Collaboration Abounds at State Tax Agencies Liaison Meeting. Ethics Committee Has Your Back. Applying Self-Employment Tax to RDPs

Transcription

1 Volume XXXV Number 5 December 2010 Collaboration Abounds at State Tax Agencies Liaison Meeting Ethics Committee Has Your Back Applying Self-Employment Tax to RDPs CPE Recordkeeping Key 1

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3 California Enrolled Agent President s Message At the time that I am writing this, I have been your President for approximately two months. I am pleased to report to you that the Officers, Board Members and Committees of CSEA have been working hard to ensure that your membership works to benefit you, the Members. Every Member is important to me and to the survival of our organization. We, your elected and appointed leaders, are keenly aware that without you, the Members, our organization would simply not exist. This commitment to you is why I take such pleasure in the opportunity that I have been given as President to meet each of you personally as I travel around the state visiting our Chapters. In my first president s message to the Board of Directors, I requested that each Board Member look around their Chapter and identify those Members who have given extraordinary service to our organization. I know that every Chapter has these Members who volunteer their time and talents whenever they are asked, knowing that they are providing a much-needed service that ensures the survival of our profession and professional organization. I am proud to say that not only do I see the depth of talent that we share, but so do the Chapter leaders who have provided me with names and background material on several of our finest colleagues. This has given me the opportunity to present Letters of Commendation elaborating on the many achievements of these individuals and to personally thank them for their service on behalf of their Chapter, the CSEA Board and the entire membership of CSEA. continued on p. 4 EDITOR S NOTE: Beginning with the January/February 2011 edition, the California Enrolled Agent adopted a new publication schedule. Readers can expect to receive six issues per year in the following months: February, April, June, August, October and December. California Enrolled Agent will continue to provide readers with important news and information impacting the tax industry and their professional Society. Editorial staff will continue to provide the high standard of service readers have come to expect from California Enrolled Agent since California Enrolled Agent (ISSN ) is published bi-monthly for $9.00 per year (included in membership dues) by the California Society of Enrolled Agents, Inc. Offices are located at 3200 Ramos Circle, Sacramento, California Periodical Postage Rates Paid at Sacramento, CA. POSTMASTER: Send address changes to California Enrolled Agent, 3200 Ramos Circle, Sacramento, CA Your comments and suggestions are invited. We reserve the right to edit letters for length and clarity. Contents 2011 all rights reserved. Reproduction rights granted with credit, on condition that tear sheets of usage are sent to the above address with the exception of those items listing specific copyright information. We SpEAk Tax, Super Seminar, C-STAR and The Tax Boat are registered service marks of the California Society of Enrolled Agents. Unauthorized use forbidden. Contributions to the EA Promotion or Major Media Marketing funds (as may be referenced herein) are not deductible as charitable contributions but may be deductible as business expenses. Contributions to the CSEA Legislative Action or Political Action funds are not deductible. Contributions to the CSEA Education Foundation are deductible as charitable contributions. California Enrolled Agent is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting or other professional advice. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. (Adapted from a Declaration of Principles jointly adopted by a committee of the ABA and a Committee of Publishers and Associations.) While every effort has been made to ensure the accuracy of information presented herein, the California Society of Enrolled Agents and its staff do not guarantee the accuracy or completeness of any information and is not responsible for any errors, omissions, or misrepresentations. Statements of fact and opinion as made are the responsibility of the authors alone and do not imply an opinion on the part of the Officers or Members of the California Society of Enrolled Agents. CSEA is an Affiliate of the National Association of Enrolled Agents. TABLE of CONTENTS September/October 2011 VOLUME XXXV NUMBER 2 The Society President s Message EVP Perspectives...5 Legislative CSEA Wants You!...6 Features CSEA Members, Tax Agencies Representatives Collaborate...7 Continuing Education and Recordkeeping Requirements How Self-Employment Tax Applies to California RDPs and Same-Sex Couples Challenging Times for Offers in Compromise If You Were the Judge Super Seminar Ethics Committee Why Have One? CSEA Networking Pays Dividends at the 2011 IRS Forums Save the Dates! Franchise Tax Board Responds to CSEA Member Questions Should You File, and Then Opt Out? Members Summary of June Board Meeting CSEA s Marketing Efforts Aimed to Improve Your Bottom Line CSEA Events Calendar Statement of Ownership Memorial for Past President Jack Robishaw Donations Sought for CSEA Education Foundation Auction Welcome New Members CSEA s Newest Member Benefit Member Classifieds Business Partners Directory Reference Materials CCH Quickfinder TaxBook Ramos Circle, Sacramento, CA Telephone: 916/ , Fax: 916/ Toll Free: 800/ info@csea.org, Website: Subscription rate: $75.00 per year Editor/Publisher Executive Editor Managing Editor Contributing Editor Magazine Layout Scarlett D. Vanyi, CAE Jeanie J. Clapp Jana Perinchief Cary M. Steward Kate Cook Design 3

4 The Society continued from p. 3 I am also aware that when I stand before Members at Chapter meetings and read these Letters of Commendation, the audience who hears me is a very small portion of the approximately 4,000 individuals who should get the chance to know these talented colleagues. Therefore, I would like to take this opportunity to list the names and Chapter affiliations of those individuals who have already received their Letter of Commendation and thank them once again for all their hard work: Mary Ann Beguin, EA Far Northern Chapter George Berrettoni, EA Sacramento Valley Chapter Christine Cromwell, EA North Bay Chapter Marilyn Lim, EA Big Valley Chapter Sue Burns Medina, EA Sacramento Valley Chapter Lee Reams, EA San Fernando Valley Chapter Jackie Thomson, EA North Bay Chapter Jim Webster, EA Far Northern Chapter Bob Woodford, EA San Fernando Valley Chapter I am pleased to say that there are many more individuals who will receive their Letter of Commendation when I have the opportunity to visit their Chapter. Part of the pleasure in presenting these awards is to see the look of surprise on the faces of these individuals when I ask them to come forward. So in order to maintain this element of surprise, I have not listed anyone who has not yet received their commendation, although I will list them in subsequent President s Messages. I hope that you take the opportunity to read these President s Messages and urge you to attend your Chapter meeting when I am scheduled to visit. These visits give me the opportunity to connect with you and to thank you personally for being a Member. And there is always the chance that either you or one of your valued colleagues will hear me ask you to please come forward. Speaking of Members, here are a few CSEA Member benefits I have profited from, and I encourage each of you to do the same. This magazine that you are currently reading is a Member benefit; I appreciate the timely information regarding my organization and my profession that it always contains. In May I attended the Super Seminar in Reno, NV and received the Member discount on this comprehensive CPE. I purchase my Errors and Omissions (E&O) Insurance through Placer Insurance, a CSEA referral. I am listed on the Find an EA directory on the CSEA website and I know that this listing makes me accessible to my colleagues and potential clients in my geographic area. I also know that the CSEA and NAEA Political Action Committees (PAC) where I donate my dollars are lobbying in the best interests of my profession and the taxpayers I represent. The research company that I use to assist me with challenging tax questions came to me as a referral from a colleague at a Chapter meeting. This leads me to the final and most valuable benefit of all, which is the networking that I am able to do with other tax professionals. I have been a sole practitioner for many years and having a group of like-minded individuals who understand the challenges of my career is, in the words of that credit card advertisement, priceless. I hope that you find your membership in CSEA to be as priceless as I do. I am interested in what you consider the benefits of your membership to be. If you have any suggestions on how we can enhance your membership experience, please feel free to contact me by at jean4ea@aol.com. Thank you for allowing me to serve you and CSEA. PAID ADVERTISEMENT Jean Nelsen, EA, CSEA President 4

