Originally published January 20, 2009
On January 16, 2009, California State Controller John Chiang announced that California is facing a cash shortage issue that may result in a delay of more than $3.7 billion in outgoing payments, including payments of tax refunds. In a press conference, the Controller stated that the delays may take place beginning February 1, unless the California State Legislature can come up with a solution to California's budget deficit.1 The San Francisco Chronicle estimated that up to $2 billion in income tax refunds could be delayed.2
While a delay in refund payments is problematic, the impact may be magnified as a result of California's new 20% penalty. See Sutherland's Legal Alert entitled " California Enacts a New Round of Onerous Penalties," dated September 29, 2008, and Legal Alert entitled " California FTB Comments on New 20% Underreporting Penalty," dated December 9, 2008. Effective October 1, 2008, California imposes a 20% penalty on corporations that underreport their tax liability by more than $1 million.
The penalty is always imposed, unless the underpayment arises from a change in law or reliance by the taxpayer on a Chief Counsel Ruling. The penalty is effective for tax years beginning January 1, 2003. To avoid the penalty, corporate taxpayers may file an amended return by May 31, 2009, stating the correct tax liability.
Sutherland Observation: As noted above, California taxpayers should evaluate whether to amend returns and pay additional tax. Making these decisions will depend on a number of factors, including:
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Footnotes
1. Stu Woo, "California Moves Closer to Delaying Tax Refunds, Other Payments," The Wall Street Journal, January 16, 2009, http://online.wsj.com/article/SB123213299391391031.html.
2. Matthew Yi, "State may delay refunds, disability checks," San Francisco Chronicle, January 17, 2009, at A-1.
© 2009 Sutherland Asbill & Brennan LLP. All Rights Reserved.
This article is for informational purposes and is not intended to constitute legal advice.