Changes made to real estate withholding requirements
Governor Schwarzenegger signed Assembly Bill 1338 into law on September 15, 2004. It amends Revenue and Taxation Code Sections 18662 and 18668, making changes to real estate withholding requirements and exemptions effective for all transactions closing on or after January 1, 2005. The following is a summary of the changes.
In order to get the word out about this law change we will be conducting escrow and agent presentations, updating the various real estate withholding forms and FTB Publication 1016, Real Estate Withholding Guidelines (available by mid-December or early January), and updating our Website (Website keywords: real estate withholding).
FTB provides e-filers with electronic signature options
You may have heard that we are adding electronic signature options for e-filed returns to mirror those provided by the Internal Revenue Service. Like the IRS, you and your clients have the option of signing through the use of taxpayer, practitioner, and Electronic Return Originator (ERO) PINs. You will continue to have the option of using the California e-file Return Authorization Form (form FTB 8453).
In early January, all EROs will receive our e-file CD-ROM. All of our e-signature information will be included. But, in case you can't wait until then, here is a comparison chart of the different options and a list of frequently asked questions.
The following chart shows the taxpayers' and EROs' responsibilities when using each of the signature options.
Form FTB 8453
Review and sign form FTB 8879
Enter their PIN on your computer.
Provide their shared secret (prior-year California AGI)
Review, sign and retain form FTB 8453
Review, sign and retain form FTB 8879.
Enter your client's PIN as shown on form FTB 8879.
Enter your ERO PIN.
Allow the taxpayers access to your computer.
Enter your ERO PIN.
Review, sign and retain form FTB 8453
Shared secret (prior year California AGI) is generally not required.
No paper forms required.
No shared secret or form FTB 8879 required.
Frequently Asked Questions
1. If you use the practitioner PIN method, you must retain the California form FTB 8879
2. If you use the self-select PIN method, your clients must provide their prior year California AGI.
3. If you don't use one of the electronic methods, you must retain (not mail) the California form 8453.
Real estate or nonresident withholding credits
If your clients are individuals and sold California real property that was not their principal residence, withholding was probably performed as part of the transaction and they should have received Form 593-B, Real Estate Withholding Tax Statement, to document how much real estate withholding credit they have. To claim this credit on your clients' California income tax return, enter the credit on the Real estate withholding or Nonresident withholding line. Do not claim it on any other line or the credit will be delayed or denied during processing.
If your clients are nonresidents, they may have a nonresident withholding credit. If so, they should have received form FTB 592-B, Nonresident Withholding Tax Statement, or form FTB 594, Notice to Withhold Tax at Source, to document their nonresident withholding credit. To claim this credit on the clients' California income tax return, enter the credit on the Nonresident Withholding or Real Estate Withholding line. Do not claim it on any other line or the credit will be delayed or denied during processing.
If any of your affected clients are pass-through entities they may need to flow the credit through to their partners, members, shareholders, or beneficiaries. See FTB Publication 1017, Nonresident Withholding Partnership Guidelines, for information on how to flow the credit through.
If you have withholding questions that are not specific to your client's account, call our Withhold at Source Hotline at (916) 845-7315. If you have withholding questions specific to your client's account, please call our toll-free number (888) 792-4900. For callers outside the United States, call (916) 845-4900. We comply with the American with Disabilities Act. Persons with hearing or speech impairments please call TTY/TDD (800) 822-6268.
We have all heard those radio ads urging Californians to incorporate in Nevada to avoid paying California taxes. During our tax gap symposiums in July, many of you felt that some of these advertised tax avoidance strategies were questionable. Some tax practitioners suggested we launch our own advertising campaign to counteract their claims.
We are using our Website, to provide information that can help the public recognize questionable tax avoidance strategies. You can help by sharing these facts about California taxation with your clients:
As you know, California residents are taxed on all income, including income from sources outside California. Tell your clients that if they incorporate outside of California, yet remain California residents, any dividends or salary they receive from the corporation will be taxable to California, regardless of where the corporation is incorporated or does business.
In addition, non-California residents who receive income from a California source, such as salary for work performed in California for a corporation, regardless of where that corporation is incorporated or does business, may be required to pay California tax.
