California Penalty Abatement – There May be Hope Yet

By Torakichi Jesús Oba Pérez, EA, CPA, CalCPAs

According to etiquette experts, young children should not (yet) curse like their parents. This new era of work from home has made it that my poor child’s ears are inundated with inappropriate shouts of frustration as I review client files while realizing that I have, yet again, come up short in some California compliance matter. As I salve my ego by telling myself that its called a ‘practice’ for a reason, I think to myself that if a licensed California tax resident CPA misses a few of the state’s Franchise Tax Board (FTB) filing requirements, my brethren in Texas dealing with Californians (former or current) might want to have a few additional tools in their toolbox in the hopes they are able to save themselves some uncomfortable conversations about the root cause of their children’s precocious vocabulary.

California FTB Form 2918 – One-Time Penalty Abatement, Individual

In order to qualify for one-time penalty abatement, all of the following criteria must be met:

1. Penalty requested for abatement is for a taxable year beginning on or after Jan. 1, 2022.
2. Have not been approved for One-Time Penalty abatement previously.
3. Have filed all your required income tax returns.
4. Have paid in full or is currently on an approved installment agreement to pay all other taxes, penalties, fees, and interest due other than the timeliness penalty.

This has been used to great success when a taxpayer, California resident or non-resident, who otherwise would have filed a timely income tax return, missed a filing deadline for whatever reason and was assessed a late filing penalty. There is no reasonable cause required, but I would suggest being judicious as to what year to apply it to if a taxpayer has multiple years they are suddenly catching up on, as it is a one-time abatement.

The statue of limitations to claim a refund is the later of:

1. Four years after the original tax return due date
2. Four years after the due date of a timely filed tax return
3. One year from the date of the overpayment

California FTB Form 2917 – Reasonable Cause, Individual and Fiduciary Claim for Refund

California FTB Form 2924 – Reasonable Cause, Business Entity Claim for Refund

Now we are in the territory of reasonable cause, which the FTB defines as a failure that occurred despite the exercise of ordinary business care and prudence, not due to willful neglect. Reasonable cause is evaluated case by case based on all the facts and documentation provided with FTB 2917 (individuals and fiduciaries) or 2924 (business entities).

Anecdotally, I understand that serious illness, incapacitation or death of the taxpayer or key person responsible for filing/paying of taxes, in addition to natural disasters or other catastrophic events, tend to make the reasonable cause arguments most likely to be accepted.

Additionally, the California Franchise Tax Board does not conform to federal relief from penalties based upon good filing history, but they may abate a penalty if you can provide IRS documentation that clearly states that the IRS abated a similar penalty for “reasonable cause.”

These would cover the most typically used penalty abatement requests, but perhaps your clients have the right fact patterns to look into the following:

1. California FTB 3701 – Request for Abatement of Interest
2. California FTB 3705 – Request for Taxpayer Advocate Equity Relief
3. California FTB 4107 – Mandatory e-Pay Election to Discontinue or Waiver Request

FTB 4107 specifically states that if you have an e-pay penalty (individuals or businesses), then you would request an abatement of this e-pay penalty by filing of FTB 2917 if applicable to an individual.