Tax gap operations: FTB's procedure may be new to many CPAs.

• Author: Williams, Leonard W.
• Position: Franchise Tax Board and Certified Public Accountant

California's Franchise Tax Board has a procedure that is new to many. A client received an inquiry requesting a 2005 Form 540. Included in the verbiage was something to the effect of: "You paid $35,000 in home mortgage expense, we believe that you must have had income that exceeded the filing requirement."

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It turned out that his income was below the 2005 filing requirement because he'd made a pile of money in 2004, from the exercise and sale of stock options, invested the proceeds in California and municipal bonds and didn't work in 2005. So, he had no taxable income for 2005. (Maybe he should look into paying off the mortgage if he has that kind of money.)

This probably is ancillary to the use of Form 1098 mortgage interest payment records by both the IRS and FTB in their "lifestyle" analyses to measure possible under-reporting of income, even when a return has been filed, when the income reported on the tax return doesn't seem to support the mortgage interest being paid.

State Board of Equalization and Use-tax Collections

The SBE routinely looks for any documentation indicating a sale value of more than $400. A usual source is customs declarations from the U.S. government, which are filed when someone re-enters the United States after a trip abroad. They receive similar reports from e-Bay, as one Tax Talk participant told of a client who got a use-tax bill for a $7,195 watch purchased on e-Bay.

FTB Changes FAQs for Interest Abatement

Qualified individuals and business entities should take a look at the FTB's updated website, which contains information on everything from erroneous refunds, circumstances for abatement denied requests.

View the updates at www.ftb.ca.gov/ individuals/faq/interestabatement.html.

Prior-year Balance Due from Refunds to Taxpayers

A CPA's client still owed about $1,900 in taxes to the IRS for 2005. His 2006 taxes were filed showing substantial refunds from both the IRS and the FTB.

He got a statement from the FTB stating that it had "intercepted" the refund on behalf of the IRS and would forward the amount to IRS.

There is nothing specific that has to be done at the time. Sooner or later, once the payment by FTB has been posted, the account will show an overpayment and the IRS will refund the excess automatically if no other taxes are owed to the IRS.

Good Advice From a Board of Equalization Auditor

While working with the audit regarding use tax for an out-of-state company making sales in...