TAX NEWS - April 2009

California Tax: Improper Information Return Reporting Leads to Penalties and Loss of Deductions

April 2009 - Studies indicate that taxpayer compliance is highest when there is third party information reporting, such as the filing of Forms W-2 and 1099. As a result, we, in cooperation with the Employment Development Department (EDD), will devote greater resources to verify that your clients' business expense deductions for wages and compensation paid to employees and independent contractors are supported by Forms W-2 and 1099. We may disallow deductions for unsupported wages and compensation, and either EDD or we may impose 9.3 percent penalties. We may also impose a $50 penalty for each failure to file or furnish correct and timely Forms W-2 and 1099. EDD has a corresponding $50 penalty for non-compliance with Form W-2 requirements. Finally, if the unsupported amounts result in a substantial understatement of income tax, your client could be subject to our 20 percent accuracy-related penalty.

The failure to correctly and timely report wages and compensation contributes to the tax gap, which is the difference between what taxpayers owe and what they voluntarily pay. Our efforts to address the tax gap will help to ensure that business expense deductions are properly supported and that all income received by employees and independent contractors is properly reported.

By helping your clients to comply with these reporting requirements, you further assist our efforts to close the tax gap and level the playing field among all taxpayers.

For more information, go to ftb.ca.gov and search information returns or FTB Pub 4227A, Guide to Information Returns Filed With California.