Proposal to Amend Revenue and Taxation Code Section 19035 to Mandate That the Franchise Tax Board Provide All Notices Relating to Joint Tax Returns to Each Joint Filer

• Publication year: 2016
• Author: By Robert S. Horwitz & Carolyn M. Lee

Proposal to Amend Revenue and Taxation Code Section 19035 to Mandate That the Franchise Tax Board Provide All Notices Relating to Joint Tax Returns to Each Joint Filer1

By Robert S. Horwitz & Carolyn M. Lee²

EXECUTIVE SUMMARY

Under current practice, many taxpayers do not receive notices regarding joint returns that they filed with their spouse or registered domestic partner. In most instances, the Franchise Tax Board sends only a single joint notice to a couple that filed a joint return. By statute, a single joint notice is required to be sent for a notice of proposed deficiency assessment, unless the Franchise Tax Board ("FTB") is notified by either spouse or registered domestic partner that separate residences have been established. In the case where the joint filers have declared separate residences, the FTB is required by statute to mail duplicate originals of the joint notice to each person in lieu of the single joint notice.³ This limited notice potentially reduces by 50 percent the number of taxpayers with actual notice of information pertaining to the filed return. Many California marital or registered unions are under strain, which impairs information (and mail) exchange between the partners. In addition, in the case of divorcing partners, issuing one joint notice may result in only one spouse being aware of a tax liability. The other spouse may agree to marital dissolution terms that do not provide for the payment of the liability. California's statutory notice requirements do not address the reality of the personal lives the State's joint filers.

By contrast, since enactment of the Internal Revenue Restructuring and Reform Act of 1998, the Internal Revenue Service ("IRS") is required to send any notice relating to a joint tax return separately to each spouse filing the return, whenever practicable.⁴ The IRS sends all notices of deficiency and other notices to each person who filed a joint income tax return, whether or not the individual taxpayers have notified the IRS that separate residences have been established. In this way, each joint-filing taxpayer is more likely to receive actual notice of information and issues pertaining to a filed tax return. Each taxpayer therefore has the opportunity to respond to the IRS, and to act to protect his or her interests as they relate to the tax return.

This paper proposes a change to the Revenue & Taxation Code to conform to P.L. 105-206, section 3201(d), and provide separate notices to each jointly filing taxpayer of FTB-proposed action or action taken by the FTB pertaining to the joint tax return. Such notice will permit each spouse or registered domestic partner to have actual notice of the FTB's action. All notices from the first communication pertaining to a return through assessment and the conclusion of the collection cycle would be affected by this change. Each jointly filing taxpayer would have the opportunity to respond to the FTB and protect the individual taxpayer's or both taxpayers' interests. In addition, upon receiving notice each taxpayer may take other appropriate action, including addressing a tax liability or seeking relief from joint and several liability for tax deficiencies claiming the protection of Revenue & Taxation Code section 18533.

The benefits of enacting the proposed change include increased compliance, increased taxpayer equity and other direct benefits to taxpayers as well as the Franchise Tax Board. The change also would make California's notice practice consistent with the Internal Revenue Service's notice practice.

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DISCUSSION

I. BACKGROUND A. The Law Prior to 1998

The Internal Revenue Code allows taxpayers who are married to elect to file separate income tax returns or a joint income tax return for a taxable year, with certain exceptions.⁵California requires taxpayers in most instances to use the same filing status that they used to file their federal income tax return for the same taxable year.⁶

Prior to the Internal Revenue Service Restructuring and Reform Act of 1998, the Internal Revenue Code did not require that separate notices be sent to both spouses when a joint return was filed. The only Internal Revenue Code provision dealing with notices to persons who filed a joint return is section 6212(b)(2). That section was enacted as part of the original Internal Revenue Code of 1954. It provides that a single notice of deficiency may be sent in the case of a joint return, unless the Secretary "has been notified by either spouse that separate residences have been established, then, in lieu of the single joint notice, a duplicate original of the joint notice shall be sent by certified mail or registered mail to each spouse at his last known address."

Like Internal Revenue Code section 6212(b)(2), Revenue & Taxation Code section 19035 allows the Franchise Tax Board to issue a single notice of proposed deficiency assessment to joint filers unless the Board has been notified "by either spouse that separate residences have been established."

B. The Internal Revenue Service Restructuring and Reform Act of 1998

In 1998, Congress enacted the Internal Revenue Service Restructuring and Reform Act ("the Act").⁷ Section 3201(a) of the Act enacted Internal Revenue Code section 6015 to expand the relief available for innocent spouses. Section 3201(d) of the Act requires the Internal Revenue Service, "whenever practicable," to "send any notice relating to a joint return ... separately to each individual filing the joint return."⁸

The Legislative History of Section 3201(d) is scant. The Act originated in the House of Representatives in 1997 as H.R. 2676. Although the House version of H.R. 2676 contained provisions to expand the scope of section 6015 relief, the first version of the bill to include a provision requiring joint notice was the Engrossed Amendment Senate version of the Act, which passed the Senate in May, 2008.⁹

The idea for including a requirement that separate notices be sent to joint filers apparently originated with the testimony of Lynda D. Willis, Director, Tax Policy and Administration Issues, General Government Division, U.S. General Accounting Office, at a hearing on innocent spouse relief held before the Subcommittee on Oversight of the House Ways and Means Committee. Representing the U.S. General Accounting Office, Ms. Willis testified:

I think there's [sic] also things that need to be done in terms of IRS trying to find both spouses. Picking the low-hanging fruit by

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