General Session: American Accounts Payable Association

May 20, 2009

Speakers:
Stan Adge, Chief, Taxpayer Advocate Office, California Employment Development Department
Todd Gilman, Taxpayer Advocate, California State Board of Equalization
Steve Sims, Taxpayer Advocate, California Franchise Tax Board
Connie Adams, Taxpayer Advocate, Southern California, Internal Revenue Service

Tax Advocates Warn of Code Changes and Other Measures to Meet California’s Financial Woes

California taxpayer advocates May 20 warned payroll professionals that withholdings would not cover employee tax liabilities this year and alerted them to code changes associated with the state’s dire financial situation.

The remarks were made at a first ever general session of the American Accounts Payable Association, part of the American Payroll Association's 27th Congress.

"Taxpayers are going to have bigger balances due at the end of this year," said Steve Sims, Taxpayer Advocate, California Franchise Tax Board.

"Few are aware the [California] tax rate went up 1 percent for this year" and another surprise will be the reduced exemption for dependents, which is down from $300 to $100, he said.

In the recession economy, he noted, workers are claiming as many exemptions as possible and don't have the money to pay when the bill is due.

With five initiatives placed on a special election ballot by the state legislature and Gov. Arnold Schwarzenegger (R) going down to defeat May 19, Sims said California's businesses and individual taxpayers are not likely to expect the increase in their upcoming liability "who knows what will happen now that the initiatives haven't passed," he said.

Increase in State Assessed Garnishments

There also is an impact on payroll departments because the Franchise Tax Board recently started pursuing state tax wage garnishments regardless of whether an individual also owes back child support, said Sims.

"We're hearing you're having to dedicate as many as four people to deal with our [garnishment] orders and it's going to be increasing," he said.

He said the Board used to have the responsibility for securing child support liabilities, and "did not garnish workers’ wages [for state tax debts] when they had debts in these areas." The Board has been released from that role, so "now that we're free of the responsibility, you will see more earnings withholding notices from us in the next 120 days," Sims explained.

The higher volume will be due, in part, to the Board’s release from the responsibility of securing payments on child support or student loan debt.

"We did not garnish workers’ wages when they had debts in these areas, but now that we're free of the responsibility, you will see more earnings withholding notices from us in the next 120 days," Sims explained.

The state has about 145,000 delinquent accounts, but will roll the notices out at a rate of about 100 per month to limit the effort’s impact.

Independent Contractors

The state's Employment Development Department wrestled most frequently with the relationship between employers and independent contractors, according to the entity’s Chief Taxpayer Advocate, Stan Adge.

"These arrangements can go south and when independent contractors file for benefits, most of the time their clients are held to be employers," he explained.

The department also has "ongoing issues" with employers who use trust funds such as that maintained for disability to meet business expenses. "That money doesn't belong to the firm," he cautioned.

Adge said the Employment Development Department has the tools, primarily through liens, to go after corporate officers.

The list of Franchise Tax Board measures to capture revenue also includes levies based on industry averages for occupational licensees who have not paid income tax, and a luxury vehicle tax with a formula that multiplies a car's value by 2.5 to determine the liability, said State Board of Equalization Advocate, Todd Gilman.

Equalization is also working to close the "tax gap" applying to those who are not paying levies on purchases made outside California. The state has a use tax, he explained.

By Stephen Siciliano