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J U L Y 1998

Tax Return Errors Decrease Inside ...


as E-Filing Increases 2 ... Tax return error rate
2 ... Tax return errors by type
Tax practitioners and taxpayers made fewer Voice prompts and automatic calculations 3 ... Electronic funds transfers
errors on their tax returns this year. help cut down on errors on returns that are misdirected
The number of tax return mistakes is down 8 TeleFiled. 3 ... Electronic funds transfer
information
percent. The decrease may be due to a small FTB found errors on 263,509 tax returns by 3 ... Some tax bills may be paid with
increase in the number of returns that are filed the end of April. Most of the errors fall into credit cards
electronically, known as e-filing, or by these categories: 4 ... Order Tax Talk video course
telephone. E-filing software automatically 4 ...Where to find free small
corrects math and tax computation errors. CONTINUED ON PAGE 2 business seminar
And e-filed returns with certain missing 5 ... Free seminar looks at “Taxing
information are intercepted during Perceptions”
transmission and corrected before the FTB’s Goldberg 5 ... Why taxpayers fail to file
5 ... FTB calendar
Franchise Tax Board’s system accepts them.
Honored 6 ... Send partnership Schedule K-1
on CD-ROM

The April 15 6 ... New software for editing


partnership Schedule K-1s
6 ... Fiscal-year filers: What year is
Countdown it anyway?
6 ... Start of fiscal year determines
form to file
On April 15, the Franchise Tax Board’s 7 ... Finding taxpayers on the move
Taxpayer Services Center received a call from 7 ... Head of household symposium?
a man with a power of attorney for a Stay tuned
missionary working on another continent. For 8 ... Tax News available in
electronic versions
several months, the man had been trying 8 ... News from EDD -
unsuccessfully to track down certain papers Seminars offered
needed to fill out the missionary’s tax return. 8 ... Goldberg named outstanding
He learned from FTB that the missionary did public administrator
not have to file a return in California because 8 ... Who gets direct tax refund
her income was less than $10,384. deposits?
9 ... E-filing: Slowly, surely making
Another caller said she wanted to pay a $100 gains
estimate toward her 1998 taxes because she 9 ... Refunds and credits, deficiency
does not like paying all at once. But she was assessments: When does time
a little short of cash. She learned that, run out?
because taxpayers are not required to make 9 ... FTB, IRS to hold free e-file
seminars
estimate payments of $100 or less, she could
9 ... E-file seminar schedule
send the money any time.
10 ... Manufacturers’ investment
A man who recently retired called to report credit: For your information
that he was making his best guess about his 10 ... Manufacturers’ investment
family income for 1998. But he was credit: What “qualified” means
concerned about what would happen if he 11 ... Withholding required on
Franchise Tax Board Executive Officer payments to nonresidents
made a mistake and his guess was not close to Gerald H. Goldberg receives the American 11 ... SBE opinions
the mark. He found out that FTB does not Society for Public Administration’s 12 ... Taxpayers “march” to file
issue penalties to people in their first year of “Outstanding Public Administrator” award 12 ... Sign up now for November
from Joanne Kozberg, Secretary of the State Tax Policy Conference
CONTINUED ON PAGE 4 and Consumer Services Agency. For more
information, see page 8.
Page 2

Tax Return Errors Decrease as E-Filing Increases


CONTINUED FROM PAGE 1
Volume 98-4 July 1998 Exemptions. Faulty exemption entries Deductions. Deductions accounted for
TAX NEWS is a bimonthly accounted for about 30 percent of all 5.2 percent of all errors. Mostly, the
publication of the Taxpayer Advocate errors. In most cases, taxpayers standard deduction amount was
Bureau, California Franchise Tax transferred the total exemption amount to incorrectly entered, but in some cases
Board. Its primary objective is to the wrong line. taxpayers listed itemized deductions that
provide information to income tax
preparers about state income tax Estimate amounts. In 14 percent of all were less than the standard deduction.
laws, regulations, policies and
procedures. errors, the amount of estimate payments State disability insurance. Another 5.2
listed on the tax forms as paid did not percent of the errors involved state
Members of the Board: match the amount posted on FTB’s disability insurance amounts that did not
Kathleen Connell, Chair system. And because FTB credits any match amounts on W-2 forms.
State Controller unapplied miscellaneous payments as Nonresident. Almost 5 percent of the
estimates, some of these “errors” result in errors occurred because taxpayers filing
Dean Andal
Chair, State Board of Equalization refunds to taxpayers. nonresident returns incorrectly prorated
Craig L. Brown Tax computation. Almost 12 percent of their net tax liabilities.
Director, Department of Finance the errors occurred because the tax was
computed incorrectly. CONTINUED ON PAGE 3
————————
Executive Officer: Withholding. Withholding amounts
Gerald H. Goldberg were involved in 9 percent of all errors on Tax Return Errors
Editor: 1997 tax returns. Most of the mistakes
Pat Huberty were made because amounts on two or by Type
more W-2 forms were incorrectly added.
To update or correct your address or
to subscribe to TAX NEWS (send $12 On some returns, however, the Increase/
for a one-year subscription), write: withholding amounts did not match decrease from
TAX NEWS amounts that employers reported to the
P.O. Box 520 % of previous year
Rancho Cordova, CA 95741-0520 Employment Development Department. total
or call: (916) 845-7070. Or the withholding was claimed by
another state. In some cases, no W-2 Exemptions 30.1% -12.9%
To view TAX NEWS on the Internet
or to request an electronic mail forms were attached to the returns.
subscription, contact FTB on the Estimate
Internet:
http://www.ftb.ca.gov amounts 13.7% -3.1%
For information about a client’s Tax Return Error Rate
account, contact: Tax
Tax Practitioner Support Unit Approximate % computation 11.9% -14.7%
(916) 845-7057 (phone) of all returns
(916) 845-6377 (fax)
with errors 9% -1.6%
Withholding
For recorded answers to questions
on California taxes, to order forms Form 540 33%
or check on a refund, call: Deductions 5.2% +2.5%
F.A.S.T. (800) 338-0505
From outside U.S. (916) 845-6600 Form 540A 26%
State disability
To send a facsimile about a client’s
account, transmit to: insurance 5.2% +18.8%
Scanned returns 16%
Electronic Correspondence
(916) 845-6377
—————————- Nonresident 4.9% -5.1%
540EZ 14%
Information Center:
(800) 852-5711 -0.9%
From outside U.S. (916) 845-6500 Adjusted gross 1.8%
540NR 8%
income
Hearing Impaired:
TDD (800) 822-6268 Electronically
__________________ Filing status 0.4% -68.1%
filed returns 3%
FTB on the Internet
http://www.ftb.ca.gov Credits 0.1% -9.2%
TeleFiled Less
Printed on recycled paper. returns than 1%
Miscellaneous 17.7% 16.6%