Any corporation, regardless of where it is incorporated, that is doing business in California, is subject to California franchise tax. Doing business is defined as actively engaging in any transaction for profit. A single transaction can be sufficient to be doing business. In the case of limited partnerships, limited liability partnerships, and limited liability companies, California assesses an $800 annual tax for doing business in this state. Limited liability companies are also assessed an additional fee, which is based on worldwide gross receipts.
more information on corporation filing requirements, see the following publications:
Thankfully, most of you, when asked by your clients about those radio ads, have been successful in explaining why incorporating out-of-state may not shield them from paying California tax. We believe that by working with you to educate the public about the advantages of lawful, voluntary compliance, we can dry up the market for illegal tax avoidance schemes and reduce California's tax gap. Keep reading Tax News, as we will continue to provide you with information you can use to educate your clients. When you share this information with your clients be sure to also explain to them the seriousness of the tax gap and why we need to close it. You can find comprehensive information about the tax gap on our Website.
If you have clients (businesses or individuals) who have mistakenly failed to meet their filing obligations, now is the best time for them to come into compliance by participating in either California's Income Tax Amnesty Program or our ongoing Voluntary Disclosure Program.
Tax Amnesty Program
California's 2005 tax amnesty program offers a window of opportunity for business entities and individuals to pay their past-due income or franchise taxes and interest, and they will not have to pay most penalties and fees or fear prosecution. If they choose to take advantage of this limited time program, they can correct tax records and save money. We will waive most existing penalties and fees applicable to taxable years beginning before January 1, 2003. Log onto our Website for the most current and comprehensive information about this historic opportunity.
Voluntary Disclosure Program
The Voluntary Disclosure Program allows qualified entities, shareholders, or beneficiaries that may have an unfulfilled franchise or income tax obligation to come into compliance voluntarily. If your clients are admitted into the Voluntary Disclosure Program we will waive certain penalties associated with the return filings. See FTB Pub. 1071, Guidelines for Voluntary Disclosure Agreements, for more details. Or go to our Website and type Voluntary Disclosure Program into the search engine. Not sure which program to use? Here is a comparison chart to help you determine which program is best for your clients' situation:
Tax Amnesty Program and Voluntary Disclosure Program
|Tax Amnesty Program||Voluntary Disclosure Program (VDP)|
|What is the application period?||February 1, 2005 - March 31, 2005||Ongoing.|
|What are the eligible tax years?||2002 and earlier tax years||Six year look-back.|
|Who is an eligible entity/individual?||All individuals, corporations, fiduciaries, estates, and trusts, and other entities (LLCs, partnerships, etc.)||C corps, S corps, S corp. shareholders, certain trusts, certain trust beneficiaries, LLCs and their owner-members|
|What are the qualifications?||
Failed to file income tax returns.
Underreported tax liability on a previously filed income tax return.
Failed to pay any taxes previously assessed.
Cannot be qualified, registered, or organized in California.
Neither the applicant nor any predecessors to the applicant may have previously filed California returns.
Neither the applicant nor any predecessors to the applicant may have been contacted by us regarding a tax obligation.
Cannot have staffed and maintained a permanent facility in California.
Must establish reasonable belief that there was no filing obligation.
Eligible S corp. shareholders, trust beneficiaries and LLC owner-members. cannot be California residents on the date they sign their VDP agreement.
|Who is disqualified from the program?||Under investigation as of February 1, 2005, or eligible for our Voluntary Compliance Initiative or Offshore Voluntary Compliance Initiative (but only disqualified in this latter case with respect to tax shelter items).||Admitted applicants will have their VDP agreements voided if they misrepresent a material fact, fail to file and pay timely or the tax stated on a return is understated by 10 percent.|
|What is the approval process?||Automatic (unless disqualified).||We evaluate applications. Our executive officer and chief counsel recommend and submit VDP agreements to the three-member Franchise Tax Board for approval. The Board typically renders a decision approximately 60 days later.|
|What taxes are eligible?||Income, franchise, sales, and use taxes.||Income and franchise.|
|What required payments must be made?||Tax, interest, and certain penalties and fees.||Tax, interest, certain penalties and fees.|
|What is relieved?||Certain penalties and fees.||Certain penalties.|
|Is relief discretionary or mandatory?||Mandatory.||Discretionary.|
|Imposition of 50 percent interest-based amnesty penalty||
Applies to amnesty eligible candidates with a balance due that do not apply by March 31, 2005. (other than grandfathered installment agreements), and to deficiency and self-assessed amounts that become final for amnesty eligible tax years after March 31, 2005.
