The repercussions of an unpaid balance due to California Franchise Tax Board (FTB) can be severe, especially for a small business owner with everything to lose. The law allows the FTB to pursue payment of tax debts aggressively through a number of involuntary collection actions. All of these actions are deeply unpleasant, and some can be devastating.
If you have received a notice from the FTB requesting payment in full on a past due balance or informing you that a collection process has begun, you are probably under considerable stress. The first thing that you should do is make sure that you fully understand the situation, and if necessary, find qualified legal representation for the next steps.
A quick introduction to tax liens
The topic of tax liens can be complicated and intimidating the first time you approach it, but the basic principles are not difficult to understand.
- What are tax liens and how do they occur?
In simple terms, a tax lien is a public notice which establishes the government’s legal claim to your property as security for delinquent tax debts. Tax liens may occur at the local, state, or federal level, and they may be applied to some or all of your assets. A lien makes it extremely difficult to sell property or obtain financing, and if it goes unpaid for too long, it can leave you vulnerable to more drastic collection actions.
- When are you at risk for a tax lien?
In the case of the California Franchise Tax Board, a lien is generally recorded after a demand for payment has gone unanswered. The FTB will then send a notice of collection action to a delinquent taxpayer 30 days before recording the lien. This notice will contain your tax debt, your rights in contesting the debt, and the deadline for avoiding the collection action. If your address has changed and you did not notify the FTB directly to change your address, you cannot use this as a defense. Simply mailing the notice to the last known address satisfies due process requirements.
- How is a FTB tax lien recorded?
If you do not respond to this notification, the FTB will record a lien with the county recording office in the county of your residence or a county in which you own real or personal property. They will then file a notice of state tax lien with the California Secretary of State.
The consequences of not paying
Like most tax problems, tax liens do not disappear when ignored. Neglecting to pay an active California Tax Franchise Board lien in a timely manner has serious fallout, and may trigger a cascading series of grievous personal, professional, and financial issues. Under certain circumstances, you can be held personally responsible for your business tax debt.
- Additional interest, fees and penalties
There are many extra fees which can quickly accrue to substantial amounts, including but not limited to interest, late filing penalty, late payment penalty, estimated tax penalty and demand to file penalty.
- Damaged credit rating
Credit bureaus regularly check public records for recorded liens, which can have a disastrous impact on your credit score.
Under the authority of the California Revenue and Taxation Code (R&TC) the FTB may pursue one, some, or all of the following collection actions:
- Seizure of assets
The FTB can issue warrants to enforce the payment of a lien, including warrants for the seizure and sale of assets that you own or hold an interest in. It is even possible to lose your house.
- Levy of bank account
A bank levy allows the FTB to seize any funds in your bank account up to the full amount of your liability and related fees.
- Garnishment of wages
Your employer may receive a notice from the FTB requiring them to continuously withhold up to 25% of disposable income owed to you. According the the FTB, your disposable income is your gross income after federal income tax, social security, State income tax and State disability have been deducted, but before 401(k) contributions, Health benefit deductions court-ordered assignments for support and voluntary deductions are taken out. Even if you are self-employed, the FTB can still garnish income owed to you for contracted services.
How to stop collections
If you have had an FTB lien recorded against you, it is vital that you act quickly. Delays are dangerous, and communication with the FTB is your best chance of slowing the collections machine. There are several ways that you can get your lien released.
- Pay due amount in full
Obviously, if at all possible, this is the best option. You will need to pay the total tax liability (including any penalties, accrued interest, and fees) for whatever tax years the lien represents. Once you have paid, within 40 days the FTB will record a certificate of release in the office of the county recorder where the lien recorded and will also file the release with the California Secretary of State. If you submit your payment by check, those 40 days will not begin until your bank/financial institution has honored the transaction.
- Reach an installment agreement
If you can meet the financial hardship conditions determined by the FTB, it may be possible to arrange to pay your tax liability through a monthly installment plan. You will need to file any delinquent returns and pay a one-time fee to set up the agreement, which will be added to your liability. FTB staff will determine your eligibility after you fill out a request form. The FTB may still record a lien on your property in order to secure the debt until it is paid, but the regular payment of installments will stop further collection actions. If you regularly miss payments, have dishonored payments or incur further liabilities, your agreement may be revoked.
- Make an Offer in Compromise
If you do not have the means, assets, or income to pay your full liability now or in the foreseeable future, you may apply to make an offer in compromise, which the FTB says they are likely to accept when “the amount offered represents the most we can expect to collect within a reasonable period of time.” An application for an Offer in Compromise is a fairly complex undertaking, and may not immediately stop collection actions. You may also be required to enter into a collateral agreement for a term of five years. This means that if your earnings increase substantially, you will be required to make further payments from any future income exceeds an agreed threshold.
- If the lien is in error, you may file a dispute
Sometimes, the FTB makes mistakes and records liens against innocent taxpayers. If you believe that a lien has been filed in error, you must call or write to the FTB immediately to explain the error. The FTB will investigate, and if they agree, they will send a release to the county where they filed the lien. At your request, the will also mail a copy of the release to the relevant credit bureaus. You generally have 30 days to prove the error.
What is your final resort if you cannot pay?
Unfortunately, in some cases an overwhelming tax liability can lead to bankruptcy, and bankruptcy does not always mean that tax problems go away. In some cases, a lien may survive the bankruptcy process. FTB tax liabilities can be discharged by bankruptcy, but it is important to consult with a professional before taking such a drastic and complex step. There are many steps that must be followed in the correct order, and any business which owes overdue taxes must be dissolved so that it is unable to generate any further sales tax liability.
There are a number of relevant factors which affect whether or not your liability is dischargeable and several prerequisites that must be met before any type of tax debt can be discharged. The conditions, exceptions, and events which could prevent the discharge of that debt are many. A thorough review of all the documentation and conditions surrounding your tax situation by an attorney trained in tax discharge issues is an absolute must. A qualified bankruptcy expert can lead you safely through the process to the other side, where you can begin to reclaim your life.
No matter where you may be in the FTB collections process, there is no reason to live in fear. When you can face the situation head on, armed with quality information and supported by a qualified advocate, you will have taken your first steps towards freedom and peace of mind.