Demystifying the Settlement of California Tax Controversies: Perhaps the most unique - and surprising - aspect of the California administrative settlement process is the designated agency settlement bureau structure.

Date01 July 2022
AuthorGustafson, Tim

California is a state of overflowing abundance. From technology to entertainment to produce, the state has it all and then some. So when it comes to tax agencies, why would California stop at one?

Most states have a single department of revenue, finance, or taxation, but California has five tax agencies: the California Franchise Tax Board (FTB), the California Department of Tax and Fee Administration (CDTFA), the California State Board of Equalization (BOE), the California Office of Tax Appeals (OTA), and the California Employment Development Department (EDD). And each agency comprises multiple bureaucratic layers.

The FTB, for example, has seven divisions. (1) The divisions, in turn, break down into multiple bureaus. Its legal division alone has ten bureaus. (2) Similarly, the CDTFA has its own divisions (seven) and bureaus (though, for comparison, its legal division has a mere four bureaus and one section). (3) Consequently, understanding--let alone navigating--the layers of bureaucracy is no small feat for taxpayers that seek to resolve a California tax controversy, whether through administrative protest and appeals processes or by means of settlement negotiations.

In many states, the counterpart from the department who handles a taxpayer's protest or appeal also has authority to negotiate a settlement. Not so in California. Many states may issue a substantial assessment against a taxpayer and then settle for ten or twenty cents on the dollar during the administrative process. Again, not so in California. Here is a brief overview of the settlement process in California, followed by key considerations for taxpayers seeking to resolve matters through that process.

Overview of California Settlement Process

WHO HANDLES SETTLEMENTS OF TAX CONTROVERSIES?

Perhaps the most unique--and surprising--aspect of the administrative settlement process in California is the designated agency settlement bureau structure. The FTB Settlement Bureau, for example, is the only bureau within the FTB empowered to implement the agency's statutory authorization to resolve matters on the basis of the risks and hazards of litigation. (4) This is unlike the situation in most other states, where the attorney or representative across the table is willing--and authorized--to engage in traditional settlement negotiations during the administrative process. In contrast, an FTB protest hearing officer can resolve a case on a principled basis only. In other words, a taxpayer must sway a hearing officer to accept its position by applying the law to the facts. As a practical matter, this means that there is no splitting of the proverbial baby on a particular contested issue. (5) If a taxpayer facing an assessment wants to cut a deal or "make it go away," then the FTB Settlement Bureau is the only option.

HOW IS SETTLEMENT STARTED?

To initiate settlement discussions, a taxpayer must submit a request for the matter to be accepted by the FTB or CDTFA Settlement Bureau. Importantly, acceptance is discretionary, and there are a number of reasons that either settlement bureau may reject a taxpayer's request. To begin with, statutes limit the types of matters eligible for settlement. The bureaus can accept only claims for refund or deficiency matters that are at protest/on petition for redetermination or on appeal before the OTA. (6) Deficiency matters still under audit are not eligible...

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