Consequences of Nonpayment
California is extremely aggressive when it comes to the collection of unpaid taxes. Those who do not pay their taxes contribute to the state’s annual tax gap, which is estimated to be $10 billion. California tax agencies aggressively use their broad powers to collect delinquent taxes. Besides having interest, fees and penalties tacked onto a past due tax bill, an individual or business can also face these actions:
At least twice a year, the state publicly discloses a list of the 500 largest personal and corporate income tax delinquencies. The delinquency must be in excess of $100,000 and be subject to a recorded notice of state tax lien. An inclusion on this list can prevent the taxpayer from entering into business contracts with state agencies and cause the denial or suspension of occupational and professional licenses, including a driver’s license.
Bank Account Levy
The state’s Financial Institution Record Match (FIRM) program discovers delinquent debtor accounts through a record match process with banks and other financial institutions. Once identified, a levy for the full amount owed can be issued to your bank, which will freeze the funds immediately and send the funds to the correct taxing agency after a ten day holding period. The ten days gives the taxpayer time to contact the tax agency to discuss resolving their past due account. If your tax liability exceeds the amount in your bank account, the entire amount in the account will be frozen and levied. Unless the bank levy creates a financial hardship, it is very difficult to get the frozen funds released. California can also issue bank levies in other states to collect past due taxes. Notably, unlike a wage garnishment, a bank account levy is a one-time levy, meaning that the state agency must issue an additional levy to get additional funds.
The Franchise Tax Board can garnish your wages for unpaid income taxes. This means that they will contact your Human Resources Department directly and request that a portion of your wages be sent directly to them as payment for your past due liability. Garnishments are 25 percent of a taxpayer’s disposable income, which might be modified in certain circumstances. A wage garnishment is continuous, meaning that it will not be released until the taxes, interest, penalties and fees are paid in full or an alternative payment arrangement is negotiated. Nevertheless, a reduced garnishment amount can be established with proof of extraordinary expenses or financial hardship. If an additional balance accrues on a delinquent account, the agency can issue another garnishment.
California tax authorities have the power to file liens against business and personal assets in an attempt to collect unpaid taxes. A lien is a legal claim to secure a debt and once recorded, it becomes public and is in effect for ten years or more. A lien attaches to any real or personal property a person or business owns or has rights to, and can delay or prevent certain transactions such as buying and selling property. A lien also impacts credit ratings and can prevent an individual’s ability to gain and retain employment or obtain reasonable business loans.
State Licenses & Permits Suspension/Revocation
All California agencies can revoke or suspend almost any state professional or business license, including the driver’s license of delinquent taxpayers. The State Board of Equalization can also revoke a seller’s permit for a late tax payment. Other than payment in full, a showing that revocation or suspension of a license or permit will prevent the taxpayer from paying off their tax liability is often required for reinstatement.
Suspension of Operations
The Franchise Tax Board can suspend a California corporation if it fails to file a tax return, pay the minimum annual franchise tax of $800 or fails to pay any taxes it owes. While the corporation is under suspension, the FTB will issue a delinquent penalty for failure to file a timely tax return of 5 percent per month up to a maximum of 25 percent. Interest begins on the original due date of the tax return. The FTB will also issue a demand penalty when a corporation fails or refuses to furnish information requested by it or fails to file a tax return after written notice and demand. In either case, the demand penalty is 25 percent of the FTB’s assessment of what is owed or 25 percent of the tax shown on the return when filed before any refundable credits and payments from the original notice to the date full payment is received.
In October 2013, California Governor Jerry Brown signed into law the “Revenue Recovery and Collaborative Enforcement Team Act” that brought together the state’s three tax agencies as well as the Department of Justice to combat criminal tax evasion. Currently a pilot program until January 1, 2019, the law authorizes and facilitates data and intelligence sharing among the state agencies. In California, tax fraud and evasion can be deemed felony criminal offenses that can bring not only state but also federal charges. If found guilty, a taxpayer can receive a prison sentence of up to five years and fines of up to $100,000 for individuals and $500,000 for corporations.
Need Help With a California State Tax Issue?
The attorneys of Brown, PC have in-depth knowledge of California and federal tax laws and extensive experience in resolving tax dilemmas. We represent clients in Los Angeles and throughout California. To schedule a consultation, please contact Brown, PC online or by calling 424-252-1100.