Updated: August 14, 2024

By: Kari Brummond, EA|Reviewed by: James Cha, CPA

Overview of California Back Taxes Consequences and Resolution Options (FTB)

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The State of California has different tax agencies that handle the administration and collection of their taxes. These Departments are the Franchise Tax Board (FTB), the Employment Development Department (EDD), the State Board of Equalization (SBE), and the California Department of Tax and Fee Administration (CDTFA). The CDTFA began operating in 2017, when the State Board of Equalization was broken out into three entities: the State Board of Equalization, CDTFA, and the Office of Tax Appeals.

The FTB is responsible for the State Income Tax. The EDD is responsible for the State Employment Tax. Finally, the CDTFA is accountable for the State Sales and Use Tax (sales tax audits) and other Special Taxes and Fees.

California adheres to a progressive tax structure, similar to the federal system, but with its own set of brackets and rates. Taxpayers can file as Single, Married Filing Jointly, Married Filing Separately, Head of Household, or Qualifying Widow(er) with Dependent Child, each with specific implications for how back taxes are calculated and resolved.

For instance, Married Filing Jointly in California may offer some relief in terms of broader income brackets for lower tax rates, potentially reducing the overall tax liability for couples dealing with back taxes. On the other hand, opting for Married Filing Separately could lead to different tax obligations, possibly affecting the strategies for settling back taxes.

For Californians navigating back taxes, grasping these distinctions is key to developing an effective resolution strategy, whether through payment plans, Offers in Compromise, or other relief options offered by the California Franchise Tax Board (FTB).

Tax deductions also play a pivotal role in reducing taxable income, potentially lowering the overall tax liability for both businesses and individuals. California allows for many similar deductions as the federal, including those for mortgage interest, property taxes, charitable contributions, and certain business expenses. Additionally, California offers unique state-specific deductions, such as those for contributions to the California 529 College Savings Plan. Taxpayers should be mindful of the annual tax filing deadline, typically April 15th, to avoid penalties and interest on unpaid taxes. However, the California Franchise Tax Board (FTB) may extend deadlines under certain circumstances, such as natural disasters or other significant events.

Enforcement and Income Tax Collection Process

Once a tax assessment has become final, the FTB will mail a notice and demand for payment to the taxpayer. The taxpayer will have 15 days from the date on the notice to make payment in full. If the taxpayer does not pay in full or contact the FTB to make other arrangements, the FTB will begin collection actions. At this point, the FTB will start to assess penalties, interest, and collection fees. If the delinquent tax liability continues to remain unpaid, the FTB will file tax liens.

Orders to Withhold (OTW)

The FTB may also pursue involuntary collection actions, such as bank, wage, or asset levies. The FTB uses Orders to Withhold to seize money or assets from individuals and/or businesses with unpaid taxes in California. Orders to Withhold (OTW) are one-time orders, and if the FTB places an OTW on your bank account, the bank will freeze the funds for 10 days before sending them to the state.

Continuous Orders to Withhold (COTW)

Perhaps more commonly, the FTB uses Continuous Orders to Withhold (COTW) to collect unpaid taxes from continuous payments such as rents, commissions, or scheduled installment payments from the sale of property or assets. COTWs attach to all rents, commissions, or scheduled payments, and the FTB can take 100% of the funds up to the amount due. The FTB can also attach a COTW for one year to 25% of any credits or payments due to taxpayers -- typically, this applies to self-employed people.

California State Tax Agency Contact Information:

Individual Taxes: 800-689-4776
Business Taxes: 888-635-0494
General Inquiries: 800-852-5711
Collections: 888-635-0494
Website: https://www.ftb.ca.gov/

California law requires the taxpayer to receive specific notices before the FTB may file a Notice of State Tax Lien or before taking any involuntary collection actions. In the case of a tax lien filing, California law requires the FTB to mail notice to the taxpayer at least 30 days before the filing, stating the authority by which they are filing the lien and the procedures available to the taxpayer to prevent the tax lien filing. In the case of levies, California law only requires the FTB to provide a notice in writing at least 30 days before taking a levy action. If you have been issued a California FTB tax levy, you can view this detailed guide on removing FTB tax levies.

Earnings Withholding Order for Taxes (EWOT)

The FTB may also issue an Earnings Withholding Order for Taxes (EWOT). Similar to a wage garnishment, these orders get sent to your employer, and then, they must withhold a portion of your paycheck to send to the FTB. You may face an EWOT in the following situations:

You haven't responded to a demand for payment.
You promised to pay and didn't.
You have a history of late tax payments or delinquent returns.
You didn't make a full disclosure of your financial situation as requested.
You have defaulted on an installment agreement.