5 The Society EVP Perspectives Setting Ourselves Apart By Scarlett D. Vanyi, CAE I t isn t every day that an industry experiences revolutionary change that forever alters the complexion of its landscape. But that is exactly what s happening in the tax preparation field at this very moment. Fueled by a growing need to protect the taxpaying public from unscrupulous and unqualified tax preparers and a desire to more readily communicate with and oversee tax preparers, last year the Internal Revenue Service (IRS) launched a rigorous campaign to require all paid tax preparers to register for a PTIN (preparer tax identification number) to be able to prepare and file tax returns as of January 1, Not surprisingly, what followed was a deluge of tax preparers registering for PTINs in order to be in compliance while going about their business filing tax returns on behalf of thousands of American taxpayers. However, important to note, not all PTINs are alike. Practitioners who are not Enrolled Agents, certified public accountants or attorneys are being issued provisional PTINs that allow them to prepare tax returns while the IRS formulates and launches the next step in its new oversight plan competency testing. Meanwhile, the IRS expects to continue issuing provisional PTINs through April 18, 2012 to allow preparers to remain in compliance while the new testing rolls out. With phase one of its new regulatory regimen implemented and all PTINs coming up for annual renewal on December 31, 2011, the IRS has shifted focus to the second stage of its new oversight program aimed at testing the competency of preparers who don t fall into one of the legacy Circular 230 categories of Enrolled Agents, certified public accountants and attorneys. To that end, the IRS announced that it will begin conducting minimal competency testing this month for non-legacy Circular 230 preparers who will be required to pass the competency examination that only covers individual income tax returns (specifically, Form 1040) by December 31, These preparers will also have to undergo a suitability check (including fingerprinting that will be compared with the Federal Bureau of Investigation database) and complete 15 hours continuing education annually beginning in The IRS will designate individuals who pass the exam and meet these requirements as Registered Tax Return Preparers (RTRPs), thus creating a new classification of paid tax preparer. RTRPs will be authorized to prepare federal tax returns and to represent clients only during an IRS examination of a tax return that the RTRP prepared. As this new category of tax preparer forms, Enrolled Agents must be poised to differentiate the EA designation from other preparer classifications and must be ready to educate taxpayers about the differences between preparer classifications so the taxpaying public can distinguish from among preparer types. Three key characteristics are most important in differentiating EAs from RTRPs: (1) the fact that the test that EAs must pass to earn their designation is a far more extensive exam with three separate parts meant to test for competency in all facets of taxation including both individual and business matters; (2) the fact that EAs are required to complete 60 percent more continuing professional education than RTRPs; and (3) the fact that EAs are qualified and permitted to represent taxpayers before all divisions of the Internal Revenue Service, on all tax matters, including returns prepared by others. This characteristic may not sound critical to the average taxpayer unless or until that taxpayer faces an IRS inquiry involving any IRS division other than Audits. It s in these very cases that the taxpayer most needs expert representation from a highly qualified practitioner, and it s in these very cases that Enrolled Agents become paramount to the taxpayer s representation arsenal. In addition to making clear the differences between tax preparer designations, leaders of California Society of Enrolled Agents are embracing the opportunity this new program presents to raise the overall level of professionalism and expertise among the tax preparer community. Although the Society s focus is clearly on Enrolled Agents, CSEA has always welcomed other tax preparers into the Society with open arms and is pleased to continue supporting practitioners working toward their designation of choice with intensive continuing professional education that will prepare them to serve taxpayers and effectively manage a tax practice. Beyond serving tax practitioners as their chosen trade organization, what sets CSEA apart from many others is its dedication to protecting and promoting sound tax policy for the betterment of both the profession and the taxpayer. And even as the tax landscape changes before us, this is one tenet that will surely never change. Scarlett D. Vanyi, CAE is the Executive Vice President of California Society of Enrolled Agents. She holds a Bachelor s of Science Degree in Organizational Behavior & Leadership from the University of San Francisco and recently received designation as a Certified Association Executive (CAE) from the American Society of Association Executives. Ms. Vanyi has more than 16 years of experience in the nonprofit association and legislative advocacy arenas and has expertise across a wide array of nonprofit management disciplines including organizational governance, strategic planning, membership development, internal and external communications and marketing, event and meeting management, governmental relations, operations and program development, budget and finance, and human resource management. 5

6 Legislative CSEA Wants YOU! By Joel Hendriks, EA What is the most effective tool in the CSEA Legislative Committee s toolbox? YOU are! The best advocate for the Enrolled Agent profession and the taxpayers they serve is an Enrolled Agent. In a survey on the level of influence of various methods of legislative contact, 60 percent of respondents indicated that in-person visits from constituents carried a large amount of influence. Contact from a person who represents many constituents (think of EAs representing their clients) came in second, with 47 percent of respondents indicating a large amount of influence. As you can see, there is no substitute for constituents and/or those who represent them meeting with legislators and their staff. The relationships you build and the contact you make with your legislators are the most effective ways of protecting the interests of YOUR profession and of the clients YOU serve! There are many CSEA Members who have volunteered countless hours of their time for many years to this important work. Enrolled Agents are the voice of taxpayers, and we need to speak with a powerful voice. The more voices we have, the louder our message is. This is why CSEA wants YOU! If every Member contributes, even in a small way, our voice will be heard. How do you get started making a legislative impact? 1. Know who your representatives are. 2. Contact your Chapter s Legislative Affairs Committee Chair to discuss visiting your legislators in their district offices. 3. Register to attend Jim Stern Legislative Day on January 6, It is absolutely critical that you know who represents you in the California Senate and Assembly. If you need help finding this information, you can look up your representatives by zip code at Once you have your results, follow the link to the legislator s website. You will find this to be an extremely valuable preparation tool before you reach out to the legislator. Paying a visit to the district office of your Senator or Assemblyman and developing a relationship with the legislator and staff is crucial to the success of CSEA s legislative activities. Your Chapter s Legislative Affairs Committee Chair is your very best resource before you make your first visit to your legislator. Your Legislative Chair can provide materials to help you prepare for a meeting, inform you of the issues currently on the CSEA radar, and even help team you up with another EA in your district. It is important to get to know the staff at the local district offices. Offer yourself as a resource on all tax matters; you want them to think of you when questions arise about tax policy. When an important matter affecting the Enrolled Agent profession or taxpayers comes up, you will already be in a position to offer advice and insight. Why attend Jim Stern Legislative Day? The answer is pretty simple: it s fun! You get to run around the State Capitol building in Sacramento, telling the California Legislature that you are an Enrolled Agent and explaining what that means! There s no need to convince a previous attendee to attend again the following year. Anyone who has participated in the past already knows how fantastic this event is. I imagine if we took the time to look over previous registration information, we would find that the number of repeat registrants is quite high. Of course, this event is more than just fun and games; Jim Stern Legislative Day is a crucial component of CSEA s legislative efforts. For first timers, it s a great crash course on grassroots advocacy. You will get to learn from pros and hear insights from professional lobbyists and legislative analysts. At your scheduled office visits you have the comfort of knowing that you won t have to go it alone. You will be paired with a veteran advocate who will show you the ropes. After attending Jim Stern Legislative Day you will be equipped to go back to your Chapter and start spearheading a local legislative initiative. For the experienced advocate, Jim Stern Legislative Day is a great way to gain new legislative contacts, facilitate discussion about the previous year s activities and promote strategic planning for the new year. Commit today to become an advocate for your profession and for the taxpayers you serve. Enjoy meeting your legislators, and I ll see you in January at the Capitol! Joel Hendriks, EA is Vice Chair of the CSEA Legislative Affairs Committee, and the owner of Prospect Financial Solutions. He has owned his tax and business services practice since He specializes in real estate professionals, multi-state tax issues, tax-exempt organizations, and Charitable Remainder Trusts. Joel can be reached at joel@myfinancialprospect.com. 6

