Q: Got a bill for 2020 CA state income I didn't have, based on erroneous 1098
Got bill for 2020 CA state income, with interest & penalties, at the house I used to own with my ex. Divorce finalized in 2010; she got the house, has been making the payments herself since Jan 2009. The loan was modified to remove my name and has since been refinanced.
Apparently my name was on a 1098, and, based on that, CA FTB guesstimated a minimum income for me, and is billing me for it. I haven't had CA state income since 2008. The FTB rep said I should send in proof she's been paying the mortgage herself - but this wouldn't prove I didn't have CA income; I could've been giving her cash.
Also, even if I was paying the mortgage myself, it could've been from out-of-state income or savings. My 2020 Fed/State income tax returns show no mortgage interest deduction, and only state income from where I now live.
1) Is it legal for CA to bill me for state income I didn't have, when it can't prove I did?
2) What are my options to get CA to correct the record and cancel the bill?
A:
Good questions. Here are a few points in response:
1) No, technically California cannot tax you or assess state income tax liability solely based on a erroneous 1098 form, without actual proof of California source income. So there are grounds to fight this.
2) Options to resolve:
- File a protest form with supporting evidence showing no CA income (e.g. tax returns, payroll records showing no CA employment, etc.)
- Provide documentation showing the mortgage transfer and loan modification removing you in 2010, as well as her subsequent refinance.
- Request the FTB issue a formal withdrawal/correction of the assessment and remove penalties due to the erroneous 1098 data.
The key is overwhelming the FTB with solid documentation that you did not earn or receive any California sourced income in 2020. In absence of proper income reporting, they generally should withdraw the assessment. It may take filing an appeal or tax court petition to force the issue if lower levels don't correct it. But the law should be on your side here. Consult a CA tax attorney for specifics.
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