We experienced an original success this month, trying a new approach to a very old problem. Businesses that register with the California Office of the Secretary of State (SOS) must, among other things, file annual income tax returns with the California Franchise Tax Board (FTB) and pay either the appropriate amount of income tax due based on the business' California net income, or pay a minimum $800 franchise tax, whichever is larger. Frequently, a taxpayer may set up a business but ultimately abandon the idea before ever operating the business. Or, sometimes a business ceases to operate, but the requisite documents are not correctly filed with the SOS, leaving the FTB to believe the business is still active. Many years may pass before the would-be business owner realizes an annual $800 franchise fee has been assessed against the business, along with additional penalties and interest.
We receive calls from taxpayers in these situations on a regular basis and until recently, could only offer two possible solutions: file the unfiled returns, pay the annual $800 plus interest and fees, and properly close the business; or, do nothing if the business is defunct with no assets and had no assets when it closed, because the FTB will never be able to collect the annual franchise tax. Neither option is ideal, given that one is expensive and the other feels akin to 12 inches of sand below sea level.
Last month, we submitted an Offer in Compromise to the FTB for a business that never operated after its formation four years ago. The business had accrued $3,860 in minimum franchise taxes, penalties, and interest, simply because the owner did not properly close his business with the SOS and file a final income tax return with the FTB. We prepared an offer to the FTB requiring the taxpayer to pay one year of the tax ($800) and file the unfiled "zero income" returns for all four years to close the matter. The FTB accepted the offer. We consider this a success for our client, and for the FTB. The client remedied a situation permanently, for a reasonable fee, and the FTB can remove one more delinquent account from its books.
If you would like assistance with your business tax matter, contact one of our attorneys today.