100%
100%

July 1998
Page 3

Electronic Funds Transfers Misdirected


Are your clients’ electronic funds transfer not notice that each agency had a different
(EFT) payments going to the right tax bank account number; they used the same
agency? number for all three agencies. Some Tax Bills
Since the beginning of the year, the When an EFT payment is sent to the May Be Paid with
Franchise Tax Board has received EFT wrong agency through either the
payments intended for the Employment Automated Clearing House (ACH) Credit Credit Cards
Development Department and the State or Fedwire payment method, it is not
Board of Equalization. EDD and SBE immediately credited to the taxpayer’s Taxpayers soon may use
also have received funds intended for account. As a result, the taxpayer credit cards to pay some
other agencies. receives a bill for the missing payment. personal income tax bills
from the Franchise Tax
The misdirected payments began when So, if any of your clients make EFT Board.
Union Bank replaced Bank of America in payments to FTB for bank and
January 1998 as the EFT bank for FTB, corporation taxes, EDD for disability This summer, FTB will
EDD and SBE. Each agency notified insurance and personal income tax launch a pilot program with
its EFT taxpayers in advance of its new withholdings or SBE for sales or use Paymentech that will allow
bank and new bank account number. taxes, make sure that the payment is sent certain taxpayers to use their
Apparently, however, some taxpayers did to the correct bank account number for MasterCard or VISA card to
the agency. To check on the correct bank pay tax bills. Paymentech is
account number for FTB, see FTB the country’s third largest
Tax Return Errors Publication 3825, “Electronic Funds processor of bank card
Transfer Program ACH Credit transactions.
Decrease Information (1998 Edition).” Or call Taxpayers who may
CONTINUED FROM PAGE 2 FTB’s EFT Help Desk at the number participate in the pilot
listed in the box on this page. The box program will receive an insert
Adjusted gross income. Less than also lists EFT Help Desk numbers for
2 percent of the errors concerned explaining how to make a
EDD and SBE. The Help Desks also will credit card payment with the
California adjusted gross income. Either provide general information on EFT and
the amount was miscalculated or bills that FTB mails them.
on becoming a voluntary EFT participant.
incorrectly copied from an accompanying Watch for more information
schedule. Information about FTB’s EFT program is about the credit card program
also on the Internet at the agency’s http:// in the September issue of Tax
Miscellaneous. Other errors involved
incorrect filing status, wrong refund
www.ftb.ca.gov/elecserv/eft.asp
address.† News. †
amounts and various incorrect
calculations.
Although exemption errors were made
most frequently, the number is down from Electronic Funds
last year. So are errors in other categories
such as tax computations, withholding Transfer Information
and filing status. On the other hand, state
disability insurance errors increased by To obtain the proper bank account
almost 19 percent. (See chart on page 2.) number for electronic funds transfer
Almost 87,400 of the errors were detected (EFT) payments to the Franchise Tax
on Form 540 returns that Board, the Employment Development
were manually processed. Another Department and the State Board of
68,400-plus errors occurred on manually Equalization or for other EFT
processed Form 540A returns. More than information, call the:
41,000 errors were found on image- EFT Help Desks
processed, scannable Forms 540 and
540A returns. More than 36,000 occurred Franchise Tax Board
(916) 845-4025
on manually processed Form 540EZ
returns, and more than 21,000 were on Employment Development
manually processed Form 540NR returns. Department
Only about 8,800 errors were made on (916) 654-9130
electronically filed Forms 540, 540A, State Board of Equalization
540EZ and 540NR returns, and 574 were
on TeleFiled returns. † (916) 327-4229
Page 4

