FTB Statute of Limitations on Collection
If you have an outstanding Franchise Tax Board (FTB) income tax liability, or if you are a practitioner representing clients before the FTB, it is important to understand the FTB collection statute of limitations.
California Revenue & Taxation Code (R&TC) §19255(a) prohibits the collection of a tax after 20 years have lapsed from the date the latest tax liability for a taxable year becomes due and payable. While on its face this rule appears to indicate that the FTB has only 20 years to collect on an outstanding tax liability, R&TC §19255(a) is much more complex. The term “latest tax liability” refers to the most recent assessment. Pursuant to R&TC §19255(c)(2), If the FTB makes an assessment for a given tax year, the collection statute for any liability owed prior to the new assessment is reset. For example, Mike files his 2011 income tax return on April 15, 2012, reporting a balance owed of $10,000, which Mike cannot pay. The FTB audits Mike in the spring of 2014, and issues a $5,000 assessment which went final (and therefore became “due and payable”) on June 12, 2014. The FTB now has twenty years from June 12, 2014 to collect both the balance reported on the originally filed return (April 15, 2012 return), as well as the audit assessment.
Next we need to examine the term “tax liability”. R&TC §19255(c)(1) provides that the term “tax liability” includes any “additions to tax, interest, penalties, fees and any other amounts relating to the imposed liability.” This statute section, when read in conjunction with R&TC §19255(c)(2), provides that when a new “tax liability” is incurred, the statute of limitations for both the new liability, and the prior liability, renews.
The FTB interprets R&TC §19255 to mean that if a fee is incurred for a given tax period, the collection statute renews for all of the liability owed for that tax period. A lien fee, or installment agreement fee, are two examples of fees that could be incurred. The FTB passes on the cost of filing a lien to the taxpayer. An FTB lien is only valid for ten years, which means the FTB must refile liens every ten years. If a lien is refiled in the same county in which the lien was originally filed, there is no additional lien fee charged. However, each and every time a new lien is filed, such as when a lien is filed in a different county, a lien fee is incurred. It is the FTB’s position that when a fee is incurred, the collection statute for all liability owed for that specific tax period renews.
Take Mike from the example above. Mike cannot pay the tax reported on his 2011 income tax return which he filed on April 15, 2012. The FTB has twenty years from April 15, 2012, to collect the $10,000 of self-assessed tax liability. On December 3, 2012, the FTB files a lien against Mike. When the FTB files the lien it incurs a fee which it passes on to Mike. According to the FTB, this fee resets the collection statute and now the FTB has twenty years from December 3, 2012 to collect from Mike. The FTB issues a proposed notice of assessment which went final on June 12, 2014, and therefore became due and payable. The FTB’s position is once the noticed of proposed assessment becomes final, the collection statute for the entire liability is renewed. On February 3, 2015, the FTB files a new lien to include the new tax liability. The filing of a new lien will result in the assessment of a fee which, according to the FTB, will reset the twenty year collection statute. The FTB renews its lien on February 2, 2025, and since Mike has moved to a new county, the FTB files a new lien in the different county. Since the FTB incurred a fee when it filed the new lien, and since that fee will be passed on to the taxpayer, according to the FTB, the statute of limitations on collection would reset. This would mean the FTB would have twenty years from February 2, 2025 to collect the balance owed.
The FTB’s interpretation of the law becomes even more bizarre when one considers R&TC §19255(e)(1)(C) which provides that the statute of limitations on collection is suspended for the period described under subdivision (d) of Section 19008 relating to installment payment agreements. R&TC §19008(d)(3) provides that no levy may be issued on the property or rights to property of any person with respect to any unpaid tax during the period that the installment agreement for payment of the unpaid tax is in effect. This means that when a taxpayer is on an installment agreement, the statute of limitations on collection is tolled.
I do not believe that the FTB is properly interpreting the collection statute. The FTB currently takes the position that if you enter into an installment agreement for a given tax year, you would in essence be resetting the collection statute because you incurred a fee, and the collection statute would toll the entire time you are on the installment agreement. This would mean the twenty year clock would not start to run until after the installment agreement defaulted or otherwise terminated.
I take issue with the FTB’s interpretation of the collection statute. If a “tax liability” also includes interest, which R&TC §19255(c)(1) clearly includes in its definition of “tax liability”, why is the statute not reset each and every day that interest accrues? The answer is because resetting the statute every day is clearly not the intent of the California legislature. Such a rule would negate the entire purpose of having a collection statute. One must wonder how the FTB can take the position that a unilaterally assessed fee (in the example of the lien fee) could reset the statute of limitations. Such a position is not only nonsensical but also inherently unfair to taxpayers.
The collection statute is also suspended: (1) while the taxpayer is in bankruptcy plus six months; (2) while the taxpayer is serving in the military and in a combat zone; (3) while the taxpayer is in child support collections plus sixty days; and (4) during a presidentially declared disaster.
Taxpayers and representatives must proceed with caution when dealing with FTB collection statute issues. This is especially true in situations where the collection statute of limitations is close to expiring.
Surely the California legislature did not intend to discourage taxpayers from entering into installment agreements, yet as interpreted by the FTB, a taxpayer must be very cautious prior to agreeing to an installment agreement with the FTB.
If you have any questions or concerns regarding the FTB statute of limitations, please contact our firm.