CA FTB Got Game

What is the name of your state? CA

I'm an LLC. Had the world's worst accountant for 1999 and 2000 tax years. (Short story: he filed the wrong forms -- C Corp returns instead of Partnership returns!)

I sued the accountant and won back damages. My new accountant has helped me refile 1999 and 2000 returns properly -- as a partnership.

The IRS was very easy to deal with -- we wrote a letter explaining the issue and asked to remove the form 1120 filing requirements for 1999 and 2000 and abate all pentalties and interest. The IRS agreed and sent me a letter saying so.

The California FTB is another story. We refiled the returns. They say they cannot remove C Corp filing requirements for 1999 and 2000, and the fact that I filed amended (partnership) returns means that in effect I have created two companies and owe the $800+ yearly tax on all of them. (Plus penalities and interest, of course).

I called and explained that the IRS was cool with it, and they replied "we do things different from the IRS." Eventually a supervisior agreed to review the letter from the IRS about removing the C Corp requirement. He said the letter was not good enough -- it says there is no form 1120 requirement for those years but does not specifically say "There is no C Corp requirement."

Give me a break! Form 1120 = C Corp! I'm treating the FTB very nicely, since I'm sure they have a big red button stamped "AUDIT" that they can press at any moment. Kissing their butts has failed. I need to follow up and make sure they treat my amended returns properly and invalidate the original returns.

So here's the question: what's the best way to deal with the California FTB on this issue? They are making me jump through hoops. Is there any relevant CA tax law I can point out to them?

Amend the C corp returns to show $0 income & expenses & get a refund of the C corp taxes paid. As your basis for amending, say that this was an LLC & has to file as a partnership. Use this money to pay the LLC taxes.

What happened.

Just a follow up on what happened:

I called back and spoke to another person who was able to nullify the C Corp returns and treat the amended (partnership) returns as the real deal.

They would not abate interest and penalties since the amended 2000 return required a larger tax payment. I certainly understand why interest is indeed owed, but this was a good-faith mistake. Why the penalities?

The IRS was very agreeable to abating all penalities, but the CA FTB now insists that penalities are still due and a fgood faith error is no excuse. I'm welcome to write a letter to dispute the penalities (only after paying them first, of course), but the FTB rep I spoke to seemed to think I had zero chance of recovering anything.

It's only $250, so at this point I will just move on, but I am generally frustrated with the poor customer service at the FTB. I was told three different stories by three different sets of people, all of whom seemed intent on causing some level of grief.

The kinder, gentler IRS was a pleasure to deal with. Too bad the state tax boards are not following suit.

They imposed penalties because they could. They won't waive them because the CA FTB is meaner than a junkyard dog.

You include the judgment from the CPA as income the year you receive it. Since the judgment was to cover your damages for the malpractice, you can write off the penalties as an expense. (But bury it in the Sch.C so it's not obvious.)