Where to Find Free Small Business Seminar


Would you or your clients like to attend a Connection, which is a committee of
free seminar for new or prospective small Franchise Tax Board, Internal Revenue
Order Tax Talk businesses? Service, Employment Development
Department and State Board of
Video Course The Service Corps of Retired Executives
(SCORE) and the Small Business Equalization representatives.
The third volume in the Tax Development Center (SBDC) hold For information on seminars in your area
Talk learn-at-home video occasional seminars featuring the prize- or for a copy of the booklet, which covers
series is now available. winning “Striking Gold in California” state and federal income and employment
video (see the March 1998 issue of Tax tax and state sales tax information,
The “California Employment News). contact a local chapter of SCORE or the
Factors” course includes a SBDC. You also may contact the State
one-hour videotape, textbook, The video is part of a tax education
package for small businesses that includes Board of Equalization at its http://
workbook and brief, “open www.boe.ca.gov/sbtcon.htm Internet
book” examination for three
credits.
a 40-page booklet and a directory of
services and information sources. It was †
address for a copy of the booklet.
produced by the Small Business Tax
The other courses in the
series are “Office-In-Home
Deductions” and “California The April 15 Countdown
Tax Rules for Nonresidents.”
Each course costs $60. CONTINUED FROM PAGE 1

To order any of the courses, retirement because estimating income is system received another 67,101 calls on
call (916) 845-7070 or visit difficult the first time out. April 15. More than 27,000 of them were
the Franchise Tax Board’s All three callers hung up happy. Like placed by people who wanted to file their
http://www.ftb.ca.gov/ many April 15 callers, they got good tax returns by telephone. Another 17,702
education/taxtalk.htm Internet accessed the system’s recorded answers to
address. † news. For others, it came in the form of
an application that would allow them to “Frequently Asked Questions.” And
pay their tax liabilities in installments. almost 11,300 people called on April 15
Others could not find the tax forms they to find out when they would receive their
needed on the last day for filing. Some refunds.
were directed to FTB’s Internet address By April 15, tax professionals had already
where they could download and print tax done their homework. FTB’s Tax
forms. Those without Internet access Practitioner Support Unit took only 537
were told where they might find forms calls that day. And the longest anyone
locally. waited to be connected was 98 seconds.
Some callers who had filed earlier FTB’s Internet Web site was a popular
wondered why their refunds had not place on April 15. Close to 35,400 users
materialized. In these cases, refunds had visited the site that day and downloaded
been applied to unpaid tax liabilities from 150,354 tax forms. Although an analysis
previous years or to debts owed to other of forms downloaded on April 15 has not
agencies, and the taxpayers had not yet been completed, the personal income tax
received notification. resident booklet accounted for 32 percent
In all, the Taxpayer Services Center of all downloads from January 1 through
answered 24,171 calls from taxpayers on March 31. Another 13 percent of the
April 15. On the average, calls took 3.4 downloads were the personal income tax
minutes. The average time that callers nonresident booklet. The 540EZ was
spent on hold was just under three downloaded by 6 percent of the site
minutes. And the average taxpayer mood, visitors, the 540 by 4 percent and the
despite the rapidly approaching midnight 540A and 540NR by 3 percent each. The
tax deadline, was calm and considerate. remaining 39 percent of downloads were
for various personal income tax
In addition to the calls coming in to the schedules, bank and corporation forms
Taxpayer Services Center, FTB’s
interactive voice response telephone
and forms for previous years.†

July 1998
Page 5

Free Seminar Looks at “Taxing Perceptions”


