What is the California Franchise Tax Board Collection Statute on Personal Income Taxes?
The California Franchise Tax Board collection statute is generally 20 years. This 20-year timeframe begins on the date the tax liability is finalized. For many taxpayers, this date is tied to when a return is filed or an assessment is issued by the FTB, creating what is legally defined as a “final” tax liability.
When it comes to personal income tax, many Californians find themselves surprised by the aggressive collection actions taken by the California Franchise Tax Board (FTB). Nationally, even among tax professionals, FTB is known as one of the most aggressive and difficult tax agencies in the nation– even more so than the much feared IRS! For those facing back tax issues, understanding the FTB’s collection statute and its implications is essential. The FTB has a lengthy period to pursue outstanding taxes, and failure to address this debt can lead to serious consequences. Here, we’ll cover the basics of the FTB’s collection statute and what it means for you—and how Tax Crisis Institute can help if you find yourself in trouble.
The Facts About the FTB Collection Statute
For taxpayers who owe back taxes in California, one of the most important concepts to understand is the collection statute of limitations. This statute establishes a set period during which the California Franchise Tax Board (FTB) can pursue collection actions on unpaid tax liabilities, often referred to as the Collection Statute Expiration Date (CSED). This 20-year period is set forth under California Revenue and Taxation Code (RTC) section 19255, which authorizes the FTB to utilize various collection methods throughout this time, including levies, liens, and garnishments.
Key Provisions of RTC Section 19255
Under RTC 19255, the FTB has significant latitude in enforcing collection. The 20-year statute generally aligns with other long-term collection periods observed at the federal level, where the IRS maintains a 10-year collection statute (Internal Revenue Code Section 6502). However, California’s statute is nearly double this length, giving the FTB extensive time to pursue unpaid liabilities.
RTC 19255 also grants the FTB the power to “pause” or “suspend” the collection statute in certain situations, which we’ll explore later. This ability to pause the clock enables the FTB to continue collection efforts effectively when certain events, such as a taxpayer moving out of state or entering into an installment agreement, extend the collection period beyond the standard 20 years.
Other Relevant Tax Codes and Legal Precedents
The California RTC 19254 further outlines the FTB’s enforcement powers. This statute reinforces the FTB’s right to use a variety of collection methods and allows it to report debt to credit bureaus, which can significantly impact taxpayers’ credit scores. Additionally, the RTC 18662 mandates withholding tax payments in certain scenarios, making it easier for the FTB to secure payment on unpaid taxes directly from income sources.
Legal cases like Franchise Tax Board v. Hyatt demonstrate the FTB’s determination to collect outstanding taxes, even extending its reach across state lines under interstate agreements. This has shaped the FTB’s approach to enforcement, particularly when taxpayers leave California with outstanding liabilities.
How the FTB Determines When the 20-Year Period Begins
The start of the collection statute hinges on the date a tax liability is finalized. This can occur in several ways:
- Tax Return Filing Date: If a taxpayer files a return showing an amount due, the FTB considers the tax liability final from that filing date.
- FTB Assessment: If the FTB assesses additional tax due, whether from an audit or another review process, the statute begins from the date of that assessment.
Because different actions may trigger the start of the 20-year period, it’s crucial for taxpayers to monitor their correspondence and ensure they are aware of any assessments or determinations made by the FTB. Documentation from the FTB will typically include information on the debt amount, the finalization date, and any associated penalties and interest.
Implications of RTC Section 19255 for California Taxpayers
The 20-year statute grants the FTB ample opportunity to collect on unpaid taxes, even pursuing aggressive collection actions if necessary. Taxpayers should be aware that, unlike other states or federal entities, California’s longer statute means that debts can linger far longer, compounding interest and penalties over time. As such, ignoring an unpaid tax debt with the FTB can lead to severe, lasting financial implications.
The FTB’s collection statute expiration date means that once 20 years have passed (assuming no suspensions or extensions), the debt is generally no longer enforceable, and the FTB will cease collection actions. However, this only applies if there were no interruptions during the collection period—certain actions or circumstances can reset or extend the statute, making it crucial to fully understand the specifics of RTC 19255 and related codes.
Factors That Can Extend the Collection Period
While a 20-year collection period may seem generous, certain life events can allow the California Franchise Tax Board (FTB) to extend this timeframe, thereby increasing the agency’s ability to collect unpaid taxes beyond the original statute. The 20-year limit set under California Revenue and Taxation Code (RTC) section 19255 can be paused, or “tolled,” under several specific circumstances, each of which affects the statute differently.