7 Features CSEA Members, Tax Agencies Representatives Collaborate O n Friday, Sept. 23, 2011, CSEA held its annual, widely anticipated State Tax Agencies Liaison meeting at the Hyatt Regency in downtown Sacramento. Representatives from the Employment Development Department (EDD), Board of Equalization (BOE) and the Franchise Tax Board (FTB) gathered to field questions from participants and to provide insight into some of California s more complicated tax issues. Nearly 70 attendees, along with 34 agency panelists and representatives, participated in the informative Q&A session, where CSEA members were given the opportunity to address specific tax matters or inquire about agency procedures. (For the FTP panel questions and responses, please see page 19.) The information gleaned at this event is invaluable, both for the agencies and the audience members. CSEA would like to thank all of those in attendance and encourage those unable to participate to plan for it next year. This is a CSEA event not to be missed! Vicki Mulak, EA (center), moderator of the State Tax Agencies Liaison Meeting, and FTB panelists enjoy a light-hearted moment during the afternoon session. Attendees listen diligently to panel members. Catherine A. Clow, EA, Steve Sims, EA, Taxpayers Rights Advocate, FTB, and Patrice Gau-Johnson, Assistant Director, Legislative Services Bureau, FTB, stop for a quick photo opportunity. Selvi Stanislaus, Executive Officer, FTB, addresses the room at the beginning of the afternoon session. It was standing room only in the Golden State Room at the Hyatt Regency Sacramento. Attendees Gina Rodriquez, EA, Vice President, State Tax Policy, CalTax, Karen Brosi, EA, CFP and Lynn Freer, EA were all smiles at the end of the day. 7

8 Features Continuing Education and Recordkeeping Requirements By Irene Lawrence, EA On June 3, the IRS issued its long-awaited revision of Circular 230. Most of the changes fall into three categories: the Return Preparer Office (RPO), a spin-off from the Office of Professional Responsibility (OPR); the introduction of Registered Tax Return Preparers (RTRPs) as practitioners governed by Circular 230; and changes in continuing education (CE) requirements for all, but especially for CE providers. This article will deal with the CE requirements mostly as they apply to us rank-and-file EAs, the consumers rather than the providers of continuing education. A little background: in her remarks at the 2011 CSEA Super Seminars, OPR Director Karen Hawkins mentioned that OPR had been performing compliance checks on Enrolled Agents continuing education, and that the EAs who were audited did not, in general, do particularly well in providing substantiation for the CE hours that they had claimed. Ms. Hawkins added that she personally thought that most of those EAs had indeed completed the hours they claimed, but their recordkeeping was not, to put it mildly, up to the usual EA standard of excellence. With the spin-off of the new RPO to handle the administration of Circular 230 practitioners including the new RTRPs, OPR will be free to concentrate even more on ethical issues. It is only common sense to expect that in the future OPR will pay even more attention to CE compliance. Therefore, now might be a good time to check that our own recordkeeping is compliant and up to date. First, a quick look at the changes as they affect us consumers of education: We are now required to keep our records for four years (formerly three) from our date of renewal. The CE provider (formerly, the sponsor ) is required to obtain a continuing education provider number and, for each program presented, a continuing education provider program number. We as education consumers are required to keep a record of the program number (in addition to everything else). As before, programs may be classes or self-study, face-toface, written or electronic, and instructors may claim credit for preparation and teaching hours, although the maximum instruction credit hours allowed has been severely limited. However, practitioners may no longer claim CE credit for writing and publishing articles (such as this one). As for the rest of the CE requirements, there has been no change in the CE hours required for renewal for EAs. To review, EAs must obtain 72 hours in the three-year cycle, with a minimum of 16 hours in any one year, and a minimum of two hours of ethics or professional conduct in each year. RTRPs, who apparently at this time must renew annually, must obtain 15 hours each year, including two hours of ethics or professional conduct and three hours of federal tax law updates. Every CE program for EAs and RTRPs must be a qualifying program designed to enhance professional knowledge in Federal taxation or Federal tax related matters and be a qualifying continuing education program consistent with the Internal Revenue Code and effective tax administration. Note that Federal tax related matters is usually construed to cover state taxes, but the issue does come up from time to time. Also note that Members and Associates of the California Society of Enrolled Agents and the National Association of Enrolled Agents are required to complete 30 hours of CE each year, although the extra hours may be in more peripheral subjects such as practice management. The administrative requirements for a qualifying CE program also have not changed. They must include physical attendance and a qualified instructor/leader/speaker for formal programs, or registration and a measure of completion, usually an exam, for individual study programs; a certificate of completion; and written or electronic educational materials. Instructors can find their parallel requirements in 10.6(f)(2)(iii). Once we have taken our qualifying courses, we have to keep substantiation and that is where EAs have been weak. Again, the period is now four years following the date of renewal. Let s take as an example Emma Agent, EA, whose year of renewal is Her three-year period prior to renewal is 2009, 2010, and She completes all her required CE, distributed appropriately through the three years, and renews her enrollment in April She is required to keep her records from 2009, 2010, and 2011 until April 2016, four years after her renewal date of April Thus her oldest records may be seven years old before she may safely discard them. continued on p. 9 8