In the fall, you can do more than listen host lunch break, you may attend one of
FTB Calendar
and learn at a free one-day seminar. You four three-hour sessions. The choices are
also can express your own ideas about a bankruptcy and lien seminar, an offer- July
issues that affect your tax practice, and in-compromise session, a penalty • 50,000 demand to file
you can gain six continuing professional workshop/alternative documentation notices are mailed to
education credits. discussion and a seminar titled “Trusts – individuals who failed to
The Good, the Bad and the Ugly.” file 1996 tax returns.
The Franchise Tax Board and the Internal
Revenue Service will present the “Taxing The deadline for registration is • 40,000 Notices of
Proposed Assessment are
Perceptions” seminar three times in each September 4, 1998. If you are interested, mailed to individuals
of two cities. In Oakland, the seminar sign up soon because seating will be who did not respond to
will be held on September 23, 24 and 25. limited to 75 participants on each day. To demand to file notices
In Sacramento, it is scheduled for October make a reservation, contact Bob Meyer at issued in May for 1996
6, 7 and 8. the Internal Revenue Service by mail at tax returns.
The seminar will put you face-to-face 4330 Watt Avenue, SA 2000, North • Notices of Proposed
with FTB and IRS staff. In a three-hour Highlands, CA 95660 or by fax at (916) Assessment for
974-5936. corporations’ failure to
morning session, you will be invited to file 1995 tax returns
participate in discussions on how When you register, you must make a first begin finalizing. Those
practitioners and tax administrators and second choice for both the seminar corporations will receive
“stereotype” each other, explore common date and the afternoon program. Notices of Balance Due.
misconceptions and expectations that For more information, contact FTB at its 20 Previous month
each group has and discuss the tactics http://www.ftb.ca.gov Internet address or nonresident withholding
each group uses to accomplish its call the Internal Revenue Service at payments are due if total
objectives. In the afternoon, after a no- (916) 974-5471. † withholding exceeded
$2,500.
August
Why Taxpayers Fail to File • 25,000 demand to file
notices are mailed to
Why do taxpayers fail to file tax returns? The individual must file a tax return with individuals who failed to
the appropriate schedules, even if no tax file 1996 tax returns.
Each year, the Franchise Tax Board sends • 30,000 Notices of
notices to about 600,000 individuals, is due.
Proposed Assessment are
informing them that they appear to have a “I had my own business. But even mailed to nonfilers of
filing requirement and that no tax return is though I had a lot of gross receipts, I 1996 personal income tax
on file. Many of these individuals are ended up with a loss. So, I don’t need returns.
quick to tell FTB why they did not file. to file a tax return.” • Notices of Proposed
Some of them are right; they had no filing This case is similar to the above. If the Assessment for
requirement. But some are mistaken. amount of gross receipts for the business, corporations’ failure to
Here are three of the most common combined with all other income from file 1995 tax returns
begin finalizing. Those
misconceptions that nonfilers have about California sources, is above the minimum corporations will receive
paying taxes. Nonfilers often tell FTB: threshold, the business owner must file an Notices of Balance Due.
“Sure, I sold my personal residence income tax return with appropriate
20 See July 20.
during the tax year in question. But I schedules attached.
30 Last day to file
rolled the gain over into a new home. “Yes, I am a partner in a California- Homeowner and Renter
So, I don’t need to file a tax return.” based partnership. But I don’t live in Assistance claims.
The response is “Yes, you probably do.” California. So I don’t need to file a
California income tax return.” September
When an individual’s gain on the sale of a • 30,000 Notices of
home, combined with other income from Individuals who have income from Proposed Assessment are
California sources, is above the minimum California sources are taxed on that mailed to individuals
income threshold, the individual needs to income, no matter where they live. So, a who did not respond to
file a tax return to report the gain even nonresident with income from California, demand to file notices for
though it is rolled over. This will also be except for California-sourced pension the 1996 tax year.
income, needs to file a tax return with • 40,000 demand/
†
true for individuals who take advantage of
the new law that allows an exclusion of a California.
home sale gain up to $250,000 or CONTINUED ON PAGE 7
$500,000, depending on marital status.
Page 6

New Software for Editing


Send Partnership
Schedule K-1 on
Partnership Schedule K-1s
TestWare, a new, free software program them to edit K-1 files before sending them
CD-ROM for editing partnership Schedule K-1s on to FTB. As a result, files that failed
The newest way for your diskette, is now available from the FTB’s mainframe edit program were sent
clients to save paper when Franchise Tax Board. back to partnerships for correction. In
they file partnership Schedule For the past three years, FTB has asked some cases, several tries were necessary
K-1s is to file on a CD-ROM. partnerships to voluntarily submit their before the entire Schedule K-1 file could
Schedule K-1 (565), “Partner’s Share of be accepted.
Starting now, the CD-ROM
joins magnetic tape, tape Income, Deductions, Credits, etc.,” on TestWare was designed as a tool in
cartridges and diskettes as magnetic media. The choices are preparing magnetic media California
electronic alternatives to magnetic tape, cartridge, diskette and now Schedule K-1s (565) files. The software
filing the Schedule K-1 (565), CD-ROM (see article on this page). allows transmitters to test files before
“Partner’s Share of Income, However, until now, partnerships could
Deductions, Credits, etc.” on not obtain software that would allow CONTINUED ON PAGE 7
paper.
For more information, visit
the Franchise Tax Board’s
Fiscal-Year Filers:
http://www.ftb.ca.gov/ What Year Is It Anyway?
elecserv/bus.asp Internet
address. Or call the Are your fiscal year-end corporation Taxpayer confusion about which form to
electronic filing Help Desk at clients filing their tax returns on forms for use surfaced when the Franchise Tax
(916) 845-0353 between the correct year? Board recently sent demand to file notices
8 a.m. and 5 p.m.† On the Form 100, “California Corporation and Notices of Proposed Assessment to
Franchise or Income Tax Return,” the corporations that failed to file a 1995
income year shown in the upper left hand return. A number of fiscal year-end
corner (see example below) should be the corporations responded by filing their
same year that your clients fill in for the 1995 tax returns on a form for the wrong
“For income year beginning” space. The year. FTB has notified these corporations
“ending” year space should be filled in that they filed using the wrong Form 100.
The corporations still have time to file on
with the date that is the end of the
accounting period. †
the right form.

