California Taxes Based Upon Information Returns: Using a California Address for Out-of-State Workers Causes California Assessments
Every year businesses are required to provide information to the Internal Revenue Service (IRS) regarding amounts paid to employees, contractors, and partners. The IRS, in turn, relays that information to state governments. Among the most common forms used to convey information to the IRS are:
Form W-2, Wage and Tax Statement;
Form 1099-MISC, Miscellaneous Income; and
Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc.
It has recently come to our attention that the California Franchise Tax Board (FTB) has been assessing tax liabilities and penalties against California non-residents based upon the payee’s California address that appears on the information return issued by the California business.
A California employer has an U.S. employee working overseas. Rather than using the employee’s overseas address on the Form W-2, the employer utilizes its own address in California.
The employee does not file a California income tax return, because the employee did not work in California. However, to the Franchise Tax Board, it appears that the employee is residing in California because the address on the Form W-2 is a California address. The Franchise Tax Board may even send a Notice of Proposed Assessment to the employee, but it will likely be sent to the address on the Form W-2—the employer’s address—and never received by the employee.
The result: taxes and penalties are assessed against the employer. The FTB may even take collection action including issuing levies on the California employer.
Businesses should review their payee information to ensure that the appropriate addresses appear on the information returns that are provided to the taxation authorities. We have seen this problem in California; however, other states could easily adopt this practice.
Once a California tax liability has been assessed, reversing that liability through the state’s administrative process will require the use of a tax professional.