Report 93025 Summary - March 1994
The Franchise Tax Board's Tax Settlement Program has Achieved the Legislature's Intent
The Franchise Tax Board's (FTB) tax settlement program is both more efficient than and equally as effective as FTB's other methods of resolving tax disputes. We could not quantify the number of hours FTB staff charged to settlement cases as compared with cases in the protest, appeals, and litigation processes. However, we were able to determine that the settlement program generally shortens the lengthy tax dispute process. For bank and corporation taxpayers, which comprise 98 percent of the taxes collected, the FTB's fiscal year 1992-93 settlement program resolved 99 cases in an average of 3 months as compared with an average ranging from 36 to 46 months in each of the FTB's three other administrative tax dispute processes. It also creates a better working relationship between the FTB and taxpayers when tax disputes arise. While reducing expenses incurred by the State and taxpayers, the FTB settlement program has also generally proven to sustain taxes at rates comparable to other administrative processes the FTB uses to resolve tax disputes. For bank and corporation cases, the settlement program achieved a tax-sustained rate of 61 percent during fiscal year 1992-93 as compared with a range of 43 to 68 percent in the FTB's other administrative processes. Therefore, the FTB tax settlement program is equally as effective in resolving tax disputes as the other administrative processes.
Through the settlement program, the FTB resolved tax disputes totaling $926 million related to 99 bank and corporation cases and 25 personal income tax cases. Of this amount, the settlement process sustained taxes totaling $563 million, or 61 percent of the taxes in dispute. The remaining taxes, $363 million, were written off by the FTB. Of the $563 million in sustained taxes, the FTB collected $325 million as cash and had previously collected the remaining $238 million.
Estimated accelerated collections of $300 million from fiscal year 1992-93 tax settlements made resources available for appropriation during fiscal year 199293 that would not otherwise have been available until later fiscal years. In addition, the accelerated collections eliminated the possibility that the State would not realize the collections because of a decision against the State in protest, appeals, or litigation or because of a taxpayer's insolvency. Moreover, the settlement of the 124 cases in fiscal year 1992-93 allows the FTB to direct its resources to the resolution of other new or existing tax disputes. However, the accelerated collections did not provide an economic benefit to the State resulting from increased interest earnings or decreased interest expense because the interest rate paid by taxpayers on unpaid taxes exceeds both the interest rate earned on the State's investments and the interest paid on the State's borrowings during fiscal year 1992-93.
The FTB estimates that accelerated collections will range between $150 to $200 million for fiscal year 1993-94. The estimated fiscal year 199394 accelerated collections are less than those of fiscal year 199293 because the FTB gave priority to resolving cases during fiscal year 1992-93 with the highest likelihood of generating net cash receipts and because the FTB anticipates more refunds resulting from fiscal year 1993-94 tax settlements.
Because of the overall positive results, we recommend that the Legislature continue the settlement program at the FTB with a review scheduled in five years to determine whether the settlement program continues to be more efficient and as effective as the FTB's other methods of resolving tax disputes.