The U.S. federal and California state governments fund their activities by imposing and collecting taxes on various transactions. These include the receipt of income, payment of employees, sale of goods and services, and inheritance. To collect these taxes, various bureaucracies have sprung up. Since I live and practice law in California, I limit this discussion to the IRS and the California tax authorities.
Internal Revenue Service
Most Californians are most heavily impacted by the Internal Revenue Service, headquartered in Washington, DC. The IRS administers the federal income tax, the payroll tax, the estate tax, and more obscurely, excise taxes on gasoline, alcohol, firearms, and greenmail (this is the extortion of money by threatening to make a public tender offer to purchase stock in a publicly-traded corporation).
The IRS employs about 75,000 people nationwide, although this only two-thirds the number of employees the agency had twenty-five years ago (see here for my recent Newsletter on the decreased staffing and funding of the agency). Most IRS employees are involved in the auditing or the collection function.
On the audit side, the IRS places great value and effort and making sure that tax bills are fair. Everyone should pay what they owe, and that number should be correct. Taxes are applied consistently across people and entities, across the board with no favoritism or discretion. People working on the audit side actually do not care how or whether the taxpayer pays the tax. That’s not their job. That’s the responsibility of the collection side of the IRS. Once the taxpayer owes a particular number, the collection side goes to work. Employees on the collection side of the agency largely don’t care how the taxpayer came to owe the amount owed; they just care about how and whether it is going to be paid.
Despite vilification from Congress and from the public left and right, employee morale at the IRS is pretty high. They are trained to, and generally buy into, the agency’s mission: “Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.” On both the audit and collection sides of the IRS, their employees see themselves primarily as law enforcement officers, and their primary goal is to encourage taxpayers to comply with the law, rather than to cripple people financially.
California residents are further blessed (?) to pay even more taxes: income tax, more payroll tax, sales tax, property tax. The state has created several of its own bureaucracies to administer these taxes.
Franchise Tax Board
The Franchise Tax Board handles California’s income tax and the state franchise tax (an $800 annual fee paid for the privilege of owning a corporation or limited liability company). Like the IRS, it splits its employees generally into the audit and collection functions. Its mission: “to help taxpayers file tax returns timely, accurately, and pay the correct amount to fund services important to Californians.”
In my experience, the FTB is much more interested in collecting money than the IRS, for two reasons. First, the FTB has an inferiority complex – as in, everyone is so afraid of the IRS, but the public doesn’t respect us the way it should. Second, California cannot print money. Since the U.S. Treasury is the source of our nation’s currency, Congress can print more money when collections at the IRS get tight. Thus the IRS can afford to act more like a law enforcement agency (emphasizing the fair and equitable application of tax law to citizens) and less like a tax collection agency. The state of California, however, has to find real dollars to put into real bank accounts to fund the state’s programs. The implication is that the FTB behaves much more like a pit-bull when trying to collect state income taxes from Californians than the IRS does. The FTB is much more aggressive than the IRS in negotiating over taxpayer audits and tax bills.
Employment Development Department
The Employment Development Department administers California’s payroll taxes: unemployment insurance, employment training, state disability insurance, and withholding of personal income tax. Its mission: “The Employment Development Department enhances California’s economic growth and prosperity by collaboratively delivering valuable and innovative services to meet the evolving needs of employers, workers, and job seekers.”
In my experience, the EDD is even harder to negotiate with than the FTB. The Unemployment Insurance tax is the most complex and indecipherable tax I’ve seen. I confess to not completely understanding how the EDD computes the contribution rate. No one at the EDD has given me a formula I can consistently replicate. Indeed, I doubt anyone who does not work full-time for the agency knows how to compute the rate (see Cal. Unemployment Insurance Code § 976-995 to see what I mean.) Furthermore, the EDD’s default assumption is that business owners hold all the power in the employer-employee relationship. As a result, I have encountered more bureaucratic arrogance and entitlement in my dealings with the EDD than with any other agency. I even find its mission statement a misleading hodgepodge of administrative word salad.
California Department of Tax and Fee Administration
The California Department of Tax and Fee Administration (which largely replaced the Board of Equalization in 2017) collects sales and use taxes, and also cigarette taxes, cannabis taxes, tire fees, ballast water fees, lead-acid battery fees, and others. Its mission: “to make life better for Californians by fairly and efficiently collecting the revenue that supports our essential public services.”
I find this agency the least professional. The CDTFA grew out of the Board of Equalization, an elected board that still exists. Until the mid-2010 decade, it was standard procedure, if you had a disagreement with your audit, to lobby your elected board member to overturn the audit result. I also have had auditors ask me for a job in the middle of an ongoing audit.
Sales taxes are hard to compute, and the CDTFA uses strange and indirect methods to come up with its audit results. At the collection level, it is probably the least sympathetic to delinquent taxpayers: payment agreements that allow the taxpayer’s business to continue are harder to reach with this entity than with any other bureaucracy.
No matter which tax agency you may be having trouble with, give me a call to get some insight on what kind of difficulties you’re likely facing.
September 22, 2020