California Franchise Tax Board Offers One-Time Penalty Abatement

California has finally followed the IRS, at least in part, by allowing one-time penalty abatement for certain civil penalties. That being said, the administrative relief is limited to the late-filing penalty and late-payment penalty under California Revenue and Taxation Code (R&TC) Section 19131. It does not apply to the accuracy-related penalty under R&TC Section 19164 and the civil fraud penalty under R&TC Section 19164.

The Internal Revenue Service offers penalty relief through administrative waiver, and this procedure is often used by taxpayers to abate the failure to timely file or failure to timely pay civil penalties under Internal Revenue Code Section 6651.

However, for years, the Franchise Tax Board did not offer a similar waiver. As a result, while the IRS would let taxpayers off the hook, they still owed the same corresponding civil penalties to the Franchise Tax Board. The inconsistent treatment between the Internal Revenue Service and the state taxing agency left many taxpayers, who had otherwise been compliant, feeling frustrated and wondering why the Franchise Tax Board did not offer similar administrative relief.

However, things changed with the enactment of California Revenue and Tax Code Section 19132.5. This section, signed into law in 2022, now provides a once-in-a-lifetime abatement of certain failure-to-file or pay penalties for qualified taxpayers. As this is a relatively unknown avenue for penalty abatement that you may take advantage of, here are some essential facts about this opportunity:

What kind of taxpayers are eligible for this first-time abatement policy?

Individual taxpayers can request penalty abatement for penalties related to personal income taxes. If you are a fiduciary for an estate or a trust, or a business entity, this section, unfortunately, does not apply to you. For more information on alternative penalty abatement possibilities, skip to the answer to “But what if I don’t qualify for the one-time abatement?”

What penalties can be abated with this new policy?

Penalties eligible for this program are colloquially referred to as “timeliness penalties,” imposed under California Revenue and Tax Code Sections 19131 and 19132.

Section 19131 penalties are penalties for the failure to file a return by the due date, including any extensions. The penalty amount equals 5 percent of the tax for each month that the return is late, up to a maximum of 25 percent of the taxes due.

Section 19132 penalties are penalties for failing to pay the taxes due as shown on your tax return by the due date. The penalty amount equals 5 percent of the total unpaid tax plus 0.5 percent per month of outstanding balance for each additional month, not exceeding 25 percent.

What other requirements must I meet to be eligible?

There are three additional requirements for you to take advantage of this section: (1) you need to be compliant with all tax return filing requirements, (2) be current on all your taxes except for the penalties you are requesting abatements on, and (3) not have previously gotten a one-time abatement under this section.

What tax years are applicable?

You can request penalty abatement under this section for penalties related to taxable years beginning on or after January 1, 2022.

How can I request a one-time abatement?

The abatement can be requested verbally or in writing. To request in writing, send a Form 2918 with the FTB yourself or get professional help to make sure you meet the eligibility requirements and correctly request the abatement.

But what if I don’t qualify for the one-time abatement?

You may be able to get penalty abatement based on other provisions of the Revenue & Taxation Code even if you don’t meet the requirements for first-time abatement.

This will require proving to the FTB that you had reasonable cause for late filing or late payment. The exact circumstances that qualify for reasonable cause will depend on your particular circumstances and the law. At The Law Offices of Steven L. Walker, experienced attorneys assist you in crafting a legal argument and presenting the best case possible for penalty abatement based on reasonable cause.

There may be additional arguments for penalty abatement that apply to your case, depending on the penalties and your circumstances. Such arguments will require careful consideration of the law and the presentation of the best evidence possible. We will work with you to build the strongest possible case for you.

For more information or guidance on these issues, please contact our office.