California State Tax Problems and Relief Options

The Tax Foundation rates CA as 48th in its State Business Tax Climate Index. Why? Because the state has an extremely complex tax code for both businesses and individuals. While most states have just one revenue agency, CA has three different agencies responsible for collecting tax. 

The Franchise Tax Board (FTB) collects individual income tax as well as corporate franchise and income tax and administers partnership and LLC return filing. The CA Department of Tax and Fee Administration (CDTFA) collects sales and use tax, plus several excise taxes. The Employment Development Department (EDD) handles unemployment insurance, disability insurance, and paid family leave programs. 

Individuals usually only have to deal with the FTB, while business taxpayers may have to deal with all three entities, depending on the situation. To help you out, we’ve put together this resource of the most common tax problems people have with these agencies, along with a brief review of some of the most effective resolution options. To get help now, contact us at Ace Plus Tax Resolution.

California FTB Tax Problems

Individuals, corporations, and LLCs have to deal with the FTB. If you don’t pay your state income/franchise taxes, the FTB can issue tax liens, garnish your wages, and seize your assets. The state will also assess penalties against you.

FTB Penalties for Late Payments and Returns 

If you file late, the FTB will assess a penalty of 5% of the tax due. The penalty can get up to 25% of your balance, and as of 2023, the minimum penalty is the lesser of $135 or 100% of the tax. If you pay late, you will incur a 5% underpayment penalty. Plus, you’ll incur an additional 0.5% penalty every month for up to 40 months until you pay. 

There are also a variety of different penalties for filing S-corp and LLC returns late, underpaying estimated taxes, writing bad checks to the FTB, and not paying electronically if required.

FTB Tax Levies (Click left for “How to Stop FTB Tax Levies”)

If you don’t pay your taxes, the FTB may issue a tax levy. Tax levies are when a tax agency seizes your wages, bank accounts, and other assets. If the FTB seizes your assets, they will add the costs of seizing and selling your assets to your balance due, and they will apply any remaining amount gained from the tax levy to your tax debt.

Tax Audits

The Franchise Tax Board (FTB) conducts audits on both personal and business tax returns to ensure compliance with California tax laws. If your individual income tax return is audited by the IRS and there are changes, it is important to notify the FTB, as they may adjust your state return based on these changes. If you don’t notify the state, you risk incurring penalties and other consequences. 

Statute of Limitations on Tax Collections

The FTB has 20 years to collect unpaid taxes, and the time clock for the statute of limitations (SOL) starts on the date the oldest tax liability becomes due for that year. Tax liabilities encompass a variety of charges and fees imposed by the FTB. This includes lien fees and collection cost recovery fees, among others. 

So, imagine that you file and the FTB processes and enters into their system a CA state tax return in April 2024. That is the date of your tax assessment, and initially, the 20-year statute starts on this date. However, let’s say that you don’t pay the taxes, and a year or two later, the state issues a tax lien. Now, the fee becomes the latest tax liability associated with that tax period, and the 20-year SOL starts at that point. 

To put this very simply, you most likely cannot outrun the clock on a CA tax debt. If you owe the FTB money, they have decades that they can come after you. To continue with the above example, imagine that you contact the agency and set up a payment plan. When you pay the installment agreement fee, that’s considered to be the latest tax liability, and now, there is another 20 years on the SOL. 

Relief Options for FTB Back Taxes

If you owe back taxes to the FTB, you may be able to resolve the issue with one of the following options. Or talk with a CPA who specializes in tax collection problem resolution for more details about the best path forward in your unique situation. 

Monthly Payments for CA Income/Franchise Taxes

The FTB allows individuals to make payments on their tax bills if the following conditions are met:

• You owe $25,000 or less.
• You can pay off the full bill within five years or less. 
• You’ve filed the last five years of state tax returns. 

Businesses may be able to get payment plans on FTB taxes if they are compliant with filing requirements and can pay off the bill within 12 months. You may need to provide the FTB with financial details, and as of 2023, there is a $34 set-up fee for individuals and $50 for businesses. 

Innocent Spouse Provisions With the FTB

If your state tax bill was due solely to your spouse, you may be able to get relief. However, you generally cannot have knowledge of the income that led to the tax bill. At the time you make a request for relief, you should be no longer married to, legally separated from, or no longer living in the same household as the non-claiming spouse. Unfortunately, though if the state seizes your tax refund for your spouse’s debt, you cannot get that back (unless you have a court order regarding a debt from before you were married).

Offers in Compromise

The FTB allows both individuals and businesses to settle their tax bills for less than they owe through the Offer in Compromise program. When you apply, the state won’t start any new collection actions, but it will continue with actions (garnishments, etc) that are already underway. The review process can take four to six months, and if the FTB accepts your offer, you need to pay it as a lump sum. 

CDTFA Sales and Use Tax Problems

Generally, you only have to deal with the CDTFA if you have a business that collects sales tax in CA. However, individuals without seller’s licenses can sometimes incur use tax liabilities. 

Like all other states, CA takes sales tax very seriously. Because you collect these taxes directly from your customers, the state expects you to pay them on time and in full. Here are some of the problems you may face with this agency. 

Audits of CDTFA Tax Returns

The CDTFA has the right to audit business returns that have been filed in the last three years. If you have unfiled returns, the auditors can go eight years back. If you’re selected for a CA state tax audit, you will need to back up the details on your tax return with sales reports, invoices, bank records, and other documents. 

The auditor will review your supporting documents, and then they will decide whether to accept your return as filed or make adjustments. You have the right to see all of the auditor’s working papers and comments. Make sure to ask about any changes that you don’t understand. 

