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California uses third party records to help collect income tax

In a data-driven world like ours, federal and state revenue authorities have multiple ways to determine whether someone has not filed their taxes. Historically, tax system has been largely based on voluntary compliance. But enforcement also plays a role - and is becoming increasingly sophisticated as more and more information about taxpayers becomes available to government agencies.

A good example of this occurred earlier this month. The California Franchise Tax Board (FTB) announced a major initiative to contact people who did not file a California income tax return last year. The number of people to be contacted is expected to exceed one million.

Obviously that is a lot of taxpayers. But then California is a big state, and in the 2011 tax year more than 15.8 million tax returns were filed.

How does the FTB know whom to contact? Well, the data sources the board has at its disposal are remarkably extensive. The FTB takes several hundred million income records it receives from third parties and compares those records to its own records of filed tax returns.

Not surprisingly, the third parties involved start with the IRS. But they also include employers, financial institutions and other government agencies, among others. In addition, the FTB makes use of information about occupational licenses and the payment of mortgage interest.

The FTB has a long had a practice of contacting those who may to be required to file taxes but have not done so. Last year, the board says it collected over $714 million by doing so.

People who are contacted are given 30 days to file their state return or state the rationale for why a return is not due.

Source: "State Noticing Those Who Did Not File Last Year's Taxes," State of California Franchise Board, 1-16-13

Our firm handles situations similar to those discussed in this post. To learn more about our practice, please visit our page on failure to file tax returns.

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