Sen. Appropriations

Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 526 (Fuller) - Personal income taxes: joint returns: relief from liability
Version: April 14, 2015
Urgency: No
Hearing Date: May 11, 2015
Policy Vote: GOV. & F. 6 - 0
Mandate: No
Consultant: Robert Ingenito
This bill meets the criteria for referral to the Suspense File.
Bill Summary: SB 526 would direct the Franchise Tax Board (FTB) to consider the
terms of a divorce settlement when determining whether to grant equitable relief on a
taxpayer’s own income.
Fiscal Impact: FTB indicates that the bill would result in an unknown reduction to
General Fund revenues; however, it estimates that for every $1 million dollars of relief
granted, General Fund revenues would be reduced by $60,000. Administrative costs to
FTB are also expected to be minimally in the tens of thousands of dollars annually
(General Fund).
Background: Spouses filing as “married filing jointly” are individually responsible for the
return’s accuracy and the tax liability, irrespective of the income split between them.
This is referred to as “joint and several” liability. While a court may revise the tax liability
in a proceeding for the dissolution of the marriage, it cannot relieve a spouse of tax
liability on earned income over which he or she has exclusive management and control
Because spouses can occasionally misrepresent tax information on a joint return
without the knowledge of the other spouse, federal law allows an innocent spouse to
qualify for relief under specified circumstances, to which California generally conforms.
To qualify for “innocent spouse relief” for state income tax purposes, the following must
The taxpayer must elect to do so within two years of the beginning of involuntary
collection activities.
The taxpayer must demonstrate the he or she did not know and had no reason to
know of the understatement of tax at the time the return was signed.
FTB must determine that it’s inequitable to hold the innocent spouse liable, taking
into account all facts and circumstances.
FTB can also reassign liabilities to the responsible spouse or registered domestic
partner (RDPs). The taxpayer must satisfy all of the above requirements, but also must
be divorced, separated, or living apart from the other person on the joint return for 12
months before making the election to request relief. Additionally, the Legislature
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directed FTB to allow similar relief for California income taxes whenever the Internal
Revenue Service (IRS) does so, under specified conditions. For those not meeting the
conditions, taxpayers can also request “equitable relief” from FTB for self-assessed
unpaid taxes reported on a joint return, similar to federal law. While not part of the law,
FTB states that it considers the following factors when determining whether to relieve
individuals of liability of unpaid taxes or any deficiency:
The taxpayer’s current marital/registered domestic partner status.
Documented proof of abuse from spouse/RDP during marriage or registered
domestic partnership.
Proof that when the taxpayer signed the tax return, he or she expected to satisfy
the tax liability.
In the case of tax resulting from an audit, the taxpayer wasn’t aware of the tax
liability understatement.
The taxpayer’s current financial situation and ability to pay the tax liability.
Whether a divorce decree, termination of a registered domestic partnership, or
the legally binding agreement identifies one taxpayer as legally liable to pay the
tax liability.
Whether the taxpayer received a significant benefit from the unpaid income tax
liability or tax deficiency.
Taxpayer compliance with income tax laws in later tax years.
FTB must notify the other spouse, ex-spouse, RDP, or ex-RDP to allow the nonrequesting spouse/RDP an opportunity to provide documentation to grant relief. FTB
also notifies them of any action, and provides the non-requesting spouse/RDP with an
opportunity to appeal.
IRS Revenue Procedures set forth the requirements for equitable relief at the federal
level, including that the taxpayer requesting relief did not know or have reason to know
that there was an understatement or deficiency on the joint return. IRS recently
expanded its equitable relief provisions to provide that this requirement is satisfied when
the requesting spouse has been abused and didn’t challenge anything on the joint
return for fear of the nonrequesting spouse’s retaliation. Federal and state statutes are
very similar; consequently, FTB usually applies IRS revenue procedures for innocent
spouse relief for California cases; however, taxpayers who don’t obtain relief can appeal
these decisions to the Board of Equalization (BOE).
In a BOE case, a taxpayer appealed FTB’s denial of equitable relief for past unpaid
taxes. FTB stated that the taxpayer failed to establish that she had reason to believe
that her tax liability would be paid when the return was filed, she didn’t provide
documentation showing she didn’t know about the liabilities, and current law doesn’t
allow innocent spouse relief for income exclusively attributable to the innocent spouse.
SB 526 (Fuller)
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The taxpayer argued that the divorce settlement between her and her husband
allocated the obligation to pay delinquent taxes to him, so she should be absolved of
any tax debt.
Proposed Law: This bill would provide that when FTB is considering a request for relief
from liability for income earned by the requesting spouse or under his or her exclusive
management and control, the fact that an individual’s liability for unpaid taxes or
deficiency has been revised under a judgment of dissolution of marriage may be a
factor weighing in favor of the requesting taxpayer.
Staff Comments: FTB would have to predict both the frequency and dollar value of its
own future discretionary actions in order to accurately calculate future revenue loss
resulting from this bill. Specifically, it would need to estimate instances of when it will
provide discretionary relief. Such instances cannot be known in advance; moreover,
both the frequency and amounts of such judgments would be unknown. Instead, FTB
has developed a calculation that for every $1 million of relief granted under this bill, the
General Fund revenue loss would be $60,000.
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