This penalty cannot be waived.
Applies to VDP applications approved after March 31, 2005, for amnesty eligible tax years (if account has not been fully paid by that date).
This penalty cannot be waived.
|Identity of applicant||Must be disclosed on the amnesty application.||Remains anonymous until accepted in VDP.|
|Time to file required returns||No later than May 31, 2005 (must have applied for amnesty by March 31, 2005).||After the Board approves applications, staff has discretion to allow admitted applicants up to 120 days to file returns and make payment.|
Try our new 1099 Internet filing option
Reporting information returns is now greatly improved with our new 1099 Internet filing option. The program is safe, private, and easy to use. Access this secure Website to view the edit results for your file (results are posted within one week of filing).
Send text or zip files using the same file format as that for magnetic media filing (see the IRS Publication 1220, Specifications for Filing Forms 1998, 1099, 5498, and W-2G, Electronically or Magnetically). And, you also get an immediate confirmation when we receive your file.
Form FTB 8305
We no longer print and distribute form FTB 8305 Reporting Requirements for Forms 1098, 1099, 5498, and W-2G to information return transmitters. The form will continue to be available on our Website. Programming changes affecting calendar year 2004 information return reporting are published in IRS Publication 1220.
For faster results, call practitioner hotline; don't send letters with client's return
The best way to receive specific answers to your clients' questions regarding their tax return or other issues requiring timely action is to contact our Franchise Tax Board Tax Practitioner Hotline at (916) 845-7057.
Don't attach a letter to your client's tax return. Often these letters are not answered until they have traveled through our entire return processing system and are ultimately rerouted to our Taxpayer Service Center for reply.
This can take many weeks and sometimes the letters are inadvertently filed without a reply. The only exception is if the letter provides an explanation for some information contained in the return. In most cases, our customer service representatives can answer your questions immediately when you call our hotline. And, for those situations when you need to furnish us with additional information, you can send it to us via fax.
If you can't call our hotline, send us your question via fax. Our Tax Practitioner Hotline is open from 8 a.m. to 5 p.m., Monday through Friday. Send us a fax 24 hours a day, seven days a week, at (916) 845-6377.
Mandatory e-file - Update
We have some good news about mandatory e-file. Due to recent legislation, the penalty provision effective date has changed to on or after January 1, 2005. The law specifies a penalty of $50 per return for willful neglect to e-file acceptable California individual income tax returns. We are sending letters, calling, and visiting those practitioners who we have identified as meeting the mandatory requirements to e-file, but who did not participate, to ensure they comply with the law. If you were subject to the mandate and were unable to participate, it is not too late to get on board.
e-File Program Enrollment Process
Step 1: Enroll in the Internal Revenue Service e-file Program.
You need an IRS Electronic Filing Identification Number (EFIN) to enroll in our e-file Program. To get an EFIN, visit the IRS Website at www.irs.gov, and search for: EFIN.
Step 2: Enroll in our e-file Program.
Complete and submit our new online California e-file Program Participant Enrollment Form (form FTB 8633).
If you would prefer to fax or mail your enrollment form, you can download the paper version available from our Website. Use the fax number or address shown on the enrollment form.
Step 3: We process your enrollment form.
After we receive your enrollment form, we will conduct a review of your account to ensure that all your business entities are valid and licensed, all personal and business tax returns are filed timely, and all liabilities are current.
Step 4: We send you an acceptance letter.
When you have passed our review, we will issue your acceptance letter. In addition, we will provide you with a CD-ROM of e-file resources to guide you through the e-file process.
Step 5: e-file enrollment is complete.
When you receive your acceptance, you can begin e-filing returns.
For additional information regarding mandatory e-file requirements.