Start of Fiscal Year Determines Form to File

Did your corporate clients file 1995 fiscal-year tax returns on the wrong form? The return for a fiscal year
that begins in 1994 and ends in 1995 should be filed on the “Income Year 1994” Form 100,
“California Corporation Franchise or Income Tax Return.”

July 1998
Page 7

Finding Taxpayers on the Move FTB Calendar


Each year, about 19 million people in the the post office as undeliverable, and FTB
United States move to a different address. has been unable to locate the taxpayers’
CONTINUED FROM PAGE 5
However, not all the Californians among new address. However, in the past three
them inform the Franchise Tax Board years, FTB has reduced the number of questionnaire notices to
when they move. undeliverable nonfiler notices to file are mailed to
approximately 15,000. corporations that failed to
The FTB program that notifies nonfilers file 1996 returns.
of their requirement to file a tax return is To find current addresses for nonfilers,
working to improve the number of good FTB checks with other tax agencies. If • Notices of Proposed
addresses on file. In the past three years, these efforts are unsuccessful, FTB Assessment for
corporations’ failure to
FTB has been able to reduce by more attempts to get up-to-date addresses on file 1995 tax returns
than 80 percent the number of nonfiler tax taxpayers from their employers and credit begin finalizing. Those
notices that the post office is unable to bureau reporting services. corporations will receive
deliver due to bad addresses. Although the 80-plus percent reduction in Notices of Balance Due.
Annually, FTB sends out more than bad addresses is significant, FTB’s 4 Last day to register for
600,000 notices to people who appear to nonfiler program is continuing to look for FTB/IRS seminar,
have a requirement to file a tax return but new ways of finding correct addresses for “Taxing Perceptions.”
who fail to do so. Traditionally, about †
all taxpayers. 15 Personal income tax
estimate payments are
80,000 of these notices are returned by
due.

New Software for Head of Household 20 See July 20.


23 FTB, IRS hold free
Editing Partnership Symposium? “Taxing Perceptions”
seminar in Oakland.
Schedule K-1s 24 FTB, IRS repeat “Taxing
CONTINUED FROM PAGE 6
Stay Tuned Perceptions” seminar in
Oakland.
submitting them. As a result, the files A Franchise Tax Board symposium on 25 FTB, IRS repeat “Taxing
should be error-free from the start. head of household issues is still on the Perceptions” seminar in
drawing board, due to the interest that a Oakland.
TestWare provides data integrity edits
significant number of tax professionals October
only. It does not perform calculations.
expressed. • 18,000 Notices of
When files fail the edit, the errors are
displayed so that changes can be made. FTB is analyzing responses to a survey Proposed Assessment are
published in the March Tax News. It mailed to individuals
The software is available in both who did not respond to
asked interested tax practitioners if and
Windows 95 and Windows 3.X versions demand to file notices for
when they would like the symposium to the 1996 tax year.
on the same disk. It is a personal
take place, what issues they would like
computer (PC) based program and is 6 FTB, IRS hold free
covered and what other ways they would
designed for partnerships that submit their “Taxing Perceptions”
like to receive head of household filing seminar in Sacramento.
files on diskettes. Any partnership that
status information.
currently sends Schedule K-1s to FTB on 7 FTB, IRS repeat “Taxing
magnetic tape or cartridges can download Since the March survey, FTB sent Perceptions” seminar in
the mainframe information to a PC for questionnaires to a randomly selected Sacramento.
testing purposes. group of 500 taxpayers to see if any 8 FTB, IRS repeat “Taxing
would be interested in joining tax Perceptions” seminar in
You can obtain the TestWare software
professionals for the symposium. Sacramento.
without charge by downloading it from
Responses, requested by June 25, had not 15 Final extended due date
FTB’s http://www.ftb.ca.gov/elecserv/
been tallied by press time. for personal income tax
bus.asp Internet address. Or call the
electronic filing Help Desk at The symposium is tentatively scheduled returns.
for sometime in January 1999, although
†
(916) 845-0353 between 8 a.m. and 20 See July 20.
5 p.m. You also can obtain more the date is subject to change. 26 Last day for postmarked
information about filing Schedule K-1s California Tax Policy
†
from FTB Publication 1062, “Guide for Conference registration,
K-1 (565) Filing By Diskette or Magnetic to avoid late fee.
Media,” which is available on the Internet
and from the Help Desk. †
Page 8

