Tax Forgiveness in California

California tax forgiveness options explained

California isn’t a lenient state when it comes to true tax forgiveness. Nevertheless, the Golden State offers a variety of programs to help you get back on track. If you fall behind paying state taxes due to being in a financial bind, you might qualify for one of California’s tax relief programs.

The Franchise Tax Board (FTB) in California offers several programs designed to assist taxpayers with overdue taxes, penalties and fees. Understanding how each program works is crucial to deciding which option might be best for your situation.

Offer in Compromise

The closest you’ll come to actual tax forgiveness in the state of California is the state’s Offer in Compromise program. Available for both personal and business taxes, an OIC program forgives tax debt in extreme circumstances. If you’re approved for an Offer in Compromise, you can settle your tax debt for less than you owe.

Penalty abatement

California offers two commonly used penalty abatement programs. These specifically target penalties and fees accrued as a result of overdue taxes owed.

A reasonable cause abatement requires you to demonstrate a sufficient need for penalty removal, such as an illness, job loss or other unforeseen circumstances.

California residents who haven’t requested relief from penalties in the past can apply for the state’s one-time penalty abatement program. This includes common penalties such as failure to pay and failure to file penalties. It’s the simplest program to qualify for; no reasonable cause is required as long as you’ve never used the program before.

Innocent spouse

California recognizes that one spouse shouldn’t be held personally liable for the other spouse’s tax mishaps. We’ll explore this in greater detail below, but California offers multiple levels of protection in this type of situation.

Other programs

Eligible California residents who are current on all tax filings from the past five years have the option to pay their overdue taxes over time using a payment plan. You’ll have up to 60 months to repay your tax debt, which must not exceed $25,000.

If your financial hardship is extensive and ongoing, you may consider applying for Currently Not Collectible status. This temporarily halts collections attempts, but you’ll eventually have to pay your tax debt (along with interest).

California Offer in Compromise eligibility

Before applying for an Offer in Compromise in California, make sure you meet the state’s eligibility requirements. According to the state’s FTB website, OIC eligibility is based on the following factors:

• Your income: Whether you make enough to cover your tax liability and your daily living expenses
• Your expenses: If your reasonable expenses are such that you have little left to put toward your tax debt
• Your assets: The value of any assets that could be liquidated to pay your debt
• Your future potential: The likelihood that your circumstances will change in the foreseeable future
• Your offer: Whether the state finds your offer to be reasonable and sufficient

To qualify for an Offer in Compromise for business expenses in California, you must show financial hardship and prove that your business is unable to pay either now or in the reasonable future.

The state handles business tax situations through the FTB, along with the California Department of Tax and Fee Administration (CDTFA). California requires that your eligible business must be no longer operating, with no ability to generate income in the future.

How to apply for an Offer in Compromise in California

You can apply for an Offer in Compromise online or by mail. Access the Franchise Tax Board online guide and application for a packet with comprehensive instructions and the forms you’ll need to fill out.

To file by mail, print and fill out the application. Send your completed application to:

Franchise Tax Board
Offer in Compromise Group MS A453
P.O. Box 2966
Rancho Cordova, CA 95741-2966

California penalty relief and waiver rules

If you haven’t previously received a pardon of tax penalties and fees in California, you may qualify for the state’s one-time penalty relief program. You can complete the application process by mail, online via your MyFTB account or over the phone by calling 800-689-4776.

You’ll need to meet a few eligibility requirements to qualify for California’s one-time penalty abatement program:

• You must be current on all tax filings.
• You must be current on any penalties and fees outside of the ones you’re requesting pardon for.
• You must not have received penalty abatement previously in the state of California.

If you have received a one-time penalty abatement in California before, you must provide the state with a reasonable explanation of why you are unable to pay your penalties. The process is similar to that of one-time penalty relief, and you can file for penalty relief online or via mail.

California innocent spouse tax relief

California believes a spouse shouldn’t be penalized for a material tax error their partner makes. If this happens to you, you can apply for innocent spouse relief with the state. Specifically called “innocent joint filer relief,” this works similarly to the IRS’ innocent spouse relief.

You may qualify for innocent joint filer relief in California if you meet the following qualifications:

• You filed a tax return in California using married filing jointly status.
• The taxes on your return were understated due to either negligence or a mistake by your spouse.
• You were unaware of the error.

Equitable relief and abuse factors

In some cases, you may not qualify for innocent joint filer relief, but you may qualify for equitable relief. This protective measure is used in situations where taxes are unpaid (not underreported) but factors exist that would make it unfair to hold you liable for your spouse’s error. In cases like these, the FTB looks at situations including financial control, marital status (such as an impending divorce), and whether you knew about or benefited from the error.

Signature fraud and invalid returns

A special case is made if your spouse signs your joint tax return without your knowledge or consent. If this happens, California might assert that your state tax return isn’t valid. As a result, your state tax return might be treated as having been filed separately rather than jointly, so you can avoid any resulting liability as the innocent spouse.

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