If you have an outstanding tax liability owed to the California Franchise Tax Board (FTB) past the due date, your tax bill is at risk of growing much larger over time. By law, the Franchise Tax Board must charge interest on unpaid taxes. This interest is charged from the due date until the date it is paid, is adjusted twice a year, and compounds daily.
On top of this interest, a delinquent penalty rate is charged. The rate is 5% of the total unpaid tax, and a further 0.5% for each month or part of a month over the due date that the tax remains unpaid, up to 40 months. Other penalties for returned checks, understatement, negligence and fraud may also add to the overall total owed to the FTB. There is no “reasonable cause” exception for interest due on your tax assessment. In some specific cases, however, you may qualify for tax interest penalty abatement. This concession from the FTB can make paying your late taxes less of a burden.
An introduction to tax interest penalty abatement
Interest penalty abatement is the reduction or elimination of interest penalties under certain (often extraordinary) circumstances. The rules around tax interest abatement are very specific, and if you are seeking abatement, you must be prepared to present evidence proving that you meet the strict requirements. Reaching a successful abatement agreement with the Franchise Tax Board requires good information and careful preparation.
Circumstances for abatement
There are six recognized circumstances under which the Franchise Tax Board will consider tax interest abatement. Each has its own specific rules and requirements which must be met in full when applying for abatement.
The extreme financial hardship circumstance applies only to individuals, not to corporations, and you must be able to prove that your financial hardship is the result of a catastrophic circumstance or a significant disability. If you are requesting an abatement under these grounds, you will be asked to include the following with your application:
- A completed Financial Statement, Form FTB 3561.
- A detailed statement from your physician, if it applies to your case.
- Verification of catastrophic circumstance or significant disability, such as insurance documentation, etc.
If your tax liability is due to the FTB issuing too large a refund, you are not required to pay interest on the overage amount. This circumstance applies to both individuals and business entities, and in this case you do not need to formally request an abatement: it will be granted automatically and should be reflected in your correspondence with the FTB .
Reliance on formal written advice
This is another case where a mistake by the FTB can mean that you are not liable for interest on your tax liability, and it applies to individual taxpayers and businesses. Here is what this circumstance might look like:
- You make a formal written request to the FTB for specific clarification about whether any particular transaction or activity is subject to tax.
- The FTB responds, in writing, to your request, with information stating that the activity or transaction is not subject to tax.
- You reasonably rely and act on this advice, and do not remit tax, based on the advice.
If this is the circumstance of your overdue taxes, you will likely qualify for an abatement, however the requirements are very specific and legally significant. You must provide all of the following with your abatement request:
- A copy of your original written request for advice. This request must not include any misstatement or omission of relevant facts or important information, or your claim will be denied.
- A copy of the written advice you received from the FTB.
- A statement outlining the facts on which you are basing your claim. This statement is made under penalty of perjury, which means that you must be able to state these facts truthfully under oath in court.
- Any other relevant information required by the FTB.
The FTB has special rules around interest charged to victims of disasters. The taxpayer must be located in a location that the President of the United States or the Governor of California has officially declared a disaster area or under a State of Emergency. During the period of the disaster, the FTB may declare extension periods and delay the mailing of bills and notices, and they will abate any interest due during this period. They also automatically follow any federal postponements announced by the IRS, so penalties and interest are cancelled for the postponement period, which may be up to one year.
The exact qualifications of abatements under disaster states depends on when the disaster was declared:
- For disasters that were declared on or after January 1, 1998, the FTB will not charge interest for the extension period for individual taxpayers who were victims of a disaster. This provision does NOT apply to estates and trusts or to corporations, and covers up to 90 days of interest.
- For disasters that were declared on or after September 11, 2001, the FTB will not charge interest for the extension period for any taxpayer, including individuals, estates and trusts, business entities and corporations who are victims of a disaster.
You will need to show that you were located in the disaster area for the tax year owed and that the FTB issued an extension in response to that disaster.
Active military personnel stationed outside the US are qualified to receive filing and payment extensions without interest or penalties, including in the case of back taxes.
- Military personnel serving outside the United States in a designated combat zone or in a qualified hazardous duty area (QHDA) at any time during the tax filing period of January 1 to April 15: You are entitled to an interest- and penalty-free filing and payment extension of 180 days after leaving the combat zone or QHDA, as well as an additional extension for every day you served in the combat zone or extension, up to 106 additional days.
