California Franchise Tax Board Penalties 101

November 4, 2020

When the California Franchise Tax Board conducts a state tax audit, the Franchise Tax Board looks to impose an additional tax liability upon the taxpayer.  In the alternative, state tax liabilities may result from piggy-backing federal tax assessments imposed by the Internal Revenue Service. Whether additional state tax liabilities arise from California Franchise Tax Board audits or via piggy-back Internal Revenue Service assessments, the process can be an expensive one for California taxpayers. Given this reality, taxpayers should be especially wary of penalties that are often imposed.

There are three particular penalties that taxpayers should be mindful of. The first is the failure to file a timely return penalty imposed by the California Revenue and Taxation Code.  This penalty is imposed on any taxpayer who is required to file a return, but fails to file such return by the prescribed due date. The reason this penalty in particular is expensive for taxpayers is because the penalty imposed is 5% of the tax due. Then, after the Franchise Tax Board allots one month for payments, an additional 5% for each month is due thereafter.  The maximum amount for a failure to timely file penalty cannot exceed 25% of the tax owed. 

The second penalty occurs when a taxpayer fails to timely pay his or her tax by the due date of the return. In the event a taxpayer does not timely pay on his or her tax liability, the penalty amounts to 5% of the unpaid tax. In addition, the California Franchise Tax Board imposes a penalty equal to 0.5% of the total unpaid tax for each month after the initial 5% penalty. Similar to the failure to file penalty discussed above, the failure to timely pay penalty cannot exceed 25% of the total unpaid tax. Furthermore, taxpayers can note that the failure to pay penalty cannot be imposed, if the failure to timely file penalty and failure to file return on demand penalty (discussed below), are equal to or greater to the failure to timely penalty that would be imposed. 

The third penalty, the “notice and demand” penalty, is often confused with a failure to file penalty. However, it is important taxpayers be aware of the difference. A notice and demand penalty is imposed when the California Franchise Tax Board becomes aware of California-sourced income (i.e. Form W-2, Form 1099, Schedule K-1, etc.) and cannot locate a taxpayer’s return. Upon such failure to locate, the Franchise Tax Board will then issue a demand notice which requests a taxpayer does one of the following, within the time period allotted on the notice: (1) file a tax return, (2) prove a return was indeed filed, or (3) prove why the taxpayer did not have a filing requirement. If a taxpayer does not respond to the demand notice timely, the taxpayer is then assessed a 25% penalty of the tax owed without accounting for other penalties or credits. Moreover, this penalty may be assessed in addition to the failure to timely file, and failure to timely pay penalties discussed above.

Based on the above, a California Franchise Tax Board audit or piggy-back assessment can be very expensive particularly if penalties are imposed.  Understanding these penalties can increasing one’s chances of having the penalties abated.  In addition, having a basic understanding of these penalties may help taxpayers before such penalties are assessed.

If you have been assessed any of the above penalties or you may be concerned about the potential assessment of these penalties, please contact our experienced and skilled attorneys at Law Offices of A. Lavar Taylor at 714-546-0445.

Author: Rami M. Khoury, Attorney