FTB e-file: Filing season review
During this past filing season we saw a tremendous increase in the number of e-filed returns, particularly in tax practitioner e-filing. Mandatory e-file was the main driver for the 86 percent increase in the number of e-file returns we received and a 106 percent increase in the number of e-file returns we received from tax practitioners. Here is a summary of the 2004 e-file season:
Electronic Returns Received
Tips for completing business entity payment vouchers
Incomplete or inaccurate payment vouchers slow down processing of your business entity clients' estimate and extension payments. They can also increase the risk of your clients' payments being applied to the wrong accounts, erroneous or delayed refunds, and erroneous billings.
Here are some general guidelines for producing complete and accurate payment vouchers:
Reduce paper consumption and minimize waste
Reducing paper consumption is one of the most effective ways to minimize waste. When taxpayers send us unnecessary attachments, particularly federal income tax returns, our cost to process their return increases. In 2002 alone, 1.8 million taxpayers unnecessarily attached their federal return to their California income tax return. Many attached a Form 1040 return to their Form 540 2EZ!
Processing tax returns containing unnecessary federal tax returns is a costly procedure, and so is processing those returns that lack the required federal tax return attached. We received 600,000 such returns in 2002 and in many instances we had to contact taxpayers and request that they send us their federal income tax return.
Both problems are significant because of their extremely high volumes. Most of you already instruct your clients on what to send us when they file. Please also explain to them how important it is to follow your instructions when they file, and to attach only what we require from them. As a general reminder, here are some guidelines for when to attach federal returns to California personal income tax returns (for filing purposes):
Attach Federal Return?
|540 2 EZ||No|
|540 with Schedules And B only||No|
|540 NR (Short)||No|
|540 with any other schedules other than A and B||Yes|
|540 NR (Long)||Yes|
If special circumstances exist and you're not sure of what documentation your client needs to provide us, please check the filing instructions on the tax form. You can find all our forms and related instructions on our Website. For a fail-proof way to ensure your clients are filing their returns properly, use e-file.
State conforms to Military Family Tax Relief Act of 2003
Changes made to the exclusion of gains on sale of principal residences and increases to the amount of exclusion of military death gratuity payments
now conforms to the federal Military Family Tax Relief Act of 2003, which makes
many changes to the taxation of military personnel. A couple of notable provisions
include changes made to the exclusion of gains on the sale of a principal residence,
and increases to the amount of exclusion of military death gratuity payments.
Regarding the rules for principal residences, California taxpayers have until November 10, 2004, (the same date for filing federal claims for refund) to file amended returns to take advantage of the new provisions for older years barred by the statute of limitations. An extended period is available for members serving in a combat zone or a contingency operation.
Exclusion on gain from sale of a principal residence by a member of the uniformed services or the foreign service
New law now provides that an individual may elect to suspend for a maximum of 10 years the five-year test period for ownership and use during certain absences due to service in the uniformed services (e.g., the Army, Navy, Air Force, Marine Corps, Coast Guard, the commissioned corps of the National Oceanic and Atmospheric Administration, and the Public Health Service). This provision is effective for sales or exchanges made after May 6, 1997. Taxpayers who want to make claims for refunds for older years that are otherwise closed by the statute of limitations (generally tax years 1997 through 2000) have until November 10, 2004, to make the federal election, which is binding for state purposes. This new provision also applies to members of the U.S. Foreign Service. When amending for state purposes, write "Military Family Tax Relief Act" in red on the top of the amended return. An extended period is available for members serving in a combat zone or a contingency operation.
Exclusion from gross income of certain death gratuity payments
Qualified military benefits include certain death gratuities with the level of the death gratuity exclusion increased from $3,000 to $12,000. The provision is effective for deaths occurring after September 10, 2001. Since the death gratuity income exclusion is increased retroactively, taxpayers who included part of the death gratuity as income for deaths occurring in 2001, 2002, or 2003, should file an amended return claiming a refund because of the change in law that excludes from income the full amount of death gratuity benefit. Write "Military Family Tax Relief Act" in red on the top of the amended return.
Check out our new forms update Webpage
often update our tax forms after we initially release them. It is now easier
than ever to review the most recent updates, online, using our Forms and Publication
Webpage. Go to our Website, and click on Forms and Publications.
