In the final days of the 1988 legislative session, lawmakers approved a measure that would severely penalize the state for giving individuals faulty written advice on income tax questions.
Now the authors of the legislation claim the Franchise Tax Board is attempting to circumvent provisions in the law that require them to waive additional taxes, penalties and interest when the state’s written advice is wrong.
The law was pushed through the Legislature by Assemblyman Elihu Harris (D-Oakland) and Board of Equalization Member Conway Collis as part of a Taxpayer Bill of Rights designed to make it easier for individuals to grapple with the state’s complex tax system.
While both federal and state law had previously provided protections against penalties and interest when written advice was given in error, never before have taxpayers been granted an exemption from additional income taxes if the advice was wrong.
The provision could virtually wipe out a taxpayers’ liability in the event of a major error on the part of the state. For lawmakers, it seemed particularly apropos at a time when the federal government’s Internal Revenue Service was being constantly criticized for giving wrong answers.
“I wanted to create a situation in which average taxpayers could rely on advice given to them by their state government,” Collis said Tuesday. “Income tax is an area that is really scary to most taxpayers and I wanted them to be able to write in and say ‘I’m confused.’ ”
But when the law became effective in January, Collis said, the staff of the Franchise Tax Board made no attempt to advise taxpayers of their new rights. And guidelines drafted to implement the law, he said, were fashioned so that it would be difficult for average taxpayers to avail themselves of the guarantees against additional taxes, penalties and interest if the written advice from the board was wrong.
“This isn’t going to work if the board keeps it a secret,” said Collis. “The whole idea is to make the state tax system a little easier to deal with for people. It’s bad enough that we have to pay taxes. We ought not to put people through the wringer to figure out what they’re supposed to pay.”
Collis said his complaints have since produced suggestions from the board’s staff for “major” revisions to the guidelines. Collis and Harris are scheduled to air their complaints directly to the board at a March 23 meeting.
The present guidelines, patterned after the Internal Revenue Service system, establishes several categories of written advice. The only category that provides protection from additional taxes--called a chief counsel ruling--requires the taxpayer to present a written explanation and analysis of his tax question. The category routinely used to answer taxpayer questions, called an information letter, provides no protections.
Collis, who argues that the law was meant to apply to all forms of written advice, said few taxpayers would ever know to ask for a specific category of reply when they seek written advice.
In drafting the guidelines, Franchise Tax Board officials said they had taken pains to ensure that protections against additional taxes only be extended when the written advice was given by experienced lawyers.
“Let’s assume a brand new employee in the department who has only a few weeks’ experience makes an error in judgment and provides the wrong data,” said Jim Reber, a spokesman for the board. “Is it reasonable then for the state of California to forgive the tax although legally it may be owed?”
Nor did officials in the agency believe, he said, that the new law was attacking a particularly egregious problem in California. He said studies have shown the advice given taxpayers by the agency is in error less than 10% of the time. By contrast, the IRS announced earlier this month that its own tests showed taxpayers who called a toll-free line for advice were getting wrong information 30.8% of the time.
Reber said employees who give oral advice to taxpayers are frequently monitored by their supervisors and tested annually on their knowledge of the tax laws.
“The integrity of this department is recognized throughout the nation. The majority of people can rely on and be confident that the tax forms and information they get is accurate,” he said.
Even so, Reber said the board does not consider the guidelines to be “in concrete.” Indeed, in a memorandum from executive director Gerald Goldberg, the staff said it would support changes in the guidelines that would extend the protections to taxpayers who get other forms of written advice. For now, however, the board’s policy remains in effect.
“While we do not agree with Mr. Collis with regard to his characterization of what we have done, we have nonetheless taken a second look at our guidelines to determine if we can be more flexible,” Goldberg wrote.
Collis however, said he would ask the board to go even further and begin a campaign to inform taxpayers of their right to obtain the legal advice.
Reber acknowledged that no mention of the new law was made in this year’s California Resident Income Tax Forms and Instructions, but said that was because the tax information booklet was being printed just as the law was being passed.