9 Features continued from p. 8 RTRPs also must keep their substantiation for four years after renewal, but currently their renewals are annual rather than triennial. Thus an RTRP who renews in 2012 will have to keep until 2016 only substantiation for education claimed in 2011 and later. Now, what information is Emma (and are we) required to keep? Our recordkeeping requirements are summarized in Circular 230, 10.6(h)(1). (Instructors can find their requirements in 10.6(h)(2).) Recordkeeping Requirements: The name of the sponsoring organization; The location of the program; The title of the program; The qualified program number; A description of its content; Written outlines, course syllabi, textbook, and/or written or electronic materials provided or required for the course; The dates attended; The credit hours claimed; The name(s) of the instructor(s), discussion leader(s), or speaker(s), if appropriate; and The certificate of completion and/or signed statement of the hours of attendance obtained from the CE provider. Customarily, this information is included on the Certificate of Completion that the provider issues. Presumably, providers will include the new program number on new versions of their certificates as the numbers begin to be required. Nevertheless, it is ultimately the practitioner s responsibility to keep all the required information and find it again if audited! Because of the complexity and magnitude of the issues involved in setting up the RTRP program, the Treasury Department and the IRS have decided to delay implementing the continuing education program requirements for RTRPs for at least the first year of registration. But that doesn t let EAs off the hook. The next time the Director of the Office of Professional Responsibility discusses EA educational compliance, let s be the standard setters. Irene Lawrence, EA, has her own practice, Lawrence Associates, now in Menlo Park, CA. Her tax specialties are personal income taxes and expatriate taxes. She has been active in CSEA, first in the East Bay Chapter, then in the Mission Chapter, since she became an Enrolled Agent in She has served many years on the CSEA Ethics and Professional Conduct Committee, and was President of CSEA in Her first career was as a teacher and professor; she holds a B.S. in mathematics from Stanford University, and a Ph.D. in theology and linguistics from the Graduate Theological Union in Berkeley, CA. She can be reached at irene@lawrencetax.com. PAID ADVERTISEMENT 9

10 Features How Self-Employment Tax Applies to California RDPs and Same-Sex Couples By David M. Fogel, EA, CPA and Joe Calderaro, EA Introduction The IRS has taken the position that in the case of California Registered Domestic Partners (RDPs) or same-sex couples, if one of the partners carries on a business, and if the income from the business constitutes community income under California law, self-employment tax must be paid by both partners. This represents a departure from IRC 1402(a)(5) (A), which holds that only the spouse that carries on the business is liable for self-employment tax. How did the IRS reach this position? Is it constitutional? Is it likely to change in the future? Background The California Domestic Partner Rights and Responsibilities Act of 2003 ( California Act ), which became effective January 1, 2005, provided that RDPs shall have the same rights, protections and benefits, and shall be subject to the same responsibilities, obligations and duties under the law as are granted to and imposed upon spouses. The California Act, however, provided that earned income may not be treated as community property for state income tax purposes. On September 29, 2006, California enacted Senate Bill 1827, which repealed this language by providing that as of January 1, 2007, earned income would be treated as community property for state income tax purposes. Accordingly, California currently treats the earned income of RDPs as community property for both property law purposes and state income tax purposes. California also gives RDPs the right to enter into agreements identical to premarital agreements between prospective spouses. In Chief Counsel Advice (5/5/2010), the IRS announced that since federal law respects state law property characterizations, the federal tax treatment of community property should apply to California RDPs. Consequently, for tax years beginning after December 31, 2006, a California RDP must report one-half of the community income of the couple, whether received as compensation for personal services or as income from property, on the RDP s separate federal income tax return. The IRS also issued Letter Ruling (5/28/2010) that reached the same conclusion. Neither of these two rulings addressed the issue of self-employment tax. IRC 1402(a) and its Applicability to RDPs and Same-Sex Couples IRC 1402(a) states: The term net earnings from self-employment means the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business, plus his distributive share (whether or not distributed) of income or loss described in section 702(a)(8) from any trade or business carried on by a partnership of which he is a member... [emphasis added]. This provision indicates that only the person carrying on the trade or business has net earnings from self-employment from that business, and only the person who is a partner in a partnership has self-employment income from that partnership. IRC 1402(a)(5)(A) provides that when the income from a business is community income, the income will be treated as net earnings from self-employment of the spouse carrying on such trade or business except where the business is jointly operated by both spouses. IRC 1402(a)(5)(B) provides a similar rule for the distributive share of income from a partnership; such income is self-employment income of the partner and not the partner s spouse. As a result, with respect to sole proprietorships, if the net income from a trade or business is community income, self-employment tax is imposed on the spouse carrying on the trade or business. The same holds true regarding partnerships. The entire distributive share of a married partner s income from a partnership trade or business is attributable to that partner for purposes of self-employment tax even if such income is considered community income. If both spouses are partners, then any self-employment tax is allocated based on their distributive shares. However, since RDPs aren t treated as spouses for federal income tax purposes, the IRS has taken the position that the community income rules of IRC 1402(a)(5)(A) and (B) don t apply, and therefore the community income of one RDP s business must be split with the other RDP for purposes of self-employment tax. As a result of this position, the IRS revised Publication 555 to provide that RDPs and same sex couples in California are continued on p

11 Features continued from p. 10 required to report community income for self-employment tax purposes the same way they do for income tax purposes, i.e., the partners must split the income 50/50. 1 This requires the non-earning partner to pay self-employment tax, which is contrary to the general rule that applies to married spouses. Is the IRS s Position Constitutional? Before 2004, IRC 1402(a)(5) didn t use the word spouse, but rather, it said that the net income of a business that was community income was income of the husband for purposes of self-employment tax unless the wife managed and controlled the business. The language was changed by the Social Security Protection Act of 2004 (P.L , Act. 425) because the same language that existed in 42 U.S.C. 411(a) (5)(A) (the Social Security Act) was declared unconstitutional since it discriminated on the basis of gender. 2 The word spouse in IRC 1402(a)(5) is defined by the 1996 Defense of Marriage Act or DOMA (P.L ) as a person of the opposite sex who is a husband or wife. Neither same-sex RDPs nor same-sex couples satisfy this definition. But is this definition constitutional? In Gill et al. v. Office of Personnel Management, 3 the District Court for the District of Massachusetts ruled that this definition is unconstitutional because it violates the equal protection principles embodied in the U.S. Constitution. The government has appealed the decision to the First Circuit. On March 2, 2011, four tax practitioners sent a memo to the IRS Chief Counsel and Commissioner (W&I Division) urging them to revise Pub In part, they pointed out that the IRS s position in Pub. 555 creates a unique situation where a non-working person (an RDP in a community property state) is treated as having net income from self-employment, which is a position not supported by the legislative history of IRC 1402(a)(5). The IRS has not indicated that it will change its position. Conclusion Given that IRC 1402(a)(5) uses the word spouse, that DOMA excludes treatment of RDPs or same-sex couples as spouses, and that the federal government has appealed the Gill case to the First Circuit, it is unlikely that the IRS will change its position in Pub. 555 that both RDPs and partners in a same-sex marriage are required to treat community income from one partner s business as net earnings from self-employment. Perhaps someone will challenge the IRS s position in Tax Court or another tax-related forum sometime in the future. About the Authors: David M. Fogel, EA, CPA is a self-employed tax consultant and frequent contributor to the California Enrolled Agent. He provides tax consulting services to other tax practitioners and represents clients before the various tax agencies. David has more than 37 years of experience in tax controversy work, including 26 years working for the IRS. He can be reached by at dfogel@surewest.net or on the Internet at fogelcpa.com. Joe Calderaro, EA is tax resource specialist for the California Society of Enrolled Agents. His primary responsibility is to provide technical and procedural support to CSEA members. Joe retired from the IRS after 42 years where he provided similar services to IRS personnel in the Examination and Collection areas. He can be reached by at jcalderaro@csea.org. 1 See Publication 555, Community Property (Rev. Dec. 2010), p.6. 2 See Carrasco v. Secretary of Health, Education and Welfare, 628 F.2d 624 (1st Cir. 1980); Becker v. Harris, 493 F.Supp. 991 (E.D. Cal. 1980); and Hester v. Harris, 631 F.2d 53 (5th Cir. 1980). In Rev. Rul , C.B. 119, the IRS agreed to follow these decisions. 3 Gill et al. v. Office of Personnel Management, 699 F.Supp.2d 374 (D. Mass. 2010), gov t. appeal to 1st Cir. pending. 4 See Memorandum from Donald H. Read, Attorney, Patricia A. Cain, Inez Mable Distinguished Professor of Law, Pan Haskins, CPA, and Karen K. Stogdill, EA (Document No , Tax Analysts, Inc.). PAID ADVERTISEMENT negotiate tax debts with the IRS for professionals ONLY A how to manual by a former IRS tax collection manager learn what 30 years of experience can show you. everything you need to know to resolve your clients tax problems TaxNegotiatorGuide.com 11