We have added pull-down menus that allow you to view the list of forms and publications that have been revised since the initial paper version was released to the public. To view the revisions, first select the form using the pull-down menu. Then click the View Updates button. You will get a description of the change(s), and information about where the revision is located on the form. Editor's note: Most of our revised forms are not reprinted in a paper format.
Time to order your 2004 FTB Package X
We are now accepting orders for the 2004 California Package X. We will offer the printed version in bound and loose-leaf formats for $18 plus sales tax. If you subscribe to the print version of Tax News, you'll receive a personalized order form on the back of this issue. Use it to order your Package X and to renew your Tax News subscription. When completing the form be sure you:
Attention Tax News electronic version customers: If you are reading an electronic version of this issue, you will not find an order form. If you did not receive a personalized order form either in your print version of Tax News or in the mail, go to our Webpage and download an order form. Here's how:
For more information about ordering your 2004 Package X or subscribing to Tax News, visit our Website or call us at (916) 845-7070. Remember: You can always get up-to-date versions of all our forms and publications on our Website.
Substitute, scannable forms need our approval
If you are planning to use tax preparation software next year, be sure that the substitute and scannable California income tax forms generated from your software meet our Substitute Forms Program requirements.
All companies that manufacture and sell tax preparation software that generate substitute and scannable California income tax forms must file an agreement with us stating their intent to comply with our requirements for the 2004 tax year. By signing form FTB 1096, Agreement to Comply with FTB Publication 1098, the company agrees to follow the rules for developing substitute and scannable forms.
Each year, tax software companies that produce substitute and scannable forms are required to submit their forms to us for approval before they are offered to their customers. If you are unsure whether the forms you plan to use this upcoming filing season have our approval, ask your software provider to show you the FTB issued approval letter for each form you plan to use, before you use it. Do not accept a general statement from your provider that all company forms have been approved. Instead, give your software provider a list of the forms you plan to use and ask them to provide a copy of the FTB approval letter for each form.
Note: Companies that either sell or provide photocopies of official FTB income tax forms do not need to submit them for approval.
Filing tax returns on unapproved forms can lead to processing delays and in those cases where we cannot process the tax returns we will have to contact your clients directly in an effort to process their tax returns.
Summary of legislation signed into law in 2004
Several legislative measures affecting the Franchise Tax Board were signed into law in 2004. We have summarized them below. If you want to learn more about a legislative measure you read about here, go to the Law and Legislation Webpage located on our Website. You can also find comprehensive information about all legislative measures on the Official California Legislation Information Website.
Amnesty (& Budget Trailer items)
1100 (Senate Budget Committee) Chapt. 226
This budget trailer act:
Child support collections
2358 (Steinberg) Chapt. 806
This act transfers the authority and responsibility for the collection of past-due child support from us to the Department of Child Support Services.
1073 (Dutton) Chapt. 261
This act conforms California law to the new federal law by increasing the amount of the death gratuity excludable from gross income from $3,000 to the entire amount of the death gratuity, currently $12,000.
615 (Cedillo) Chapt. 388
This act makes California law compatible with the federal Servicemembers Civil Relief Act (SCRA) (PL 108-189) that was enacted on December 19, 2003. This act provides expressly that:
Native American servicemembers whose legal residence or domicile is a federal Indian reservation are treated as living on the federal Indian reservation and the compensation for military service is deemed to be income derived wholly from federal Indian reservation sources.
1713 (Machado) Chapt. 552
This act conforms California law to the changes made by the federal Military Family Tax Relief Act Of 2003. The act contains the following provisions:
246 (Escutia) Chapt. 380
This act gives California superior courts the authority to refer restitution orders to us for collection and requires us to seek resources to accept additional debt collection referrals.
2480 (Campbell) Chapt. 267
This act repeals a penalty provision for tax practitioners that are required to e-file individual income tax returns, and adds an identical penalty provision to be operative at a later date.
Franchise Tax Board sponsored legislation
AB 1260 (Matthews) Chapt. 163 This act makes it a crime to fraudulently obtain a state refund in any manner, not just by paper warrant.