News from EDD

Tax News Seminars Offered


Every month, the Employment employees, new laws, emerging issues
Available in Development Department offers seminars and EDD services.
to help employers comply with California
Electronic employment tax laws.
For a listing of seminars, contact EDD at
its http://www.edd.cahwnet.gov Internet
Versions Topics covered in the seminars include address. Click on “For Employers” and
state payroll reporting requirements, then “Attend a Tax Seminar.” You also
Tax News is now available preparing payroll tax returns, avoiding may call or visit your local Employment
on the Internet and by unnecessary tax liabilities, distinguishing Tax Customer Service office. Or call
E-mail, as well as in print. between independent contractors and (916) 464-3502. †
For Internet viewing or for an
E-mail subscription, contact
Tax News at the Goldberg Named
Franchise Tax Board’s
http://www.ftb.ca.gov Web Outstanding Public Administrator
†
site.
Gerald H. Goldberg, the Franchise Tax improvement in government” and “a
Board’s Executive Officer, was named leader in the efficient and effective use of
“Outstanding Public Administrator” by strategic and business planning
the Sacramento Chapter of the American technology and activity based costing.”
Society for Public Administration She also cited his “efforts to improve
(ASPA). communications with taxpayers and
ASPA is a national organization simplify filing.”
dedicated to advancing the science, At the award ceremony, Kozberg praised
processes, art and image of public Goldberg for, among other things,
administration. The award was presented creating a notable “corporate and family
at a ceremony on June 10. culture” at FTB and what she termed “the
Goldberg received the award from Joanne best” technical procurement policies in
Kozberg, Secretary of the State and the state. She also stated that FTB is the
Consumer Services Agency, who nation’s model tax agency.
nominated him for the honor. In her Goldberg has served as FTB’s Executive
nomination letter, Kozberg called Officer since 1980. †
Goldberg “an advocate for continuous

Who Gets
Direct Tax Refund Deposits?
About 184,300 California taxpayers took who opted for direct refund deposits rep-
advantage of the Franchise Tax Board’s resent almost 28 percent of the approxi-
offer to directly deposit their refunds in mately 659,400 electronic filers who re-
their bank accounts. ceived refunds. The rest received paper
Only taxpayers who filed tax returns elec- refunds.
tronically qualified for direct deposits this Approximately 121,400 electronic filers
year, although FTB is looking into ex- had a balance due. And close to 55,000
tending the opportunity to TeleFile and more electronic filers came out even on
paper filers in future years. April 15.†
About 835,500 taxpayers filed their 1997
tax returns electronically. The 184,300

July 1998
Page 9

E-Filing: Slowly, FTB, IRS to Hold E-File Seminar


Surely Making Gains Free E-File Seminars Schedule
For most California taxpayers, filing a tax Everything you always wanted to know Franchise Tax Board and
return means mailing a paper document. about electronic filing will be discussed at Internal Revenue Service
Although paper tax returns still free e-file seminars in the fall. e-file seminars are scheduled
predominate, electronic methods of filing, The Franchise Tax Board and the Internal for the Los Angeles, Southern
known as e-filing, are expected to double Revenue Service are co-sponsoring the California and Northern
by the year 2000. seminars where you can learn about California IRS Districts (see
Currently, 92 percent of all tax returns everything from how to fill out an e-file article on this page). Central
filed are on paper. About 60 percent of application to how to read the District seminars will be
the paper returns are processed by acknowledgment report you receive when announced later.
manually entering the data on computers. your tax returns are accepted by an e-file Los Angeles District
The rest of the paper returns are system. The seminars will be held in September 17 – Los Angeles
“scanned” by image processing September, October, November and September 22 – Diamond Bar
December. September 29 – Cerritos
equipment, which is a faster, less September 30 – Van Nuys
expensive process. Six percent of this tax During the summer, tax practitioners will October 7 – Diamond Bar
season’s tax returns were electronically receive flyers with instructions on October 8 – Lawndale
filed, and two percent were TeleFiled. registering. You will be able to register October 15 – Los Angeles
Along with the increase in e-filing this either by fax or on-line at FTB’s Internet October 20 – Cerritos
site. October 28 – Van Nuys
past season, the Franchise Tax Board October 29 – Lancaster
experienced a few problems that have The flyers also will list seminar schedules November 5 – Los Angeles
been ironed out. For example, FTB by IRS district. Although the schedule November 12 – Lawndale
erroneously sent a Return Information for the Central California IRS District is November 19 – Van Nuys
Notice to about 60,000 e-filers. FTB not yet available, see the listing on this Southern California District
subsequently sent out a letter of page for seminars in the Los Angeles, September 25 – San Diego
explanation and apology to the affected Southern California and Northern
† †
September 29 – San Bernardino
taxpayers and tax practitioners. California IRS Districts. October 1 – Costa Mesa
October 6 – Long Beach
October 8 – Palm Springs
October 14 – Laguna Niguel
Refunds and Credits, October 22 – El Centro
October 27 – Oceanside
Deficiency Assessments: October 29 – Victorville

