Exploitable Quirk in I.R.S. Levies of State Tax Refunds

A snafu by the California Franchise Tax Board has exposed a vulnerability that tax resisters may be able to exploit.

I haven’t been resisting my California state income tax. This isn’t an ideological decision, but more a matter of picking my battles. Wrestling with one tax bureaucracy is enough fun; two might be one too many.

But it looks like California wants to play with me even if I don’t want to play with them. , because California has its own labyrinthine clutter of rules about depreciating business assets that don’t match up with those of the feds, I realized I didn’t have enough information to file my state return on time. So, as one is supposed to do in such a situation, I filed for an extension and sent a check for the $61 I expected I’d owe once I got the paperwork all straightened out.

Once I had everything in order, the damage turned out to be $64 instead of $61, so I sent in my tax returns and another check, for $3, to cover the difference.

But a few weeks later I got a letter from the California Franchise Tax Board saying that they’d issued me a $61 refund, but that because I owed money to the IRS, they sent the check to them instead of to me.

A week or so after that, I got another letter from the California Franchise Tax Board containing a refund check for the other $3.

A few days ago, I got a third letter asking me why I never paid them the $64 I owe them and threatening me with interest, penalties, collection and the usual.

So, typical bureaucratic government stupidity, right? I tried to call them morning to get it all figured out and, after punching in dozens of numbers in their phone menu, a pre-recorded voice told me that they had too many calls for their operators to handle and abruptly hung up on me. A second call got me relief after a mere 30 minutes of synthesized elevator music and reminders of how important my call was.

But this incident may turn out to be a valuable lesson for tax resisters. Notice that because I’d sent them two payments they issued me two refunds, and notice that some automated screen seized the first refund and sent it to the feds, but let the second payment through.

Hypothesis: this screen is set up to intercept a single refund and then to expire. If you owe the feds money and they set up such a screen, and you anticipate a large state tax return, you may be able to foil the screen by triggering a small refund before the big one gets issued — for instance by paying the state tax authorities an unexpected and small amount before you file your return.