Getting constant reminders from the California Franchise Tax Board (FTB) of your unpaid tax debt is not something one looks forward too. In fact, it can cause a lot of stress especially once they start taking collection action. In this article, we will talk about what there is to learn about California Franchise Tax Board liens and what necessary actions you need to take to overcome them.
See our video explanation below, then keep reading on for more information:
The first things to know about California Franchise Tax Board liens: Credit hurt, creditors are notified
A tax lien is the government’s right to claim or seize your property if you fail to pay your taxes on time. There are different government entities who can impose a tax lien, with the most common one being at the federal level. Liens can also occur at the local and state level. One of the frustrations of having a tax lien is that you might have a hard time selling property or getting financing since your creditors will be notified about this. This can affect your credit score negatively too.
When Does the California FTB file a lien? After their notice of collection action letter
The California Franchise Tax Board files a lien if they haven’t heard back from you or a resolution that does not meet their minimum monthly payment to avoid a lien is put in place. They will also send you a notice of collection action and give you a time period of 30 days before recording the lien.
The notice contains the necessary information about your tax debt such as the amount to pay (including penalties and interests), due date, who to contact, and instructions for the payment. It is important to notify the FTB if you moved to a new address. Failing to notify the FTB of the address change is something you’re held accountable for, so you cannot use this as a reason to appeal the lien filed against you.
How does the California FTB record tax liens? Through the county recorder where you reside
The logo for the Los Angeles County Recorder
Failure to respond to the notice sent by the FTB will allow them to record a lien with the county recording office in the county of your residence or a county in which you own real or personal property. After this, the FTB will file a Notice of State Tax Lien with the California Secretary of State.
Consequences of getting a California Franchise Tax Board lien
Levy Bank Account
A CA FTB bank levy takes funds from your bank account if you haven’t responded to their notice of your unsettled tax debt. They can take up to the full amount you owe. The FTB can make this action as stated under California Revenue and Taxation Code Sections 18817 and 18670.
Garnishment of wages by the California FTB
Another common act that the FTB can do is to garnish your wages. Garnishment means that the FTB will take funds directly from your paycheck. The FTB will normally send a notice to your employer requiring them to withhold up to 25% of your disposable income. As per the FTB, your disposable income is your gross income after federal income tax, social security,
Some items are deducted from the disposable income total
State income tax and State disability have been deducted, but before 401(k) contributions, Health benefit deductions court-ordered assignments for support, and voluntary deductions are taken out. If you are self-employed, the FTB can garnish income for contracted services and often they take everything until you can show expenses on these types of garnishments (typically referred to as a levy – because they levy the source that pays you as a contractor).
FTB Asset Seizure: Not as often as tax relief companies make it sound
The FTB can issue a warrant to enforce the payment of a lien. Once they get the authorization, they can seize your assets or property, including houses, cars, or anything of value. Let’s be realistic though. The FTB rarely ever takes a primary residence, regardless of what some tax relief companies may want you to believe. The same thing applies to personal vehicles. They are typically only coming intake vehicles and homes when the debts are extremely large and the assets are extravagant.
Accumulated penalties and interest
When you continue to delay the payment of your tax debt, additional charges such as penalties and interests are applied on top of the amount you owe. You may qualify for a penalty abatement, but they are harder to get from the FTB than from the IRS. You need a good reason as to why you did not pay on time. Not having the money is generally not considered a good reason. Things like divorce, deaths in the family, and floods are better reasons to get an FTB penalty abatement.
FTB lien affect on credit rating
Once the FTB records a lien under your name, creditors may know about this from public records of liens. This kind of public record would harm your credit score.
How to stop collections and resolve your tax debt
There are different ways that you can stop the FTB from taking collection action against you. You may seek for legal assistance to help you in making the ideal decision to take to resolve the tax debt. Here are the most common ways to respond to the FTB collections.
Pay the amount in full
If you have the capability to pay off your debt, then this option is best. You will have to pay the total amount due in the notice given to you. This includes the amount owed, penalties, and interests for late payment. The FTB will record a certificate of release within 40 days after they receive your payment. FTB Web Pay is the easiest way to make a payment.
Payment Plan: This can result in a lien, but they won’t take anything
If you cannot make your payment in full, you can arrange a Payment Plan with the FTB. This installment agreement will allow you to make monthly payments over a specific period. You need to submit a request form and the FTB will determine if you are eligible for a payment plan. They can still record a lien on your property to secure the debt until it has been fully paid.
Depending on the length of the payment plan, FTB might still file a lien
For most balances, the agent working your case will offer a payment plan over a maximum amount of months to avoid a lien. If you need to submit financial information to get a lower payment plan, they will file a tax lien. You can also pay more per month than they request to avoid a lien. Once the tax debt is paid off, the lien will be released.
File for an FTB Offer In Compromise: Settle for less than the amount owed
An Offer In Compromise is settling for less than you owe. This is the best form of California tax debt forgiveness. The FTB will assess if you are qualified for an OIC. These include your current assets, household income and expenses, and a number of dependents. The FTB may still file a lien while the Offer is pending. It does not prevent a tax lien, but if it’s accepted, the tax lien will get released once the terms of the Offer are satisfied.
FTB Offer In Compromise is harder than it is with the IRS
If you generally have low income, do not have assets, and are older, your odds are good. The FTB places age as a factor and sometimes will deny an Offer because you are too young. They have a long time to collect on the debt, as the debts do not expire for 20 years. Plus they often find ways to add time to that debt expiration. See our FTB Offer In Compromise guide for more information on the process.
FTB Hardship Status: You can afford to pay $0, so they shelve your case for a year
Being placed in FTB hardship status is very similar to the IRS’ Currently Not Collectible status. It means that the FTB will hold off on the collection of back taxes for the time being. The difference between FTB’s hardship status and Currently Not Collectible is the renewal process. The IRS just looks at your tax return each year and if it is the same, typically renews the status. The FTB will require you to re-submit for hardship status after one year. It automatically expires.
Bankruptcy: Not the best option if your main debt is tax debt or only debt is tax debt
If back taxes are your only debt, bankruptcy is not the best option in most cases. If you have many other substantial debts and your tax debts qualify to be discharged, bankruptcy might be the best option. Some FTB and IRS debt may survive bankruptcy. Payroll and Sales tax debts will not be discharged nor income tax debts that are not old enough.
File for a dispute if you disagree with the lien: Have a valid reason
If you don’t agree with what the FTB is demanding from you, you can file an appeal. You can request an appeal if you believe that there was a mistake with the amount being charged, or you already made the payment but it wasn’t reflected in your account. After you file for an appeal, the FTB will investigate. They will release the lien if they agree with you.
California Franchise Tax Board liens get released, not withdrawn
If the debt is valid and a lien is filed, then when it is paid off the tax lien will be released. The IRS has a way to withdraw liens. The difference? The withdrawal is like it never existed while the release shows it was there then satisfied. Policies might change in the future, but for now, the lien will show on your credit report as released even when paid or settled. Released is not bad though and heavily improves most credit scores.
Concluding our guide California Franchise Tax Board Liens
The best way to avoid a CA FTB tax lien is to pay it in full or do the minimum monthly payment plan the FTB wants. Sometimes risking a lien is worth it to settle the debt for much less than you owe. We had a $265,000 FTB debt settle for $225. The liens were then released. It probably was worth $264,775 to have a released lien on the record rather than no lien for that client (and realistically that client could not pay it anyway).
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