In California's May Tax News, California provides guidance regarding the payment of tax and filing of amended returns under California Revenue and Taxation Code Section 19138, subdivision (b). Section 19138 became effective December 19, 2008, and applies to taxable years beginning on or after January 1, 2003, for which the statute of limitations on assessment had not expired as of December 19, 2008.
Who does the penalty apply to?
Section 19138 imposes a large corporate understatement penalty to taxpayers who have understated their tax in excess of $1 million.
What is the amount of the penalty?
The penalty is 20% of the entire amount of the understatement, which is measured by the difference between the correct tax liability and the tax reported on the original return or an amended return filed on or before the extended due date.
When does the penalty NOT apply?
The penalty will not be imposed to the extent the understatement of tax is attributable to a change in law that is enacted, promulgated, issued, or becomes final after the earlier of the date the taxpayer files the return or the extended due date of the return for the taxable year for which the change is operative. In addition, the penalty will not be imposed to the extent that the understatement of tax is attributable to the taxpayer's reasonable reliance on a legal ruling by California's Chief Counsel.
When is penalty due?
The penalty is payable upon notice and demand, and claims for refund of amounts paid in satisfaction of the penalty may be allowed only if the penalty was computed incorrectly.
OPPORTUNITY TO AVOID PENALTY - Act by May 31, 2009
For the 2003-2007 taxable years, a taxpayer can file an amended return and pay the tax shown on the amended return by May 31, 2009, in order to treat the tax shown on the amended return as tax shown on the original return for purposes of the penalty. This action will increase the taxpayer's self-assessed tax base against which the understatement of tax is measured to reduce the likelihood of receiving the penalty for those years.
Click on the following link to access California's May Tax News article:
http://www.ftb.ca.gov/professionals/taxnews/2009/May/Big_Business.shtml
California Resources
California has a webpage on ftb.ca.gov for the large corporate understatement penalty that brings together all Section 19138 information and resources. California provides additional information and procedural guidance relating to the penalty, including payment of tax, and filing of amended returns for the 2003-2007 tax years.
SIDENOTE - Constitutional Challenge to Imposition of Penalty
The California Taxpayer's Association filed a lawsuit in the Sacramento Superior Court on April 24, 2009 alleging that the new penalty violates both the California and U.S. constitutions. It is currently not know when the court will decide the case or how it will rule.
As always, if you have questions, please contact me at leveragesalt@earthlink.net.