12 Features Challenging Times for Offers in Compromise By Terrence J. Moore, Esq. They used to work. In fact, I was very aggressive and successful with Offers when I did them. I was even very successful with Offers when the IRS announced that they had low acceptance figures. My success rate was about 98 percent. Further, I did not just pick and choose to submit good Offers. A lot of my Offers required hours of preparation prior to submission in order to make them work. But times have changed. The Changes As of July 16, 2006 the IRS changed the rules. The rules now require that: Taxpayers filing Offers (excluding doubt as to liability Offers) will have to specify whether they are filing a lump sum or periodic payment Offer. Taxpayers submitting a lump-sum Offer shall make a 20 percent nonrefundable, up-front payment to the IRS; Taxpayers submitting a periodic-payment Offer must make a nonrefundable, up-front payment, plus continue to make monthly payments while the Offer is pending. 1 A lump-sum Offer means any offer of payments made in five or fewer installments. A periodic payment Offer means any offer of payments made in six or more installments. Plus, the IRS now considers a good faith Offer to be one in which the taxpayer offers the realizable value of his/her assets plus the total amount of cash that could be collected over 60 months of payments (or the remainder of the statutory period for collection, whichever is less). Realizable value is defined as the quick sale value (amount that a taxpayer could reasonably expect from the sale of an asset if sold quickly, typically in 90 days or less) minus what the taxpayer owes a secured creditor on the asset. These numbers can be obtained by the addition of all the taxpayer s assets required to be listed in the F-433A and the amount of the taxpayer s monthly gross income over the National Standards. Unfortunately, in changing the rules, the IRS also changed the success rate of Offers. You also need to make your clients aware that the present marketing for Offers is exaggerated and it is likely that their Offer will not work unless they fall neatly into the little box that Offers have been created for. You need to understand that Offers are now basically useless. If you try to push one through, there is a good chance it will fail and then your client will place their disappointment (and perhaps their lost deposit) on you. You don t need or want this. I first noticed the ineffectiveness of Offers around September At that time, I was working an Offer for a taxpayer who owned a construction company. The company was struggling and its current expenses far exceeded its income. Under the prior guidelines the Offer should have come in somewhere around $5,000 to $8,000. Yet, the IRS came back and wanted over $300,000! Of course the taxpayer was unable to pay that amount. Even if the taxpayer had the funds, it would have been hard to convince the taxpayer that this was indeed an Offer! I inquired with the Agent as to why the amount was so high. The Agent stated that under the new rules anyone who submitted an Offer and owned a business would have to offer at least 50 percent of the prior year s gross income. Not 50 percent of the gross profit, but gross income! I told the Agent that this made no sense. No company is ever left with 50 percent of their gross income after expenses. In fact, most companies would be thrilled to be left with 20 percent of their gross income post expenses. The Agent simply stated that was one of the new rules. Business Pays 50 Percent of Gross Profit Under the new Offer rules anybody who submits an Offer and owns a business will not be successful in their Offer unless they Offer 50 percent of the prior year s gross income. This is one of the new unrealistic rules associated with Offers. Non Refundable Deposit Another unrealistic rule is the requirement of an up-front nonrefundable deposit. This is not a deposit at all, but an advanced payment toward tax. It is a misnomer to call it a deposit. If it was a deposit then it should be returned to the taxpayer if the Offer is rejected. But it is not! If the Offer is rejected the IRS keeps the deposit. It does not matter why the Offer is rejected. I worked on a case where an Offer was pending and the IRS requested additional documentation, due by the 15 th of the month. I provided the information to the IRS by the 10 th, with proof of receipt from Federal Express. Subsequently, I received a letter from the IRS that the Offer was rejected because I had not provided the proper documentation in time. I contacted the IRS and explained that I had provided the documentation and, in fact, provided it early. Further, I had confirmation that the information was received. The Offer unit indicated that they were sorry for their mistake, but the Offer was already rejected and it was now out of their inventory. Nothing further could be done. Of course, they took my client s deposit. continued on p

