Report 98017.2 Summary - July 1999
Franchise Tax Board:
Its Tax Settlement Program Remains an Important Alternative for Dispute Resolution
RESULTS IN BRIEF
The settlement program of the Franchise Tax Board (FTB) has remained both more efficient in terms of time elapsed and generally as effective as the FTB's other methods of resolving tax disputes. We reported similar results during a previous audit of the settlement program for fiscal year 1992-93, the program's first year of operation. Although we could not quantify the number of hours the FTB staff spent on settlement cases as compared with hours spent on cases in the protest, appeal, and litigation processes, we were able to determine that the settlement program generally shortens the lengthy tax dispute process. For bank and corporation taxpayers who pay 95 percent of the taxes collected through settlements, the FTB's settlement program resolved cases in an average of 13.5 months during fiscal years 1993-94 through 1997-98, as compared with an average of 31 to 43 months in the FTB's three other administrative tax dispute processes. We previously reported that bank and corporation cases were resolved in an average of 3 months during fiscal year 1992-93. The settlement program may also create a better working relationship between the FTB and taxpayers when tax disputes arise.
The settlement program has generally sustained taxes at rates that fall within the range of rates for other administrative processes the FTB uses to resolve tax disputes. For bank and corporation cases, it achieved a tax-sustained rate of 62.7 percent during fiscal years 1993-94 through 1997-98, as compared with a range of 37.5 percent to 79.1 percent in the FTB's other administrative processes. We previously reported that bank and corporation settlements achieved a 61 percent tax-sustained rate during fiscal year 1992-93. For personal income taxpayers, who contribute the remaining 5 percent of the taxes collected through the settlement program, we found similar results.
During fiscal years 1993-94 through 1997-98, the settlement program resolved 283 bank and corporation disputes and 165 personal income tax disputes worth a total of $2.43 billion. It sustained $1.52 billion, or 62.7 percent, of the taxes in dispute. The remaining $905 million was resolved in favor of the taxpayers. Of this $1.52 billion, the FTB actually collected $759 million immediately upon settlement, money the State may not have otherwise received. The remainder was previously collected.
The settlement program eliminated the possibility that the State would not realize those collections because of a decision against the State in protest, appeal, or litigation or because of a taxpayer's insolvency. Moreover, because the 448 settlements resolved in fiscal years 1993-94 through 1997-98 cannot be appealed unless fraud or misrepresentation of important facts is involved, the FTB can direct its resources to resolving other new or existing tax disputes.
The FTB settlement program has merit and should be continued. However, the FTB should perform annual reviews of the program and compare the program to its other dispute resolution processes. Further, the FTB should report the results of the reviews to the Legislature every two years. This monitoring will help to ensure the settlement program's continued viability.
The FTB agrees with our conclusion concerning its tax settlement program. It also agrees to provide periodic reports of program results to the Legislature but suggests using a longer reporting cycle.