1. Bankruptcy Proceedings
When a taxpayer files for bankruptcy, an automatic stay is triggered under 11 U.S.C. § 362 of the U.S. Bankruptcy Code, which temporarily halts most debt collection activities, including those by the FTB. This stay is a powerful tool for individuals and businesses struggling with overwhelming debt, as it effectively suspends all collection efforts, giving taxpayers relief during the bankruptcy process. However, for tax debts, the automatic stay only temporarily delays collection—the FTB’s 20-year clock pauses during this period and resumes only once the bankruptcy case is resolved.
Additionally, RTC 19377.5 provides that while collection activities must stop during bankruptcy, the FTB can continue to assess tax liabilities, thus potentially impacting the total debt owed once the collection statute resumes. This provision allows the FTB to maximize its collection efforts once the stay lifts. Tax experts often recommend discussing bankruptcy with a professional, as tax debts may not be fully dischargeable in all cases, and the FTB can prioritize tax debts during proceedings.
2. Installment Agreements
An installment agreement, also referred to as an installment payment plan under RTC 6832, is a practical solution for taxpayers facing back taxes, as it enables them to repay their debt over time. However, many taxpayers do not realize that entering into an installment agreement effectively extends the 20-year collection statute. According to RTC 19255(b), any period during which an installment agreement is active pauses the collection statute. This suspension remains in place as long as the taxpayer adheres to the payment schedule.
This rule is not the same as federal tax law, where the IRS pauses its 10-year collection statute upon entering into a pending installment agreement, per Internal Revenue Code Section 6502. When the installment agreement commences, the statute resumes. If taxpayers default on payments, the FTB can renew its collection actions and extend the collection period by the time spent in the installment agreement.
3. Absence from California or the U.S.
If a taxpayer leaves California or the U.S. for an extended period, the FTB can pause the collection statute under RTC 19255(c), giving it the authority to resume collection efforts once the taxpayer returns to California or the country. This rule ensures that taxpayers who owe the FTB cannot avoid collection simply by relocating out of state or moving abroad.
This measure reflects the FTB’s proactive approach to enforcing tax compliance, as seen in cases like Franchise Tax Board v. Hyatt, where the FTB pursued a taxpayer who moved out of state. California’s reciprocal tax agreements with other states also aid in extending the FTB’s reach beyond California’s borders, allowing the FTB to maintain collection efforts even if the taxpayer is temporarily (or even permanently) out of state. While the FTB can easily levy funds held at national banks that operate in California—even if those funds are located in another state or in accounts that are opened in other states—the FTB cannot seize other out-of-state assets without obtaining a court judgment. This extension mechanism underscores the importance of addressing outstanding tax debt, as relocating does not necessarily offer protection from the FTB’s collection efforts.
4. Offer in Compromise (OIC)
The Offer in Compromise (OIC) program provides a potential relief option for taxpayers facing significant financial hardship, allowing them to settle their tax debt for less than the total amount owed. However, while the IRS’s OIC program has a somewhat lenient reputation by comparison, the California FTB is far more stringent, making it challenging for taxpayers to secure approval. In fact, California’s standards for accepting an OIC are so demanding that it is often considered “nearly impossible” to obtain approval unless a taxpayer can clearly demonstrate severe, long-term financial hardship.
To qualify, the FTB requires that taxpayers exhaust all other payment options, including installment plans and asset liquidation, before an OIC will even be considered. Additionally, the FTB conducts an exhaustive review of the taxpayer’s financial situation, scrutinizing assets, income, and potential for future earnings. According to RTC 19443, an OIC application must show that collecting the full debt would cause undue hardship or be otherwise unfeasible. This statute grants the FTB broad authority to deny offers that do not meet its strict standards, often turning down proposals that might otherwise qualify under federal IRS guidelines.
While the FTB suspends the collection statute during the time an OIC is under review, taxpayers should be cautious: if the OIC is ultimately rejected, the FTB will resume its collection actions immediately, and the statute will be extended by the time spent during the review process. As a result, this program is best suited for individuals with substantial financial hardship and little to no assets, and taxpayers are advised to consult a tax professional before applying to navigate California’s exceptionally high bar for OIC acceptance.
This stricter approach underscores the FTB’s firm stance on tax collections, as it aims to ensure that OICs are reserved only for the most severe cases of financial hardship, contrasting sharply with the IRS’s relatively more accessible OIC program, which may offer taxpayers a viable route to debt resolution under broader qualifying conditions.