- Military personnel serving outside the United States but NOT in a designated combat zone or in a qualified hazardous duty area (QHDA): You are entitled to an interest- and penalty-free filing and payment extension of 180 days after your return to the USA.
- If you owe back taxes, you will be able to defer payment in most cases without interest or penalty in most cases, for up to 180 days after you return to the USA. In the case of a National Guard or reservist called into active duty, and this service materially affected your ability to pay your tax liability, you can request an interest and penalty free determent from the date you were called to full-time service until 180 days after you left full time service. You will also need to submit a certificate signed by an appropriately authorized officer of the military which includes the following:
- Dates you entered and left service
- Place where service occurred
- Rank, branch, and unit
- Monthly pay received at the date the certificate was issued.
- If you receive a notice from the FTB, you should call the number on the notice to discuss your military status and qualification for interest abatement. To qualify for deferral or abatement will need to provide the FTB with:
- Your name and social security number (SSN)
- Your mailing and/or permanent address
- Your branch of service
- Name and number of your unit
- Dates you entered and left service
FTB/IRS error or delay
The Franchise Tax Board has the discretion to abate interest for both individuals and business entities if the taxpayer can prove an “unreasonable error or delay by an officer or employee of the Franchise Tax Board (acting in his or her official capacity) in performing a ministerial or managerial act. (Rev. & Tax. Code, § 19104)”
This is a highly qualified statement, and there are several terms which you will need to understand. Here are the official definitions from the FTB:
“A ministerial act is a procedural or mechanical type act that does not involve the exercise of judgment or discretion. It occurs during the processing of a taxpayer’s case after all prerequisites to the act, such as conferences and review by supervisors, have taken place. A ministerial act does not involve the application of tax law to the facts of a case.
An example of a ministerial act is when a taxpayer contacts an FTB employee and requests a balance due. The employee fails to access the most current information and provides the taxpayer with an amount that is less than the actual balance due. The act of accessing the account information and providing that information to the taxpayer is a ministerial act.”
“A managerial act is an administrative type act that occurs during the processing of a taxpayer’s case. It is also the exercise of judgment or discretion relating to management of personnel. A managerial act does not involve the application of tax law to the facts of a case.
An example of a managerial act would be an FTB employee, in the process of reviewing a taxpayer's protest of an additional tax assessment, is sent to a training course for an extended period. If the protest case was not reassigned to another employee, the decision to send the employee to the training course and the decision not to reassign the taxpayer's protest to another employee, are both managerial acts.
There are are few other requirements you must meet in order to qualify for interest abatement under these circumstances.
- The interest must have accrued after September 25, 1987.
- No significant aspect of the error or delay can be your fault or attributable to you.
- The error or delay must have occurred after the date you first heard from the FTB in writing regarding your deficiency or payment.
It may be that your tax liability to the FTB was based on a final federal determination of tax by the Internal Revenue Service (IRS), and that the IRS committed the error or delay in the performance of a ministerial or managerial act. If the IRS agrees to an abatement under these circumstances, the FTB will follow suit for the same period of time. In the case of managerial acts, the FTB will only abate interest accrued on tax years starting on or after January 1, 1998.
There is a specific form to apply for abatement of interest based on errors or delays by the FTB or the IRS, FTB Form 3701, Request for Abatement of Interest. This request must be submitted alongside any protest against proposed deficiencies or any appeal from a notice of action on a protest.
What if your request for abatement is denied?
A denial is not the end of the road. If your request is denied, you may file an appeal with the State Board of Equalization. You will need to:
- Fill out and mail form FTB 5847I Procedure for Appealing a Denial or Partial Denial of a Request for Abatement of Interest.
- Prepare supporting evidence and documentation for your appeal hearing.
How to file a penalty dispute
Interest and penalties go hand in hand, and if you believe that you have reasonable grounds for any or all penalties to be cancelled, you can file a formal dispute. You will need to:
- Fill out and mail either Form FTB 2917 Reasonable Cause – Individual and Fiduciary Claim for Refund or Form 2924 Reasonable Cause – Business Entity Claim for Refund
- Send a copy of the notice you are disputing.
- Provide evidence and documentation supporting your case.
Dealing with the stress and confusion of an outstanding tax bill can be a huge drain on any individual or business, and the worry is made worse by fears of compounding interest and penalties. Whatever your circumstances, facing your liabilities directly is the best way to prevent your tax debt from growing into a much larger problem. You may have more options than you think. Consulting with a qualified tax attorney can give you a lot of comfort and peace of mind as you navigate your way through the tax system.