Does the debt disappear when it comes to state taxes in California? When you are behind on taxes with the California Franchise Tax Board (FTB), it can seem like you are responsible for a debt that will never end. California’s tax collector has a much longer timeline than the IRS, which has 10 years in general to collect federal back taxes.
The expiration of California’s tax debt is all about understanding the intricacies of California’s FTB’s Statute of Limitations (SOL), which runs 20 years.
Does California Tax Debt Ever Expire?
Indeed, there is a time limit on California tax debt – and it’s very long. California Revenue and Taxation Code (R&TC) Section 19255 considers and mandates the cancellation and elimination of unpaid state income tax debts after 20 years.
After the clock expires, the state is no longer legally entitled to continue with involuntary collection proceedings, including bank levies, wage garnishments, and asset seizures. In the sales tax audit, penalties or other tax debt can be mitigated with the help of a lawyer.
When Does the FTB’s 20-Year Clock Actually Start?
The 20-year collection clock doesn’t begin on the day you receive your income, or even on the day you file your tax return. Rather, the time period runs when the tax is actually due and payable. This is referred to as the “assessment date” or “statutory lien date.”
Importantly, if there are multiple liabilities from a single tax year (e.g., due to the self-assess and then an audit deficiency), the 20-year clock will start from the most recent final assessment date for that tax year.
What Can Pause or Toll the 20-Year Statute of Limitations?
This is a long time, 20 years, but the clock doesn’t always tick. For certain events, the statute of limitations will be “tolled” or temporarily suspended. The FTB gets more time to collect your debt when the clock is paused, and this is equal to the amount of time that has passed during the pause. Typical tolling events are:
- Filing for bankruptcy protection
- Making payments under an acceptable Installment Agreement (payment plan)
- Service in a combat area as a member of the military community
- Litigation or official tax disputes that are pending.
Did the “Forever Clock” Loophole Get Closed?
The trick the FTB has used in the past is that adding on late administrative fees or collection costs would also start the 20-year clock again from the beginning, effectively making the clock “forever. The experts (attorney for payroll issues) can help to figure out those loopholes and get them closed.
But the tide turned in California when the Assembly passed Assembly Bill 357. Standard interest, penalties, and collection costs are not included in the definition of “tax liability” for the purpose of this calculation when the tax liability is due and payable after January 1, 2020. These penalties and fees are now concurrent with the underlying tax liability, providing real finality to taxpayers.
Conclusion
While the California FTB has a 20-year deadline for tax debt, navigating through it requires strategy. Individuals who want to resolve the high-dollar California tax balances will need to be precise in choosing the assessment dates, as voluntary payment agreements and bankruptcy filings block the clock. If you have multiple state charges, you must have a professional tax expert to help you determine your collection expiration dates with certainty.