Usually, the FTB only tells your employer to withhold up to 25%. If the FTB wants more or if the agency wants to take wages from a non-liable spouse, they must get court approval. Note that private creditors always need court approval for wage garnishments, but the FTB doesn't need court approval to garnish 25% or less.

You can get OTWs released if you prove that you're suffering financial hardship or that it was issued in error. If you establish financial hardship, the FTB may review your details once a month to see if anything has changed. You can get OTWs and COTWs released by paying the tax liability in full. To get an EWOT removed, you must pay in full or prove that your Social Security Number was incorrect, you didn't receive due process, the order was wrong for some other reason, or the garnishment is causing financial hardship.

Overview of Options for Those With Back Income Taxes

You can pay California taxes online, through the mail, or over the phone -- get instructions on how to pay CA taxes. Taxpayers who owe delinquent income taxes to the State of California and cannot pay in full have several options available. These are:

Installment Agreement (Payment Plan),
Offer in Compromise,
Establish a Financial Hardship (Currently Not Collectable, “CNC”)
Penalty Abatement
Innocent Spouse Relief

California’s FTB offers an Installment Agreement (IA), also known as a payment plan. An IA allows a CA taxpayer to pay the FTB over a series of monthly payments until the delinquent tax liability, including penalties, interest, and collection fees, is paid in full. An Offer in Compromise is an agreement where the taxpayer and the FTB agree to settle the delinquent tax liability, including penalties, interest, and collection fees, for less than the amount the taxpayer owes. Establishing a Financial Hardship/CNC is merely acquiring a hold on involuntary collection actions for a temporary period. A request for penalty abatement is a written request asking the FTB to waive some, or all, of the assessed tax penalties.

FTB Monthly Payment Plan for Individuals and Businesses

For Individuals:

Compliance: Ensuring current tax compliance is crucial.
Debt under $25,000?: If you're able to repay through monthly installments within a 5-year span, you're likely eligible for an Installment Agreement.
Debt over $10,000 or need beyond 3 years?: Be prepared to disclose financial information.
Setup Fee: A nominal $34 fee is required to establish the payment plan, and anticipate a tax lien as part of the process.

For Businesses:

Filing and Payments: All tax returns must be filed, and current taxes paid.
Higher Setup Fee: Businesses face a $50 Installment Agreement fee.
Tax Lien: Similar to individuals, businesses should expect a lien filing.
Financial Disclosure: Documentation of your financial situation is needed for Installment Agreement consideration.

Establishing a Financial Hardship (Currently Not Collectible)

The taxpayer may be in a situation where they cannot afford any Installment Agreement, and they do not otherwise qualify for an Offer in Compromise. In these situations, the taxpayer should request Currently not Collectible status. To apply, you must file FTB form 3561 (Financial Statement). Note that in some cases, the FTB requires taxpayers to complete this form when applying for monthly payment plans.

If the FTB agrees, they will suspend enforced collection on the taxpayer for a specified period. A tax pro can give you guidance on how to apply for or qualify for this type of temporary relief. This relief is only a temporary fix and does nothing to reduce or resolve the delinquent tax liability. Further, penalties and interest will still accrue, and tax liens will remain filed. This option is for those taxpayers who need time to qualify for a more appropriate form of tax resolution.

Alternative Options That May Be Available

Challenge the Assessment

If the taxpayer has a proposed assessment for additional income tax due as a result of an FTB audit, they have the opportunity to protest the proposed assessment. The taxpayer can submit the protest online through MyFTB or file a written protest. The taxpayer must file the protest letter by the “protest by date” shown on the front of the proposed assessment notice. The protest process is informal and conducted by a hearing officer within the FTB. Taxpayers have the option of requesting an oral hearing, although not required. The FTB will issue a Notice of Action (NOA) informing the taxpayer as to their determination of the protest.

If the taxpayer cannot reach an agreement with the FTB audit protest office, they may appeal to the Office of Tax Appeals (OTA). The taxpayer must request an appeal within 30 days from the date on the NOA. The OTA is an administrative, judicial body that works in a formal, courtroom-type manner. While a taxpayer may represent themselves in the OTA, many may recommend hiring a licensed attorney or tax professional who has experience practicing in front of the OTA.

Bankruptcy

Bankruptcy, just like many tax resolution services, can be an expensive endeavor. Therefore, this option is likely only practical for taxpayers who also have significant personal liability as well. Bankruptcy proceedings may discharge some state tax liabilities. Taxpayers should seek the advice of an experienced tax and bankruptcy attorney if they want to consider this option.

