of limitations.
An assumer differs from a transferee because an assumer voluntarily assumes any subsequent
liabilities or responsibilities for a business entity, where a transferee has the liabilities transferred to them without their consent. FTB indicates certain limitations in this respect:
- An assumer cannot be a general or limited partnership.
- The surviving entity of a conversion assumes the converted entities liability without a tax clearance unless they are a domestic or qualified corporations that are converting to another type of entity.
FTB will include assumer in its automated system and will check with Secretary of State whether the original business entity taxpayer truly merged, dissolved, canceled, etc. Please note that the statute of limitation for assumer assessments is one year beyond the statute for assessment of the original liability regardless of any extension.
Transferee Assessments
Transferee assessments are issued when assets are inappropriately taken from a business entity, leaving the business insolvent and unable to meet its tax obligations. This process makes the transferee (the one who receives assets) responsible for the amount taken or the tax liability due (whichever is less). A transferee can be any of the following:
- A company officer
- Stockholder
- A business entity
Examples of transfers are:
- Corporate officers who receive improper compensation, such as excessively high salaries or expenses
- Stockholders who borrow from the corporation without repaying the loans
- Other corporations, partnerships or sole proprietorships that receive assets from the corporation without adequate compensation
FTB will identify transfers and transferees, and will make assessment. Such assessments are divided into two major categories: transferee assessments based upon law, or based upon equity. For transferee assessments based upon “law,” a contract must exist in which the transferee agrees to pay the transferor’s tax. Transferor is one who gives away its assets to transferee. For transferee assessments based upon “equity,” all of the following requirements must be met:
- Transfer of assets
- Tax liability accrued before or in the taxable year the transfer was made
- Transfer made without full and adequate compensation
- Transferor left without assets sufficient to pay tax liability due to the transfer
- Transfer must have been to actual beneficial owners
- Creditor may be held as transferee only to the extent of the overpayment
FTB staff must have exhausted all means available to collect from the business entity before proceeding with a transferee assessment. FTB will have to prove transferee before imposing assessment. Proof of transferee is determined by the following:
- Identification of the asset transferred
- Evidence that the transfer left the transferor insolvent or defrauded creditors
- The value of the asset transferred
- Asset transferred after tax accrued or during tax year in which liability arose
After that FTB sends to transferee of the asset form 5900 and waits 45 days from mailing date before taking any action, for example, imposition a lien on the asset. Please note that the statute of limitations for setting up a transferee assessment is five years past the original due date of the tax return. For subsequent transferees, the statute of limitations is within one year of the expiration of the previous transferee assessments’ statute of limitations (up to a maximum of three years).
Franchise Tax Board Business Collections
Involuntary Case Resolution
FTB can use involuntary means of delinquent tax collection if voluntary means do not work. For example, an Order To Withhold (OTW) is a one time legal order seizing 100% of the available funds from a financial institution or escrow company. Potential payors for an OTW include California banks or escrow companies holding funds (e.g., checking or savings account, or proceeds from a sale of property or another asset) of a business entity. An OTW can not be issued to a financial institution where no branches are located within California. Prior to remitting funds to FTB, banks are required to hold funds for 10 days from the date the OTW was received.
Miscellaneous payor sources for OTW may be, but are not limited to the following:
- Rental income
- Escrow companies
- Oil and gas rights
- Use of patents
- Movie and television rights
- Copyrights/literary works
- Stock
FTB must ensure due process by sending notice to business entity before issuing OTW. FTB can skip-trace to find new payors not listed on account yet. Enforcement of an OTW that attaches to non-cash assets, (stocks, securities, safe deposit boxes, etc.) is seized and sold at public auction per FTB warrant procedures. Any recipient of a levy failing to withhold and send to Franchise Tax Board (FTB) the amount due may be liable for the amount due, even if recipient is not related to taxpayer entity. It is not necessary for FTB to issue an assessment against the payor, which failed to honor the levy, before taking an involuntary action. The liability must be established and the non-complying party must be given notice and an opportunity for a hearing. In the case of a financial institution, if an OTW is mailed to the branch where the account is located or principal banking office, the financial institution is liable for a failure to withhold only to the extent that the accounts can be identified by information maintained at that location.