Examples of How the Collection Statute Impacts Taxpayers
To illustrate the impact of the FTB’s collection statute, let’s consider a couple of hypothetical scenarios:
- Case 1: A taxpayer who moves abroad to avoid collection efforts. If they leave the U.S. for five years, the FTB’s collection statute “pauses” during this time, effectively extending the collection period by five additional years.
- Case 2: A taxpayer who enters an installment agreement with the FTB for seven years to manage their debt. While making regular payments under this agreement, the statute is suspended, giving the FTB more time to pursue the debt if the taxpayer defaults or stops payments.
In both cases, the FTB’s collection statute can stretch significantly beyond the standard 20-year period, increasing the financial and legal risks for taxpayers.
What Can Happen if You Ignore FTB Collection Efforts?
Ignoring tax collection efforts from the California Franchise Tax Board (FTB) can lead to severe and lasting financial consequences. The FTB has extensive authority to pursue unpaid taxes and employs aggressive collection actions that can severely impact a taxpayer’s financial stability. Here are some of the most common collection actions the FTB may take:
1. Wage Garnishment
One of the most immediate ways the FTB can collect on unpaid taxes is through wage garnishment. Unlike typical creditors who may need a court order, the FTB can initiate garnishment directly, instructing your employer to withhold a portion of each paycheck until the debt is satisfied. According to California Revenue and Taxation Code section 18670, the FTB can garnish up to 25% of your disposable earnings—which is often a significant portion of take-home pay. This action can continue for as long as the debt remains unpaid, potentially lasting for years and creating a financial strain that impacts your ability to manage other living expenses.
2. Property Liens
If you own real estate or valuable personal property, the FTB can place a tax lien against it. A lien is a legal claim that restricts your ability to sell, refinance, or otherwise transfer ownership of the property until the tax debt is paid in full. This process is authorized under RTC 19221, which gives the FTB the right to file a lien with the county recorder’s office, making it a matter of public record. Once a lien is in place, it can significantly harm your credit score and affect your ability to obtain financing. Additionally, a lien may remain on your record even after the debt is paid, though it will be marked as satisfied, which can still affect future financial transactions and property dealings.
3. Levies on Bank Accounts
The FTB also has the power to issue a bank levy under RTC 18670, allowing it to seize funds directly from your bank account to settle outstanding tax debt. This can happen suddenly and without advance notice, as banks are required to comply with the FTB’s directives. When a bank levy is issued, the FTB can freeze the funds in your account and withdraw the amount due, up to the balance of your unpaid tax liability. This action can cause considerable disruption, especially if the levy results in overdrafts, missed payments, or difficulty covering essential expenses. While bank levies typically apply to funds currently in the account, the FTB may reissue levies periodically until the full debt is paid, making it crucial for taxpayers to address the debt to avoid repeated financial impacts.
4. Interception of State Tax Refunds and Other Income Sources
The FTB can intercept your state tax refunds, including lottery winnings or other payments owed to you by the state, applying them directly toward your outstanding tax liability. Known as the California Interagency Intercept Collection (CIIC) program, this initiative allows the FTB to collaborate with other state agencies to seize funds before they reach taxpayers with outstanding liabilities. This program is codified under RTC 19551, which enables the FTB to recover debts owed to various government agencies, including tax debts, by intercepting payments before they are issued to the taxpayer.
Solutions for Taxpayers Facing FTB Collection Issues
If you’re currently facing FTB collection issues, there are several strategies you can consider to help resolve the debt:
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- Installment Agreements: Set up a manageable payment plan with the FTB.
- Offer in Compromise: This allows you to settle your debt for less than the total amount owed if you can prove that paying the full amount would cause financial hardship. Please note that this option is incredibly difficult to navigate with the FTB, even for tax professionals.
- Hardship Status: If you’re experiencing genuine financial hardship, the FTB may grant temporary relief from collection actions.
- Bankruptcy: Most FTB taxes are bankruptable, subject to the same time rules that apply to an IRS debt bankruptcy.
These options can help protect your assets while resolving your debt, but navigating the application and negotiation process can be complex.
How Tax Crisis Institute Can Help
At Tax Crisis Institute, we specialize in helping clients navigate the complexities of the California Franchise Tax Board collection statute and all that comes with it. Whether you’re looking to negotiate an installment plan or simply understand your options, our experienced team is here to guide you through each step of the process. We’ve helped countless clients protect their finances and work toward financial freedom, and we can help you, too.
Ignoring an FTB collection notice can lead to overwhelming consequences, but you don’t have to face this alone. Contact Tax Crisis Institute today for a free consultation to explore how we can help you take control of your tax situation and move forward with confidence.