When Does Time Run Out? Northern California District


September 22 – Oakland
September 28 – Richmond
Do your clients know how long they have propose to assess additional tax by the September 28 – Santa Rosa
to claim a refund when they overpay their later of four years after either the original September 29 – Eureka
taxes? Do they wonder how much time due date of the return or the date that the September 30 – Willits
the Franchise Tax Board has to allow a return was filed. So, for taxpayers who October 6 – San Francisco
refund or credit or to propose a deficiency file returns after the original due date, the October 16 – Redwood City
assessment? October 20 – Stockton
statute of limitations for refunds, credits October 21 – Chico
The laws that establish the statutes of and deficiency assessments are different. October 22 – Walnut Creek
limitations for claiming refunds or issuing For example, 1997 personal income tax October 27 – North Highlands
credits and for assessing deficiencies set returns were due April 15, 1998. If a October 29 – Vallejo
different expiration dates effective for taxpayer filed on August 15, 1998, within November 5 – Corte Madera
taxable or income years beginning on or November 18 – North Highlands
the automatic extension period, the statute November 19 – Hayward
after January 1, 1992. of limitations for filing a refund claim November 30 – Redding
A taxpayer must claim a refund or FTB or allowing a credit would expire on April December 4 – Oakland
must allow a credit by the later of four 15, 2002. The statute of limitations for December 10 – North Highlands
years from the date that the return was proposing a deficiency assessment, December 17 – North Highlands †
however, would expire on August 15,
due, without regard to extensions, or
within one year after an overpayment was 2002. †
made. On the other hand, FTB may
Page 10

Manufacturers’
Manufacturers’ Investment Credit:
Investment What “Qualified” Means
Credit: The following overview of the Capitalized labor costs for constructing or
manufacturers’ investment credit is the modifying qualified property can qualify
For Your first of a series. Other articles will deal for the MIC as long as they meet the
with errors that taxpayers frequently definition of “direct” labor costs under
Information make in claiming the credit. the federal uniform capitalization
Qualified taxpayer, qualified cost and (UNICAP) rules. (See FTB Legal Ruling
Information that will help qualified property are the three key 98-1, “Manufacturers’ Investment
your clients better understand requirements for claiming the Credit - Capitalized Costs of Labor for
the manufacturers’ investment manufacturers’ investment credit (MIC). Engineering and Design,” at FTB’s
credit (see article on this Do your clients understand what http://www.ftb.ca.gov Internet address.
page) is available from the “qualified” means in each case? Qualified property. Qualified property
Franchise Tax Board. must meet a four-prong test. It must be:
The MIC is a 6 percent credit for the
FTB Publication 1113, qualified cost for qualified property • Tangible personal property.
“Frequently Asked Questions placed in service in California. Although
About the Manufacturers’ • Internal Revenue Code Section
1995 is the first year in which the credit 1245(a) property.
Investment Credit (MIC),” can be claimed, the credit applies to costs
provides answers to 19 actually paid on or after January 1, 1994. • Property used in a manufacturing
questions about the credit. establishment listed in the SIC
The questions include “How Taxpayers who claim the MIC must meet manual’s Division D.
is the MIC claimed?” and all three key requirements:
• Property used at least 50 percent of
“Do leases qualify for the Qualified taxpayer. The taxpayer can be the time for manufacturing, refining,
MIC?” For a copy, visit FTB an individual, a corporation, an processing, fabricating, recycling,
at its http://www.ftb.ca.gov S corporation, a partnership, a limited research and development or
Internet address. Click on liability company taxed as a partnership, measuring, testing or repairing
“Tax Forms” and scroll to an estate or a trust. Determining whether otherwise qualified property.
“Miscellaneous California taxpayers are “qualified” is the first step
Income Tax Forms, in establishing eligibility for the credit. In Tangible personal property means any
Instructions and order to claim the MIC, taxpayers must tangible property except land and
Publications.” Or write Tax own at least one operating establishment improvements. However, special purpose
Forms Request, P.O. Box classified under Division D, buildings and foundations are the
307, Rancho Cordova, CA Manufacturing, of the 1987 edition of the exceptions to the rule. Both can qualify
95741-0307. Or you may call Standard Industrial Classification (SIC) even though they are not IRC Section
(800) 852-5711. Manual, SIC codes from 2011 to 3999. 1245(a) property. Generally, this
(See “Manufacturers’ Investment Credit: exception applies to “clean rooms” used
You also can obtain form by certain qualified taxpayers in
FTB 3535, “Manufacturers’ For Your Information” on this page.)
manufacturing computer and office
Investment Credit,” from the For MIC purposes, ignore principal equipment (SIC codes 3571-3579
same FTB sources. The form activity codes on the state and federal tax inclusive) or electronic components and
includes instructions that returns. accessories (SIC codes 3671-3679
feature the Standard Industrial Qualified costs. For costs to qualify for inclusive), commercial physical and
Classification (SIC) Manual’s the MIC, three requirements must be met: biological research (SIC code 8731) or
Division D listings. biopharmaceutical activity (SIC codes
• The costs must be paid or incurred
Also, see MIC regulations at for acquiring, constructing or 2830-2836 inclusive). However, special
Title 18, California Code of reconstructing qualified property. purpose buildings and foundations do not
Regulations, Sections include:
17053.49-0 through 11 and • The taxpayer must directly or
• Buildings designed and constructed
23649.0 through 11. † indirectly pay California sales or use
tax on all costs, except for qualified or reconstructed principally as
capitalized labor costs. general-purpose manufacturing,
industrial or commercial buildings.
• The costs must be properly
chargeable to the taxpayer’s capital • Research facilities that are used
account (depreciated). primarily before and/or after the
manufacturing process.

