State Board Won’t Offer Free Filing for ’99 Returns After All

Because of a production error, this story did not run in its entirety in some editions of the Nov. 26 paper.

*

A squabble over bidding procedures has forced the state Franchise Tax Board to shelve its plans to offer free Internet filing to nearly 2 million taxpayers for the 1999 tax year.

The agency had directed MCI WorldCom to develop Internet filing as an extension of MCI’s existing telecommunications contract with the state. The FTB would have first offered participation in the pilot program to the 1.8 million taxpayers who filed the simplified EZ returns for tax year 1998 and who had incomes of less than $50,000.

But tax preparation chain H&R; Block and software company Intuit filed suit in October seeking to block implementation of the program, saying the FTB should have put the contract out for competitive bidding. The companies won a temporary injunction.

“That delay in itself was enough to knock the project off base,” said FTB spokesman Jim Shepherd. The board is now making plans for a competitive bidding process to result in free Internet filing for tax year 2000, Shepherd said.

Free filing could steal some business from the two companies, both of which provide electronic filing. Intuit offered free electronic filing for 1998 returns to taxpayers with incomes of less than $20,000, but it charged up to $40 to those with higher incomes who used its Internet-based software, which includes electronic filing for federal and state tax returns.

The FTB has not abandoned all efforts to make the coming tax season easier, however. Virtually all taxpayers are eligible to use electronic filing, typically for a fee, through tax preparers, tax preparation software or Web sites such as those provided by TurboTax or SecureTax.

In addition, about 4 million taxpayers who filed EZ returns for tax year 1998 will be mailed a smaller, simpler Form 2EZ return for 1999 that’s about the size of a postcard--it’s the brainchild of state Controller and FTB Chairwoman Kathleen Connell. EZ filers are taxpayers with incomes of less than $50,000 if single and $100,000 if married and who take the standard deduction.

The state also has developed a new Form 911, to be used by professional tax preparers only, that can quickly stop an FTB levy or garnishment if a client is suffering a financial hardship. The form usually requires that the taxpayer set up an installment plan that directly debits a bank account.

And as of Oct. 10, the FTB was given greater power to accept offers in compromise to settle tax debts for less than what the taxpayer owes. Previously, all offers in compromise required a judge’s approval. Today, offers of less than $7,500 can be approved by the agency’s executive officer and chief counsel. Larger offers require the three-member board’s approval.

Here are some other tax law changes:

* Taxpayers will be able to charge their 1999 state tax bills to Discover, MasterCard or American Express credit cards. The state expanded a pilot program for the 1998 tax year that allowed residents with past-due tax bills to pay by credit card.

The convenience fee for charging can be stiff, however, starting at $3 for tax bills of less than $100 and climbing to $109 for bills of less than $5,000--making the program an expensive way to get frequent-flier miles, said Lynn Freer, president of Spidell Publishing Inc., a tax information firm.

* The FTB is sending out balance due notices to some taxpayers who failed to report income from other states’ municipal bonds, Freer said. Such bonds, as well as mutual funds that invest in non-California municipal bonds, can be taxable. In the past, the FTB has not bothered sending notices if the amount due was less than $50, but it is doing so now as part of a campaign to educate taxpayers, Freer said.

* Business owners who are considering incorporation should probably postpone doing so until after Jan. 1. A new law (Assembly Bill 10) that takes effect next year waives the minimum franchise tax for a new corporation’s first two years, which could save a corporation as much as $1,600, said Jose Currameng Jr., managing editor of the state and local taxes department of tax research firm Research Institute of America.

* With another new law, AB 1107, the state conforms to federal law on deductions for health insurance premiums. The self-employed can deduct 60% of their premiums for 1999. The rate is scheduled to rise to 70% for 2002 and 100% for 2003 and thereafter.

* The state also conformed to a host of other federal tax changes, including “innocent spouse” provisions, in state Senate Bill 94, enacted this year.

These provisions refer to state and federal laws that relieve spouses of tax liability if they did not know or did not have reason to suspect there was unreported income or were improper deductions on a joint tax return. Federal laws are already in place making it easier to qualify for innocent spouse protections, and they allow a spouse the option of severing his or her legal liability after a divorce or legal separation. The new California law matches those federal provisions.

* Many workers will pay more for state disability insurance next year. The Employment Development Department said that although the rate for disability insurance will stay at 0.5% of annual wages for 2000, the maximum wage base on which the withholding is figured will increase to $46,327 from $31,767. That means the maximum SDI withholding will jump to $231.64 from $158.84 for 1999, Freer said.

* The FTB says it has more than $7 million in undeliverable state income tax refunds, in amounts ranging from $1 to $82,000. If you might be one of the 40,000 taxpayers who didn’t get your refund, you can call the FTB at (800) 852-5711.

Incidentally, taxpayers can ensure that they get their refunds by signing up for direct deposit. For more information on direct deposit, call the above number. * The agency also is expanding its child support collection efforts. Counties are now required to send collection cases to the agency once the amount exceeds $100 and the support is more than 60 days past due. The agency can attach refunds, garnish wages and take other steps to collect overdue child support.

Under new rules that take effect Jan. 1, a taxpayer who owes both state taxes and child support may earmark money to be applied to the tax debt first, but only if the money is sent voluntarily and is not part of a collection process already in place. Any money collected through garnishments or other collection procedures will go to pay the child support.