13 Features continued from p. 12 Under the new Offer rules, the deposit needs to be at least 20 percent of the Offer amount. The Offered amount is determined by an analysis of the 433. If you do not undertake a proper analysis of the 433 or have miscalculated the amount of the minimum Offer, then whatever deposit the taxpayer offered will immediately be lost. If this happens because of your miscalculation it will be your fault that the taxpayer s deposit was lost. For instance, let us consider the minimum Offer amount for a single taxpayer living in Orange County, California with no kids, who is earning a gross monthly income of $3,336 and has various monthly expenses (including $500 of tax withholdings), leaving a monthly excess of $125. The only assets the taxpayer possesses are a 2006 Jeep which is paid off and worth $3,500 and an IRA worth $4,000. In this case the minimum amount of the Offer should be $10,806. This is calculated by the quick sale of the vehicle being $2,800. The vehicle can be discounted 20 percent to account for its quick sale value. The IRA has a net value of $1,800 (after early withdrawal penalties and taxes paid at the time of distribution). The IRS considers the excess monthly income of $125 having a value of $6,205. (The IRS allows a present discount of percent for the present value of $125 for 60 months.) Thus, in this scenario where the taxpayer has very few assets and no real expendable income, a minimum Offer is required to be no less than $10,806. Consequently, the up-front nonrefundable deposit in this matter would be $2,161. If your client is willing to put $2,161 at risk then this Offer should be submitted. However, imagine if the taxpayer was married, had four children and the same exact assets as the taxpayer in the prior example, but owned a home in Orange County, California, with a monthly mortgage payment of $3,485 and monthly utilities of $480 equaling a total of $3,965 in monthly housing and utilities expenses. Similarly, the taxpayer also had $125 monthly excess income after his expenses and his mortgage are considered. However, under the National Standards the taxpayer is only allowed $2,742 of out his monthly income to spend on his family s housing and utilities. The difference between allowed housing and utilities of $2,742 and the taxpayer s actual housing and utilities of $3,965 is $1,223. The additional $1,223 is considered excess income by the IRS (even though in reality the taxpayer is only left with $125 extra per month). In this scenario, the IRS considers that the taxpayer has total excess monthly income in the amount of $1,348 ($1,223 plus $125). The realizable income in this case has just jumped to $66,914. A 20 percent deposit which equals $13,382 in this scenario is staggering. Is your client willing to risk $13,382 as an up-front nonrefundable deposit with no guarantees? I doubt it. I have explained the deposit requirement to my clients and informed them that in order to have a successful Offer they must submit a deposit. Further, once we submit the Offer there is at least a 70 percent chance that the IRS will simply take the money and deny the Offer. Think about it. There is no incentive for the IRS to accept Offers if taxpayers continue to submit deposits (advanced payments) with them. Why should the IRS accept Offers? The IRS has now come up with a new tool for raising money without having to do much work. I often discourage my clients from submitting an Offer because I know they will be unhappy with the results. Eventually, they will turn their unhappiness on me and not the IRS. So be wary of your clients who want to submit an Offer. Make sure you provide them with sufficient written warning that they could (and likely will) lose their deposit. Their memory will become selective and they will forget your prior warnings after their Offer is denied, and their deposit is taken by the IRS. Other Alternatives Payment Plan: Even though Offers do not work, there are still several alternatives available for resolution. The first alternative is to establish a minimum payment plan for your client. In my opinion, a minimum payment plan is somewhere in the neighborhood of $100 or less. With proper planning most skilled tax professionals can obtain a payment plan for $100 a month or less. To establish this you will need to look at the language contained in the One Year Rule which will be quite helpful. Bankruptcy: Another alternative is to file bankruptcy. Income taxes can be discharged in a Chapter 7 Bankruptcy. 2 In order for the taxes to be discharged the tax returns must have been due for three years, the returns themselves filed for at least two years and the tax assessed for at least 240 days. In many instances, you might consider placing your client into a minimum installment agreement until these deadlines are met. The Installment Agreement will not extend the statute of limitations. Statute of Limitations: The other alternative is to simply wait for the statute of limitations to expire. The statute of limitations on collections is 10 years. After 10 years the IRS must stop collections 3 unless the taxpayer has signed a waiver. 4 Recently, I was counseling a taxpayer who had been in collections for eight years. He explained to me that although the IRS was not presently pursuing him he wanted to submit an Offer to finally rid himself of his tax debt. I explained to him that first, by submitting the Offer he will extend the statute of limitations on collections; 5 and second, it is unlikely that his Offer would be successful, and an up-front nonrefundable deposit would be required. Thus, he might want to simply wait two more years for the statute of limitations to expire. It is not that Offers cannot be done. But under the current rules, it is likely that the Offer will be unsuccessful and your continued on p

14 Features continued from p. 13 client will lose their deposit. Thus, you need to at least consider other alternatives for your client and explain all the pros and cons before going forward with an Offer. Terrence J. Moore, Esq. is the principal in Moore & Affiliates, APLC in Santa Ana, CA. Mr. Moore started out as a tax attorney, with a Master in Tax Law (LL.M.) in However, his practice has grown so that he represents many businesses and individuals in tax and business matters. Mr. Moore has been assisting individuals and businesses to resolve their legal issues with the IRS or other creditors ever since. If you have any questions or need Mr. Moore s assistance you can contact him at tjmlaw@pacbell.net or , or at Moore & Affiliates, APLC, 1010 N. Ross St. #400, Santa Ana, CA The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), section 509: Effective July 16, 2006, federal law changed the way the offer in compromise (OIC) program operates and its role in the Internal Revenue Service collection process. In general, this means that: taxpayers submitting lump-sum offers must make a 20 percent nonrefundable, up-front payment to the IRS; taxpayers submitting a periodic-payment OIC must make a nonrefundable, up-front payment, plus any other proposed payments that may be due, while the IRS is evaluating the offer U.S.C. Section 507(a)(8), to the extent that taxes are not priority taxes they are dischargeable in a chapter 7. In short, dischargeable taxes are those where returns have been due for these three years, the tax returns have been filed for at least two years and taxes have been assessed for at least 240 days, certain tolling events can occur to extend the statutes. 3 IRC 6502(a)(1) Length of period. Where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun. 4 There may be an extension of the collection period if the taxpayer agrees to extend the collection period. IRC 6502(a)(2) (2) if (A) there is an installment agreement between the taxpayer and the Secretary, prior to the date which is 90 days after the expiration of any period for collection agreed upon in writing by the Secretary and the taxpayer at the time the installment agreement was entered into; or (B) there is a release of levy under Section 6343 after such 10-year period, prior to the expiration of any period for collection agreed upon in writing by the Secretary and the taxpayer before such release. Also see Rev. Reg The Offer Form 656 and the T(h)(2) of the Treasury Regulations both allow for the statute of limitations to be extended by the amount of time the Offer is pending plus 30 days. If You were the Judge CASE A tax preparer in San Diego, CA, used his ethnic ties to insinuate himself into a minority community. He obtained fraudulent Social Security numbers and also stole the names and Social Security numbers of his clients minor children and names and Employer Identification Numbers from his business clients. From 1997 through 2004 he used these identities to hide his assets, filing 40 fraudulent federal income tax returns and evading $245,000 in federal income tax. Not content with this largesse, he further filed fraudulent applications and received over $38,000 in medical care under Medi-Cal; $53,595 in Cash Aid and Food Stamps; and $40,711 in subsidized housing costs. After a lengthy trial he was sentenced in 2011 to: A. Pay $1,667,428 in restitution, fines and penalties. Serve 240 days of community service, not to include volunteer tax preparation. B. 132 months in prison, pay prosecution costs of $36,051, assessments of $3,200 and restitution to be determined later. C. 9 years in prison, a fine of $250,000 and $416,857 in restitution. D. 48 months in prison followed by one year of supervised release, pay all back taxes with all penalties and interest and a permanent injunction from further activity as an income tax preparer. See page 28 for answer 14

15 Features 15

16 SUPER SEMINAR 2012 TAX PROFESSIONALS: Don t Miss the Premier Education Event for your Profession!!! ABOUT SUPER SEMINAR The BEST Networking!!! CSEA s premier educational offering is Super Seminar. Established in 1983, Super Seminar has grown to be the most respected and renowned gathering of hundreds of tax professionals in the nation. Supers Offers You: Up to 25 Hours of quality CPE! 10 of the best, most requested Speakers! A Full Exhibit Hall! Fellowship, Networking, and Fun! The BEST Exhibitors!!! SUPERS SPEAKERS Super Seminar speakers are simply the BEST in the business. These proven experts provide in-depth education on timely subjects chosen to meet the requirements of your tax practice invited speakers include: The BEST Tax Education!!! Join the Most Respected Gathering of Tax Professionals in the Nation. Save the Dates!!! Two Fabulous Locations: May 15 th 17 th Bally s Las Vegas, Las Vegas, Nevada May 31 st - June 2 nd Grand Sierra Resort and Casino, Reno, Nevada 16 Frank R. Acuña, Attorney at Law C. Dale Boushley, EA, CFP Karen Brosi, EA, CFP Claudia Hill, EA, MBA Kevin C. Huston, EA, MBA Robert E. McKenzie, Esq., EA Vicki L. Mulak, EA, CFP Mark F. Seid, EA, CPA, TCP Steven L. Walker, Attorney at Law Ron Roberson, CPA WHO SHOULD ATTEND Enrolled Agents Certified Public Accountants Public Accountants Tax Practitioners Attorneys Tax Interviewers Financial Planners Estate Planners Tax Preparers Staff for all listed above 3200 Ramos Circle Sacramento, CA / phone 916/ fax