The California Tax Amnesty Program

The State of California has conducted numerous tax amnesty programs. Currently, this program is called the Voluntary Disclosure Program. It is open to qualified entities, shareholders, members, beneficiaries, or partners. It encourages delinquent taxpayers to become current by waiving penalties for those who file and fully pay their delinquent tax liabilities. Many delinquent business taxpayers should consider taking advantage of this program. California and the FTB have run similar programs in the past for individual taxpayers as well.

Appeal Rights

California law does not provide taxpayers with the right to appeal determinations of the FTB concerning the collection of delinquent tax liability. However, there are a couple of practical tips a taxpayer should consider in an attempt to reach a reasonable resolution.

First, do not be afraid to escalate contentious issues to a manager within the FTB. Often a fresh set of eyes and the authority and experience of a supervisor can help resolve the matter amicably.

Second, if you believe that your case manager is not following California law, or discriminating against you, file a request for assistance with the Taxpayers’ Rights Advocate Office. The Taxpayers’ Rights Advocate Office is authorized to help resolve problems or complaints that were not resolved through proper channels. Taxpayers should file FTB 914, Taxpayer Advocate Assistance Request, found at https://www.ftb.ca.gov/forms/misc/914.pdf or leverage the online form found here.

FTB Lien Releases

The FTB will release state tax liens after the delinquent tax liability, including any penalties, interest, and collection fees, has been paid in full. They can also release them through an Offer in Compromise acceptance or Penalty Abatement.

California Tax Liens and their Implications

What is a Tax Lien?

A tax lien represents the state's legal claim over your assets and remains effective for a decade. The FTB holds the authority to renew this lien if the outstanding taxes are not settled before its expiration. Being a matter of public record, a tax lien severely restricts your ability to sell or leverage assets for loans, potentially complicating employment opportunities in certain sectors due to the lien's implications.

When you fall behind on your tax obligations, the Franchise Tax Board (FTB) may attach a tax lien to both your personal and real property. This action is initiated if you neglect the FTB's attempts to communicate through letters or notices, which results in the issuance of a Notice of State Tax Lien. This lien is reported in any county where you own real estate and registered against your personal property with the California Secretary of State.

The Treasury Offset Program and Its Effects on Your Federal Tax Refund

The Treasury Offset Program (TOP) empowers the FTB to intercept your IRS tax refund, applying it towards your unpaid state taxes. While you might receive a notification, the FTB is not obligated to inform you before taking this action. This program also allows for the seizure of refunds from other states, and if you owe taxes to the federal government or another state, those entities may claim your California tax refund.

CA Wage Garnishment

Failing to pay your taxes can lead to the FTB issuing a wage garnishment order to your employer. This order details the amount you owe, including tax, interest, and penalties, and requires your employer to deduct these funds from your paycheck for remittance to the FTB. You are entitled to receive a copy of this order from your employer within ten days of its receipt, with the funds being forwarded within 15 days of the pay period's end. This garnishment remains in effect until your tax debt is fully paid.

Statute of Limitations

An important factor that a taxpayer may consider before pursuing a possible resolution pertains to the taxpayer’s legal rights under California law concerning the statute of limitation rules for the collection of delinquent tax liability.

California law prohibits the FTB from performing collection action on a delinquent tax liability that is more than 20 years from the assessment date, or commonly referred to by the FTB, the Statutory Lien Date (SLD). Under California law, the SLD is the point in time when the tax liability becomes “due and payable.” For practical purposes, and for most taxpayers, this date is the due date on the first assessment notice issued by the FTB for tax liability.

Taxpayers should be aware that certain circumstances may ‘stop the clock’ on the statute of limitations period. These circumstances are called “collection stays.” Some examples are:

the taxpayer files bankruptcy,
a taxpayer is in an approved installment agreement,
the taxpayer is in a military or combat zone,
a taxpayer is in child support collection,
or a presidentially declared disaster or terroristic or military action suspends the FTBs ability to perform collection actions.

During these situations the time elapsed, and possibly longer, will not count towards the 20-year collection expiration date.

Help With California Tax Problems and TaxCure

Taxpayers have many tools at their disposal when dealing with delinquent income tax liabilities with the State of California. With that said, the FTB has a government-friendly statute of limitations within which to work. Additionally, the penalty, interest, and collection fees system can result in reasonable tax delinquencies ballooning into a crippling liability. Therefore, taxpayers should consult with a licensed and qualified tax professional as soon as these problems arise. An experienced tax professional can help determine which course of action is most appropriate for their situation. At TaxCure, we have a unique ranking algorithm that can help you find the best tax professional for your unique problem. All tax professionals specialize in various problems and solutions. You can start your search by using this link to filter California FTB tax professionals by your particular problem, solution, and other important factors. You can also use the form below to start your search, or navigate by professional type located in California.