The California Franchise Tax Board Said I Owed $91,465.63! The Problem Your Tax Clients Might Have Too!

I was relaxed and refreshed when I returned to the office after a little Fourth of July vacation a few months ago, but my cheerful mood disappeared the second I opened a letter from the California Franchise Tax Board that was addressed to Roslyn and me.

After opening the envelope, the first thing I saw was, “Notice of Tax Return Change: Revised Balance Due.” I scanned the page and it said “Notice of Tax Return Change.” According to the Franchise Tax Board, Roslyn and I owed them an additional $91,465.63 in state income taxes for 2021.

I knew the notice immediately was a mistake. I don’t do my tax return, but my CPA, who’s been doing my tax returns for decades, is fantastic. We do tax projections several times a year to ensure there are no surprises. I knew my return had been filed on time, and everything was copacetic. After my immediate shock, I compared the Notice to the return we filed and had an idea of what went wrong, and I also knew I could fix this mess myself.

After several hours on the phone with the California taxing authority and being transferred to different people, I finally got through to the right person and got an answer, and my suspicions were confirmed. The problem stemmed from a SALT (State and Local Tax) “workaround” passed into law by the California legislature late in 2021 that affected 2021 personal income tax returns. The problem was that the 2021 tax forms had not caught up with this new law that generated the automatic balance due notice.

As a side note, when the 2017 Tax Cuts and Jobs Act went into effect, it capped the deduction for state and local taxes (SALT) at $10,000. This was a big problem for a lot of people in high property tax states — including me! So, some state legislators came up with what’s called the SALT workaround. Simply put, this lets individuals with Subchapter S Corps take a Pass-Through Entity (PTE) deduction to get around the SALT limitation.

The state of California personal income tax form had no designated place to record this credit. My accountant used the most logical spot (the withholding line), but it still came up incorrectly in the California Franchise Tax Board’s system.

I had to write up and send a nine-page fax to the California Franchise Tax Board to get the error resolved. In the end, as I already knew, I didn’t owe anything. However, it was a huge distraction that sucked up several hours of my time. If this mix-up happened to me, it’s probably happening to thousands, if not millions, of taxpayers across the country right now, or it’s going to appear as a problem soon.

Imagine how your clients would feel if they got the letter I did in the mail. I wasn’t worried and actually felt confident and welcomed resolving this issue since I personally resolved over 2,000 cases on my own when I owned my tax resolution practice. The clients you file for won’t have the expertise to find the problem, talk to six different people until they get to the right one, and write up a nine-page fax with supporting documentation proving they’re “innocent.” They’ll need you to do that for them — so get ready to step up and help. In fact, I’d recommend doing more than that. You can actually get ahead of this problem and increase your tax resolution revenue with three easy steps.

1. Review your client list and look for all of the Subchapter S Corps you filed for 2021.

2. Identify the Subchapter S Corps where you also took the Pass Through Entity (PTE) reduction.

3. Contact those clients and see if they’ve gotten notices like mine from their respective states. If they have, offer to fix the problem for a fee! Abikarram on being elected Vice President for the Florida Society of Enrolled Agents (FSEA).

Congrats to Ben Butterfield for signing 3–4 new clients a month by implementing marketing strategies. Keep up the good work!

Jesus Abikarram being sworn in as Vice President of FSEA

Hats off to Melinda Tolbert for an inspiring write-up of your personal and business journey in the Voyage ATL. Way to go, LuSundra Everett, for officially separating your tax resolution business from your tax prep business and creating EST Tax Relief.

Kudos to William Harmon for signing three clients in one week.

Congratulations to Michele Harris, Hassan Muhammad, and DeAnna Jacobs for signing their first clients. LuSundra Everett and Yvette Best attending FSEA Conference If you do this, you’ll become a hero to your clients and bring in thousands of dollars of tax resolution business. It’s a win-win for everybody except the IRS — just the way we like it.

-Michael Rozbruch