17 Features Ethics Committee Why Have One? By Rose Hablitzel, EA The California Society of Enrolled Agents takes the ethical requirements of the tax profession seriously. One of CSEA s standing committees is the Ethics and Professional Conduct (E&PC) Committee, whose mission is To ensure all CSEA Members observe high standards of ethical and professional conduct. The Committee s objectives, as stated in its Charter are: To resolve consumer complaints about Member behavior in an equitable, non-confrontational, mutually beneficial manner. To increase the awareness and observation of the National Association of Enrolled Agents (NAEA) Bylaws and Code of Ethics, the CSEA Bylaws, Treasury Department Circular 230 and applicable provisions of the Internal Revenue Code by Members. To follow the procedure with scrupulous attention to detail and the maintenance of confidentiality at all times. When the EP&C Committee gets an ethical complaint about one of CSEA s Members, it is usually following a review and an evaluation with the Association s Executive Vice President (EVP) and possibly the CSEA EP&C Chair, who are responsible for handling these types of complaints. Depending on the nature of the complaint, there are different avenues of resolution. Some complaints require nothing more than speaking to both parties and having them resolve the issue; others may require more action and a decision of the Committee or possibly a thorough investigation by a trained investigator. Items that are beyond the scope of the E&PC Committee will be channeled to the Office of Professional Responsibility (OPR) of the Internal Revenue Service. Many times the initial complaint against the Member can be easily diffused by the EVP so that it goes no further. Complaints not handled by CSEA include those that do not involve a Member, or are unrelated to an ethical issue, or that involve legal proceedings, or that are frivolous in nature. If informal procedures fail, CSEA invites the complainant to make a written formal complaint to be processed in accordance with the written rules, including prescribed processes and deadlines, which include the appointment of an independent investigator to determine the facts of the case. There are only seven items in the NAEA Code of Ethics for Members and Associates: 1. Members and Associates will, in personal and public life, strive to enhance the status of Enrolled Agents and promote their qualifications to serve the public. 2. Members and Associates will demonstrate honesty, integrity and objectivity in all of their professional actions and relationships. 3. Members and Associates will continually strive to improve upon their competence to practice by keeping informed and educated about tax practice and representation. 4. Members and Associates will maintain the confidentiality of professional relationships. 5. Members and Associates will support all efforts to advance the reputation and prestige of the EA license. 6. Members and Associates will be compliant with the most current provisions of Treasury Department Circular 230 and the NAEA Rules of Professional Conduct. 7. Members and Associates will not knowingly misrepresent or omit information in preparing or in approving and filing tax returns, documents, affidavits, and other papers relating to Internal Revenue Service matters. If a client insists on misrepresentation or omission, the Member or Associate should withdraw and refuse to prepare the return or other document. Although the NAEA Rules of Professional Conduct are lengthy, Members should familiarize themselves with them and occasionally re-examine them. They can be found in the naea.org website under the NAEA Governance tab. In Robert s Rules of Order under the Section Rights of the Society and the Accused it states: A member has the right that allegations against his good name shall not be made except by charges brought on reasonable ground. If a member is thus accused, he has the right to due process that is, to be informed of the charge and given time to prepare his defense, to appear and defend himself, and to be fairly treated. Note that the word Member is highlighted throughout this article. The E&PC Committee is one of those silent Member benefits that CSEA provides. This vital committee continued on p

18 Features continued from p. 17 ensures that disputes are handled fairly and impartially and with utmost confidentiality. Those Enrolled Agents who are non-members risk having their complaints handled directly by OPR, no matter how slight the complaint is. They do not have the benefit of mediation from CSEA or any other organization. Enhanced credibility with agencies and policymakers such as legislators and regulators is another plus for an organization that polices their own. This is an important issue as CSEA is involved in advocacy for Enrolled Agents and taxpayers. Our credibility is vital. Why have an Ethics Committee? Complaints come in to the CSEA office on a regular basis. These vary from Members not returning calls, not returning client paperwork, not handling tax returns expeditiously, passing a taxpayer s returns to be prepared on to other staff members without permission of the client, fees disputes, omission errors, and various other very common complaints. How close have you come to having a complaint against you or your business? Isn t it great to know that as a Member, the Ethics and Professional Conduct Committee has your back? Rose Hablitzel, EA, NTPI Fellow, is a partner in Lassen Tax Professionals tax and representation practice in Red Bluff, CA. She is currently Chair of the NAEA Political Action Committee (PAC) Steering Committee and a member of CSEA s PAC. Ms. Hablitzel is President of the Far Northern California Chapter of CSEA, Parliamentarian for CSEA and a member of CSEA s E&PC Committee. Contributing also was Tom Johnston, EA, E&PC Chair and Kittie Vicars, EA, E&PC Vice Chair. CSEA Networking Pays Dividends at the 2011 IRS Forums CSEA staff promoted the benefits of membership at the 2011 IRS Forums in San Jose, CA and Las Vegas, NV. With a total of more than 6,000 visitors attending this year s forums, Marketing Coordinator Ashley Soy (left) and Director of Marketing & Member Development Cary M. Steward (right) networked with current and prospective Members as they extolled the advantages of CSEA, including detailing Member benefits, reviewing opportunities for taking Special Enrollment Exam (SEE) classes, and the availability of Education Foundation scholarships. Save the Dates 2012 Jim Stern Legislative Day Friday, January 6, 2012 The Annual CSEA Jim Stern Legislative Day is your opportunity to... Represent the Enrolled Agent profession at the State Capitol Improve your understanding of CSEA s legislative activities Visit with legislators or legislative staff (CSEA will schedule visits for you) By introducing myself and other North Bay Chapter members to our Assemblyman, Jared Huffman, I am now a resource for his office on tax issues. Assemblyman Huffman has utilized Enrolled Agents for a financial literacy workshop that he sponsored and considers EAs to be the go to tax professionals. By the way, he had never heard of Enrolled Agents when we met with him the first time. Gary Anspach, EA Anspach Financial Group LLC 2012 Annual Meeting July 9-12, 2012 The Far Northern California Chapter of CSEA invites you to Soar with Eagles at the 2012 Annual Meeting, July 9-12, 2012 at the Red Lion Hotel in Redding, CA. Just five minutes from downtown and 15 minutes from the airport, and with Lake Shasta, Whiskey Town Lake, Mt. Lassen Volcanic State Park, the Sundial Bridge and other local attractions just minutes away, the 2012 Annual Meeting is an ideal getaway for Members and their families. Far Northern Chapter is hosting the event, which promises opportunities for business and fun all in one. 18