By expanding the form of fraudulently obtained refunds that may be prosecuted as a violation of the Revenue and Taxation Code, this act effectively expands existing provisions to allow the department to recover investigative costs for fraudulent direct deposit refunds as well as other forms of fraudulent refunds.
1740 (Assembly Revenue and Taxation Committee) Chapt. 13
This act does the following:
3071 (Assembly Revenue and Taxation Committee.) Chapt. 353
3073 (Assembly Revenue and Taxation Committee) Chapt. 354
1172 (Ackerman) Chapt. 62
This act provides expressly that California is conformed to federal statutes that limit or preempt California's ability to tax the California source income of specified nonresidents. This act will prevent lengthy and expensive litigation to validate the preeminence of federal law.
Limited liability companies
AB 1859 (Nakano) Chapt. 416 This act allows domestic limited liability companies to cancel their existence in California without obtaining a tax clearance certificate.
AB 1416 (Bermudez) Chapt. 412 This act extends the repeal date from January 1, 2005, to January 1, 2009, for the provision of the Revenue and Taxation Code that essentially expands the client/attorney privilege for communications regarding tax advice to communications between a client and a non-attorney tax practitioner.
AB 1510 (Kehoe) Chapt. 772 This act allows taxpayers special tax treatment, called disaster loss treatment, for losses sustained as a result of the Middle levy break, the Southern California wildfires, losses related to the wildfires, and the San Simeon earthquake.
AB 1704 (Assembly Judiciary Committee) Chapt. 339 This act makes a non-substantive technical clarification to recently enacted law that allows an obligor under financial hardship that meets certain conditions to file for a claim of exemption for an amount that is less than or equal to the amount levied by us. In addition, this act makes non-substantive technical changes regarding the use of the term transfer when referring to delinquent child support debts referred to us.
AB 2585 (Parra) Chapt. 885 This act requires us to determine the increase in state income tax revenues attributable to locating the Joint Strike Fighter program in Kings County.
AB 2722 (Laird) Chapt. 715 This act allows the Wildlife Conservation Board to use bond funds to reimburse the General Fund for lost revenue resulting from the award of the Natural Heritage Preservation Tax Credit.
1097 (Senate Budget Committee) Chapt. 225
This act does the following:
1193 (Soto) Chapt. 547
This act creates a $10,000 death benefit, which is excluded from tax, for the surviving spouse or beneficiary of certain military personnel killed in the performance of duty.
SB 1458 (Johnson) Chapt. 591
1689 (Poochigian) Chapt. 402
This act excludes from gross income any payments, including related interest, made because of persecution during the Ottoman Turkish Empire received by an eligible individual or by the individual's heir or estate.
The act defines eligible individual as a person who was persecuted on the basis of race or religion by the regime that was in control of the Ottoman Turkish Empire from 1915 through 1923.
Real estate withholding
1338 (Chavez) Chapt. 528
AB 79 (Dutra) Chapt. 409 This act allows a public agency the option of preparing or submitting any written report not specified under this bill to the Legislature or Governor, unless required under specific circumstances. Those circumstances are as follows:
2328 (Wyland) Chapt. 782
This act provides limited tax relief for corporations required in 2002 to be S corporations for state purposes. In addition, this bill would conform to the current federal accrual method of accounting rules.
SB 1543 (Figueroa) Chapt. 921 This act:
1534 (Johnson) Chapt. 844
This act requires us to make available to certain taxpayers the option of using Form 540 2EZ to file their income tax return. To qualify for this filing option, the taxpayer's income would have to be under the following income thresholds:
For purposes of this bill, total income would mean taxable wages, dividends, interest, and pension income.
AB 263 (Oropeza) Chapt. 868 This act amends the tax statute that allows a deduction for dividends received by a parent corporation from an insurance company subsidiary because the statute was previously found to be unconstitutional. The act also stops corporations subject to tax under the Corporation Tax Law from overcapitalizing insurance subsidiaries that are subject to the insurance gross premiums tax instead of the corporate income tax.
658 (Nakano) Chapt. 562
This act establishes the California Prostate Cancer Research Fund for taxpayer contribution designation on the personal income tax return.