CONTINUED ON PAGE 11

July 1998
Page 11

Withholding Required on Payments to Nonresidents


Recently, the Franchise Tax Board sent • For goods.
letters to a number of business entities SBE Opinions
• For income from intangible property
that apparently failed to withhold 1996 such as interest or dividends.
taxes on amounts paid to nonresident
independent contractors. • Made to a nonresident corporate Appeals of Douglas and
director for performing director Barbara Broyles, et al.,
Your California clients who make services, including attending a board May 1, 1998. The State
payments to nonresidents are required to of directors’ meeting. Board of Equalization
withhold taxes under certain overruled its previous
circumstances and forward the • Made to a payee for whom FTB has decision in Appeals of
withholdings to FTB. The withholding issued a written waiver of the Thomas J. and Gerd Perkins,
rate is 7 percent of the gross payments of withholding. In most cases, a waiver et al., 96-SBE 010, April 11,
California source income made to is authorized because the nonresident 1996, Petition for Rehearing
nonresidents. The withholding payee has a history of filing tax denied November 13, 1996,
requirements were established to promote returns in California or shows, by with respect to limited
voluntary compliance with California tax making estimate payments, that it partners who “had no control
laws among nonresident individuals and intends to file. over the decision as to
entities that may be unaware of their filing For more information on nonresident whether to distribute the stock
requirements. withholding, read FTB Publication 1023, to partners, or to sell it in the
Your clients that do not withhold taxes on “1995 Nonresident Withholding – partnership.”
payments to nonresidents may be liable to Independent Contractor Rent and Royalty The SBE concluded that, as
pay the lesser of the amount of taxes due Guidelines.” To obtain the publication, long as the taxpayer limited
from the nonresident or the amount that contact FTB at http://www.ftb.ca.gov on partner was a partner at the
should have been withheld. A failure to the Internet. Click on “Tax Forms” and time the partnership
withhold also can result in penalties and then on “Miscellaneous Tax Forms.” You purchased the subsequently
interest. However, FTB’s policy is to also can obtain the publication by mail by sold “small business stock,”
educate business entities about writing to Tax Forms Request, Franchise the taxpayer’s stock
withholding requirements and help them Tax Board, P.O. Box 307, Rancho acquisition date is the date
establish withholding procedures. Cordova, CA 95741-0307. that the partnership purchased
Generally, corporations, other business If you have questions after reading the stock. The partnership’s
entities and government bodies must Publication 1023, call FTB’s Nonresident purchase of the stock at issue
withhold taxes on payments to Withholding staff at (916) 845-4900. in these appeals was in 1982,
nonresidents if the payments are more And watch for more information on “after the effective date of the
nonresident withholding in future issues
†
than $1,500 for the year and are one of small business stock
the following: of Tax News. legislation.” And the SBE
stated that it was “confident
• For services performed in California that the Legislature’s
by a nonresident independent
contractor. (Nonresident Manufacturers’ purposes in enacting SB 690
(the small business stock
independent contractors are not
employees. Withholding on wages
Investment Credit statutes) included providing
incentives for such venture
paid to employees is collected by the capital activity.”
Employment Development CONTINUED FROM PAGE 10
Department, not FTB.) • Storage facilities that are used At press time, a case number
had not been assigned to this
• For commercial rents or lease
payments for property located in
primarily before and/or after the
manufacturing process is completed. opinion. †
California. The MIC for special purpose buildings
• For royalty payments for natural and foundations includes capitalized
resources located in California. labor costs that are directly allocable to
constructing and modifying the buildings
• Distributions from California estates
or California trusts.
and foundations. †
Withholding is not required for certain
payments to nonresidents. These may
include, but are not limited to, payments:
Page 12

Sign Up Now for November Tax Policy Conference


Tax experts from around the country will Equalization issues, tax incentives and
gather at the 1998 California Tax Policy audit issues. The program has been
Conference to debate the hottest issues approved for 13.5 continuing education
Taxpayers facing tax professionals today. credits by the State Bar of California and
has been submitted to the National
“March” to File The conference will be held at the
Palace Hotel in San Francisco on Registry of CPE Sponsors for approval of
November 11 – 13. Sponsors are the 13.5 hours of credits.
In spite of media focus on
taxpayers rushing to post California Franchise Tax Board; the The conference fee is $595 per person
offices late at night on Institute of Governmental Affairs, when it is paid with a registration
April 15, most people file University of California, Davis; and the postmarked October 26 or earlier. The
their California tax returns California Policy Seminar, a University of fee covers workshops, general sessions,
earlier. California program. comprehensive conference material
Speakers include tax authorities from the and a number of meals including a
The most popular month for November 12 reception, dinner and
filing tax returns is March. practitioner, legal and university
communities from California to entertainment. It does not include hotel
More than 2.5 million accommodations.
California taxpayers sent their Washington, D.C. and beyond.
returns to the Franchise Tax Workshop topics include electronic To register or for more information,
Board by mail, modem or commerce, allocating expenses, contact the FTB http://www.ftb.ca.gov/
telephone during March. † legislation, the IRS, court developments, education/ctpc Internet site, fax
(916) 845-5047 or call (916) 845-7998. †
litigation, state taxation of foreign
income, burden of proof issues, Board of