19 Features Franchise Tax Board Responds to CSEA Member Questions The Franchise Tax Board (FTB) is one of several state agencies that participated in CSEA s annual State Tax Agencies Liaison Meeting held on September 23, 2011 at the Hyatt Regency in Sacramento, CA. As a follow-up to the meeting, FTB has provided a transcript of CSEA Member questions and FTB responses. Questions and Responses 1. Since California backup withholding now applies whenever federal backup withholding applies, please provide an update as to the level of compliance achieved with backup withholding. What compliance efforts are currently being considered by FTB? RESPONSE: Although we have seen an increase in compliance since it became effective in 2010, overall compliance for backup withholding remains low. In 2009/2010, FTB received $1.2 million in backup withholding and in Fiscal Year 2010/2011, FTB received $3.2 million. We shared last year that the financial industry, represented by California Chamber of Commerce, requested additional time to implement backup withholding. As a result, penalty leniency was granted for the 2010 tax year and up to July 28, 2011 for gross proceeds on broker transactions. Now that the penalty leniency commitment has expired, we expect an increase in backup withholding and we are developing a plan to enforce compliance. FTB is currently working on developing audit models and exploring methods to accurately identify and assess penalties and a withholding liability for failure to withhold. 2. Please provide an update as to the level of compliance currently achieved with nonresident withholding, which includes nonresident partners and S corporation shareholders. RESPONSE: The compliance level for nonresident withholding has improved since last year. This is reflected in our revenue comparisons from Fiscal Year 2009/2010 to Fiscal Year 2010/2011; Nonresident Independent Contractor Withholding remittances increased by 59 percent and pass-through withholding remittances increased by 41 percent. We attribute the increase in compliance to our recent focus on education and outreach and compliance activities in these areas. Our education and outreach efforts included a team that focused on providing clarification for nonresident and pass-through withholding requirements. This resulted in updates to our publication 1017 Resident and Nonresident Withholding Guidelines, updated nonresident withholding webinars, and a new Three Stages of Withholding chart available for withholding agents. Our compliance efforts included conducting withholding audits and efforts to continue to assess withholding liabilities and penalties when a failure to withhold or remit withholding is identified. In Fiscal Year 2010/2011 we assessed 1.4 million in failure to withhold assessments. Is FTB planning to abate penalties associated with underpayments that result from discontinuance of the refundable child and dependent care credit beginning with the 2011 tax year? How many taxpayers are expected to be affected by this law change? RESPONSE: Effective for the 2011 taxable year, the Child and Dependent Care Credit (CDC credit) was revised to be non refundable. Eligible taxpayers entitled to the CDC credit will still be able utilize the credit to reduce their tax liability. However, if the credit exceeds the net tax liability, the excess credit cannot be refunded or credited to any other amount due. Abatement of penalties is unlikely to be an issue as many taxpayers claiming the CDC credit do not have a tax liability or have a very small one. However, the question may be based on an assumption that taxpayers have reduced or eliminated their withholding believing the (previously) refundable portion of the CDC credit would cover their tax liability. If taxpayers did this, it might appear that they would be liable for the penalty for underpayment of estimated tax. But the automatic waiver of the penalty for underpayment of estimated tax would apply because the deletion of the refundable portion of the CDC was in SB 86, which was chaptered in 2011 the same year for which the change was operative. (Revenue and Taxation Code section 19136(g)(1).) Several of our members have noted that FTB does not copy the representative of record (power of attorney [POA] on file) when levy action is taken against bank accounts. Is this a modification that could be made to the POA system, so that similar to IRS procedure, a copy of intended collection action is also mailed to the representative? continued on p

20 Features continued from p. 19 RESPONSE: The IRS does not send notice of pending collection action, but will mail a notice of the levy to both the POA and taxpayer after the levy has been sent to the bank. FTB does not send a notice of the levy, rather the financial institutions send the notice to the taxpayer at the taxpayer s address of record. Generally, FTB sends notices to the address provided by the taxpayer. If that address is the POA s address, the POA will receive the Order to Withhold Notice that the financial institution sends when a levy has attached a bank account. The billing notices that are sent prior to taking collection action inform the taxpayer of the pending collection actions if the balance is not paid. 5. Our members report that in spite of the difficult economy, FTB Collection activity seems more severe than a couple of years ago, and the number of Advocate cases being opened has increased as a result. Can you comment? RESPONSE: Advocate staff have verified that the number of Advocate contacts as a result of ARM collection staff actions has not increased notably in the last 12 months. However, as a result of the economy, more taxpayers are in the collection system than ever before. Taxpayers who previously paid their taxes as they became due are now opting for installment payment agreements, or entering into the collection cycle. As a result, installment agreement inventories and the length of the collection process have increased in recent years. From July 2010 to June 2011, the number of taxpayers entering into installment agreements increased 22 percent. The number of collection accounts based on selfassessed tax returns has increased by 32 percent over the last 24 months. 6. It has been reported that taxpayers who send in their installment payments before the monthly due date are notified of intent to cancel their installment agreement. Scenario: A payment due on 6/25/11 was mailed on 6/14/11. Taxpayer paid by money order that was confirmed cashed on 6/20/11 by the money order company and from the representative using MyFTBAccount. On 6/27/11, taxpayer received a notice of intent to cancel installment agreement. After three unsuccessful attempts to reach FTB and receive the call back, the fourth attempt to reach FTB staff resulted in a response that the problem had been in sending the payment early. Is this information correct? 7. RESPONSE: Yes, this information is partially correct. A non-eft payment (checks, money orders, etc.) received too early is considered an extra payment by the automated collections system. If a payment is received too early (10-15 days prior to the due date), the system does not recognize this payment as a timely IA payment. As a result, the system issues the Intent to Cancel IA letter and the IA is defaulted. When FTB discovers or is notified of this situation, the IA is reset with no IA fee. The taxpayer is advised to either pay by EFT or make future non-eft IA payments on the due date or up to five days prior to the due date. A system change has been requested to address this issue in the future. Less than five percent of all IAs are non-eft agreements. Due to the difficulty to reach FTB easily by phone, our Members report requesting information by fax, such as requests for transcripts or payments made on an account that receive no response. What is your normal turnaround time for a faxed request for information? If information requested is not timely received, what recommendations do you have as to next point of contact? RESPONSE: Fax requests for information are treated in the same manner as paper correspondence based on date received. This provides consistent and equitable treatment for all taxpayers. Processing time frames for correspondence can vary based on the time of year ranging from two months to four months. As an alternative to faxing us for client information, we recommend that practitioners use the self service options available on our website: MyFTB Account. MyFTB Account provides tax professionals immediate access to their clients information for both individuals and business entities. MyFTB Account self services include: For Personal Income Taxpayers Up to 25 estimated tax payments, estimate transfers, and extension payments made as a prepayment of the taxes your client may expect to owe. Up to 60 of the most recent payments applied to your client s balance due. A summary of each tax year with a balance due. A summary of up to 10 tax years with a balance and the total amount due. Four years of California wage and withholding information. Three years of FTB-issued 1099-G and 1099-INT information. Your clients can also change their address and phone number online and subscribe to our estimated tax payment reminder service. continued on p