If you don’t agree with the changes, you have the right to appeal. 

If you miss the appeals window or if you agree with the changes, the tax liability will be due immediately. Failure to pay on time will lead to a 10% penalty. 

Unpaid Sales Tax in CA

If you don’t pay your sales tax to the CDTFA, the state will send several demands for payment. If you ignore the demands, the state can enforce collection actions against you. The CDTFA can also pierce the corporate veil, meaning that they can hold individual owners responsible for the unpaid taxes of their LLCs or corporations. 

• Tax Liens — The CDTFA can issue tax liens if you don’t pay your state taxes. To get the lien released, you need to pay your tax bill. However, in some cases, the state may agree to subordinate or release part of the lien if doing so allows you to pay your tax bill. You can avoid a lien by setting up monthly payments that pay off the full tax debt within 36 months.
• Levies – If you don’t pay your taxes, the CDTFA can seize your assets. The agency can garnish wages and take assets such as bank accounts, investment accounts, real estate, and personal property. If the state levies your assets and it’s causing economic hardship, contact a tax professional immediately or reach out to the Taxpayers’ Rights Advocates for help. Generally, the CDTFA will release levies in this situation or if they’re done in error.

• Wage Garnishments — If the CDTFA garnishes your wages for unpaid taxes, the garnishment will affect 25% of your net (take-home) pay. For example, if your paycheck is usually $1000 after taxes and deductions, the state will take $250, and you will get the rest. To get the garnishment reduced, you must contact your local CDTFA office and prove that the garnishment is hurting you financially. 

• Till-Taps and Keeper Warrants – If you don’t pay your sales tax after a final warning, the CDTFA can send the sheriff into your place of business to take all of the money out of your cash register. This is called a till tap. Alternatively, the state can send a “keeper” to your place of business, and they can stay there for up to 10 days taking all of the money you collect.

• Loss of Business License – The CDTFA can take away your business license if you don’t pay your sales taxes, and operating without a license is illegal. Before taking your license, the agency will send a demand for payment with a 60-day window. The CDTFA can take alcohol vendor licenses, DMV dealer licenses, and other business licenses. A tax professional can help you figure out how to get back into good standing during this time period.

• Penalties – The CDTFA assesses penalties if you pay or file late. If you don’t pay within 30 days of billing, you will receive a finality penalty of 10% of your bill. There are also penalties for committing fraud on your CA state tax returns. The CDTFA also assesses interest on unpaid tax bills and penalties.

Resolution Options for CDTFA Tax Problems

The CDTFA understands that sometimes people get behind on their taxes. If you can’t pay in full, consider these options, but whenever possible, protect your business by paying your tax liabilities in full. 

Payment Plans

The CDTFA may be willing to let you make monthly payments on your tax debt. To apply, you may need to submit financial documentation. However, you don’t have to submit financial documents if you owe less than $50,000 and can pay off the balance within 24 months or if you owe $50,000 or more and can pay in full within 12 months.

To qualify, you must pay off the liability within 36 months. The department may be willing to give you longer depending on the situation. 

Offer in Compromise

If you cannot pay the balance in full, you can request an offer in compromise, and if the state accepts your offer, you can pay off the tax liability for less than you owe. Generally, businesses must be closed to get an offer unless: 1) they didn’t collect tax reimbursement or 2) they inherited tax liabilities from a predecessor business. Individuals may be able to get an offer if they incur a use tax bill but don’t have a seller’s permit. 

Innocent Spouse

If your spouse or domestic partner was responsible for the unpaid sales taxes, you may be able to get relief through the state’s innocent spouse program. To qualify, you must not have known about the unpaid tax liability, and the CDTFA must decide that it’s unfair to hold you responsible. Among other qualifying factors, the claiming spouse must be no longer married to or legally separated from the non-claiming spouse, and they must no longer be members of the same household.

Taxpayers’ Rights Advocates Office

An independent part of the CDTFA, the advocates can help if you cannot work out your problem using normal channels. They can also help if your rights have been violated or you need information about a certain collection procedure.

EDD Tax Problems and Solutions

If you have employees in CA, you must pay Unemployment Insurance (UI) tax and Employment Training Tax (ETT) to the EDD. You also must withhold State Disability Insurance (SDI) and Personal Income Tax (PIT) from your employees’ paychecks and remit those funds to the EDD. 

The state takes this obligation very seriously. Failing to withhold the payroll taxes can result in significant penalties. The CA EDD has a penalty of 15% plus interest on late payroll tax payments. In case of intentional tax evasion or fraud, more severe consequences, including legal action pay apply. It is important for employers to comply with payroll tax regulations to avoid these penalties.

You must make payments at least quarterly, but the exact schedule depends on your situation. If you pay withholding tax late, the penalty is 15% of the tax due. The penalties for late UI, ETT, and SDI tax vary. If you don’t pay, the state can use tax liens and levies to collect the tax debt. 

The EDD offers short- and long-term payment plans for active and inactive accounts. Typically, the state will only let you settle through an Offer in Compromise if your business is out of business. 

Get Help With CA Tax Problems

State tax problems are very complex, and because every state is different, you need to work with a tax professional who specializes in tax collection problem resolution and who has experience in that state. Ready to get help with your CA state taxes? Then, contact us today. 

At Ace Plus Tax Resolution, we have extensive experience helping clients deal with all of CA’s tax agencies. Don’t get inexperienced service from the nationwide firms that aggressively promote in misleading ways and don’t provide reliable services. Instead, get customized, high-quality, knowledgeable help from a local specialized CPA with this experience.