Update: California’s Financial Institution Record Match (Firm) And Delinquent Taxpayers


Reprinted from Cal Tax Network, September 2012

Last year (August 2011 Newsletter) I wrote a comment on recently enacted SB 86. Among the three sections of SB 86 is the Financial Institution Record Match system (FIRM). The following is an update to that comment. In a letter to financial institutions dated June 12, 2012, the Franchise Tax Board stated that it “expects to issue more than 475,000 Orders to Withhold, an increase of 75 percent over last year.” The increase in Orders to Withhold will largely be based upon implementation of FIRM.

Under FIRM, financial institution records are matched against customer records to determine if a person on the FIDM list has an account subject to levy by way of Order to Withhold. From this process comes the new California system R&T § 19266(a) establishing the Financial Institution Record Match System (i.e. FIRM). FIRM requires that all financial institutions (with some exceptions) doing business in the state provide to the FTB on a quarterly basis the name, record address and other addresses, social security number or other taxpayer identification number, and other identifying information for each delinquent tax debtor, as identified by the FTB, who maintains an account at the institution. Unless required by other law, the financial institution providing the information is prohibited from disclosing to an account holder that it has furnished the information to the FTB. Just how expansive the record match will need to be for the very large financial institutions is unclear. The financial institutions may need clarification on whether they need to do nationwide record searches, regional searches or statewide searches. FIRM is intended to comply with the California Right to Financial Privacy Act (the Act) by meeting an exception to the Act, in that the use of the information provided by the financial institutions is limited to the collection of delinquent taxes or other debts referred to the FTB for collection. All other uses are expressly prohibited.
“Financial Institutions” is broadly defined to include depository institutions, institution-affiliated parties (like captive brokerage affiliates and private banks), federal and state credit unions and benefit associations, insurance companies, safe deposit companies, money market funds or similar entities authorized to do business in California

“Account” is just as broadly defined and includes, demand deposit accounts, share or share drafts accounts, checking or negotiable withdrawal order accounts, savings accounts time deposit accounts or money market mutual fund accounts, regardless of whether the account bears interest.

A “delinquent tax debtor” means any person liable for any income or franchise tax or other debt referred to the FTB for collection where the obligation remains unpaid after 30 days from demand for payment and the person is not making timely installment payments under an agreement pursuant to R & T §19006.

There is an analogy between what FIRM has done with respect to record searches and the federal governments action in enacting the Foreign Account Tax Compliance Act (FATCA)(IRC §1474-1474). FATCA requires foreign financial institutions that have U.S. accounts to enter into information-exchange agreements with the Internal Revenue Service which provide that they will search their records and provide record information to the Service for all customers who are U.S. persons. FATCA is, in essence, a class reporting system as opposed to an individual reporting system. The class in question is (in general) all U.S. persons with accounts in a foreign financial institution. A record match system may occur later when the IRS compares FATCA reports with income tax return disclosures required under new IRC§6038D.

The focus of enforcement is now clearly on financial institutions as a tool of compliance. The State Legislature has shifted the costs of information gathering to financial institutions, much like Congress has shifted the costs of information gathering through FATCA. Just how these costs will be distributed to customers in the form of fees or lower rates of return remains to be seen.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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