Why Is The Franchise Tax Board More Difficult Than The IRS?

by Bruce Givner on April 9, 2015

Some taxpayers and tax advisors think that the FTB professionals are simply not as nice as the professionals at the IRS, and that is the reason why dealing with the FTB is more difficult.  That is simply untrue.  The overwhelming majority (probably 99%) of all the people who work at both agencies are nice, thoughtful professionals, just like most of your friends.

There is a structural reason why it is more difficult to deal with the FTB.  To understand you must first understand the Nirvana of the Federal Tax System.  There are essentially three levels to the Federal Tax System: (i) the auditors; (ii) IRS Appeals (Nirvana); and (iii) Tax Court.  The auditor's job (this is also true with the FTB) is to determine the law and apply the facts.  It is not the auditor's job to "make deals."  Once the auditor makes a determination, the taxpayer can agree and pay the tax; or can disagree.  If the taxpayer disagrees, one way or the other the taxpayer will end up in IRS Appeals.  The job of IRS Appeals is to keep taxpayers out of Tax Court.  That is an important job because there are only 19 Tax Court judges and because taxpayers do not have to pay the tax to have their day in court.  So IRS Appeals is very efficient in doing its job: it settles something like 95% of all cases.

The problem with the FTB system is that there is no corollary to IRS Appeals.  The FTB does not care if the taxpayer goes to court.  There are literally hundreds of Superior Courts in the State of California, and a taxpayer has to pay the tax and sue for a refund to have his or her day in Court.  That is the fundamental, structural reason, why dealing with the FTB is significantly more difficult than dealing with the IRS: the FTB has no incentive to compromise.

So, if you have a deficiency in an IRS audit, you can have hope of reaching a compromise.  By contrast, if you have a deficiency in an FTB audit, you are - more likely than not - going to have to pay the tax (unless the dollar amount is in the millions of dollars, making it worthwhile to spend $250,000 to wage a battle in Superior Court).

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