Proposed 20% Tax Refund Penalty Crumbles Under Pressure from CalChamber, Business Groups
(June 28, 2012) Yesterday, the California Chamber of Commerce and a coalition of job creators voiced strong opposition to a proposal that would have authorized the Franchise Tax Board (FTB) to impose a 20 percent penalty on tax overpayments.
Among the most outspoken opponents of the proposal was CalChamber President and CEO Allan Zaremberg, who said, “It is outrageous that average taxpayers, including small business owners, would face penalties for overpaying their taxes. It is equally outrageous that, to my knowledge, this proposal would make California the only state to have both a large corporate underpayment penalty and a proposed overpayment penalty. Proposals like this are why California has one of the worst reputations for having a bad business climate.”
Zaremberg further commented, “Overpayment of taxes is like having an interest free cash flow loan to the state. Every business in America would love to have that…but not the state of California. How stupid is that?”
Not only would average taxpayers have been impacted by the proposal, but large employers in the state would have faced a “whipsaw effect.” Currently, certain taxpayers are subject to a 20 percent “understatement penalty” for “understatements in excess of $1 million with no right to appeal. This has caused many of these taxpayers to substantially overstate their taxes to avoid the penalty that may result from unexpected federal adjustments. Adding an erroneous refund penalty like the one proposed would have unfairly penalized taxpayers who have overstated their liabilities to avoid the understatement penalty.
In their opposition arguments, the coalition pointed out that the proposal would have:
- Resulted in revenue loss to the state and increase the budget deficit;
- Barred taxpayers from protesting the penalty;
- Created confusion and potential litigation for the state because terms in the proposal were undefined and unspecified, including references to ‘reasonable basis;”
- Established a penalty that would not have served a legitimate purpose and was disproportionate to the severity of noncompliance.
Proponents of the proposal painted the issue as a “fraudulent claim” penalty or a penalty on unreasonable claims. However, the FTB already has an arsenal to combat both. According to the FTB’s own documents, the agency has at its disposal 69 different penalties that can be imposed on taxpayers for a variety of tax-related activities. If the FTB believes a refund claim to be without merit, opponents argued that the FTB has ample options under existing penalties.