To establish if levy was not complied with FTB can issue Subpoena Duces Tecum or simply a regular demand for information to any involved party. FTB can examine various documents, including:
- Accounts payable records
- Cancelled checks
- Checking or savings account statements
- Deposit slips
- Escrow closing statements
- Promissory notes
- Rental, installment, or lease agreements
Once FTB staff verifies payments were not sent to FTB, a letter to the non-complying party
must be sent. The “Response to Order to Withhold Tax”, FTB form 4931, is sent to a non-complying party liable for the amount of the levy. The letter must be personally served or mailed via certified mail, return receipt requested. The non-complying party may request a hearing within 15 days from the date form FTB 4931 was issued. If there is no payment received, and there is no hearing requested within 15 days, or if at a hearing the non-complying party cannot substantiate a valid reason for failing to honor the levy, FTB issues an OTW against the non-complying party. Collection actions against the non-complying party’s assets are taken as if the actions were being taken against the original debtor.
A Continuous Order To Withhold (COTW) is a legal order seizing funds from a miscellaneous payor and remains in effect for up to a year from the date the COTW was issued. A COTW attaches rents, commissions or scheduled payments from a sale of property or any other type of asset where continuous multiple payments are made. COTW payors do not include funds held by a bank or escrow company. A COTW attaches 100% of the available funds at the time they are received, but does not exceed the amount due on the order. COTW is valid until the amount on the order is withheld in full or the twelve months has expired. The total amount due includes the total tax, penalties, fees and interest to the date of the COTW. Applicable tax years are all tax years with liabilities receiving due process that are due and payable.
FTB staff may modify or withdraw an OTW/COTW to ensure the fair and reasonable collection of tax revenue and to assure funds are not over collected. Franchise Tax Board (FTB) staff may modify or withdraw an OTW/COTW for the following reasons:
- Account balance indicates liability is lower than amount on the order
- Delinquent/amended returns have been processed and decreased original balance due
- Adjustments/corrections/errors reduce liability
- Received certified funds
- Verifiable funds allocated for payroll
- Lack of due process
- Liability is paid in full
- Financial hardship
- Agreement is made with the debtor allowing additional time for payment
FTB staff is required to thoroughly review and verify all supplied documentation prior to modifying the order. When modifying or withdrawing an OTW/COTW, FTB staff must document the basis of the action, and cite all supporting documentation. FTB staff should fax a copy to the bank and follow up by sending the hard copy via first class mail.
FTB can also use interagency intercept. Interagency Intercepts allow a business entity’s credit balance with one government agency to be transferred to pay or reduce the business entity’s balance due with a different government agency. Intercepts from the Employment Development Department (EDD), and the Board of Equalization (BOE) are an automatic process performed electronically based on a list from these agencies of corporations with available funds. FTB can also intercept funds from the California Department of Health Services (CDHS). When FTB staff determines that a business entity has funds held by CDHS, FTB staff can issue an Interagency Offset Notice; form FTB 2970, to intercept the funds to satisfy the liability held by FTB. The process of intercepting funds for other state agencies is the same when they locate excess funds within the Franchise Tax Board (FTB). Intercepts can be requested against cash and time certificate deposits held by state agencies. A Medi-Cal Intercept can attach a health care provider’s funds paid by CDHS. Any monies sent by the EDD or BOE based on an interagency intercept cannot be released if the liability was previously satisfied. The intercept payment will then be appropriated to other income years with liabilities or refunded to the business entity. If California Employment Department or Board of Equilization sends money for liability that was already satisfied, FTB can apply this money to liabilities form other years, or will refund business.
Assessments
Missing year assessments are usually defined by which type of entity they are. For non-qualified in California corporation, missing years are created when a business entity does business or derives income during a tax year but doesn’t file a tax return. For California qualified corporations – any time a qualified franchise tax filer doesn’t file a return. Business activity and income do not determine the filing requirement for a corporation who has qualified through the California Secretary of State. Missing year assessments enable FTB to assess taxes due in the absence of a tax return. Missing year assessments can be set up by FTB’s automated system or manually by its staff. FTB staff must evaluate