When would California FTB waive the 10% penalty for paying by check instead of required electronic funds transfer?

Plain-English summary

Legal Ruling 1996-4 gave four examples of when FTB would or would not waive the penalty for a taxpayer required to pay by electronic funds transfer (EFT) but paying another way.

Section 19011 imposed a penalty equal to 10% of the amount paid by a non-EFT method unless the taxpayer showed reasonable cause and no willful neglect. Section 21015 supplied separate discretionary relief when the failure did not jeopardize the state's best interests and was not caused by willful neglect or an intent not to comply.

FTB first considered reasonable cause. Only if reasonable cause was absent did it turn to the separate discretionary standard.

Two routes to relief

Reasonable cause under section 19011

If the taxpayer established reasonable cause and no willful neglect, the penalty did not apply. No separate section 21015 analysis was needed.

Discretion under section 21015

Even without reasonable cause, FTB could refrain from imposing or waive the penalty case by case if the failure did not jeopardize the state's interests and did not reflect willful neglect or an intent not to comply.

The ruling says that authority became effective January 1, 1996, and applied to penalties assessed or imposed on or after January 1, 1995.

Situation 1: first non-EFT payment, no explanation

The taxpayer filed the EFT authorization form but made the next payment by another method.

Result: No automatic waiver. FTB did not know why EFT was not used. If the taxpayer later supplied the reason, FTB could consider reasonable cause or section 21015 relief based on the explanation.

Situation 2: trained employee absent

The taxpayer had successfully made several EFT payments. A later payment was sent by check because the only employee who knew the EFT requirement was absent. Afterward, the taxpayer informed the whole tax department and trained staff on the bank's requirements.

Reasonable cause: No. FTB said a reasonable course was to train more than one person before the due date.

Section 21015 relief: Yes. The prior EFT history showed intent to comply, and the taxpayer took concrete steps to prevent recurrence.

Situation 3: early check payment

The taxpayer filed the authorization form but paid by check. FTB received and deposited the check by the same date an EFT payment would have arrived, and the taxpayer stated that future payments would use EFT.

Result: No reasonable-cause or discretionary relief. Timely receipt alone did not excuse the required payment method, and the ruling found no sufficient explanation or compliance method showing why the failure occurred and how it would be prevented.

Situation 4: repeated notices ignored

FTB repeatedly notified the taxpayer that it had to enroll and pay by EFT. The taxpayer did not return the authorization form and continued paying by other methods.

Result: No reasonable-cause or discretionary relief. The repeated unexplained noncompliance did not demonstrate an intent to follow the statutory requirement.

What this means for you

Businesses required to pay electronically

Timely payment by check does not necessarily avoid an EFT penalty. The required method matters independently from whether the money arrived on time.

Tax departments

Train backup personnel, document payment procedures, and preserve proof of prior EFT compliance. A single-person process was not reasonable cause in the ruling, though prompt remediation supported discretionary relief.

Penalty-abatement requests

Explain exactly what happened, why it was not willful, how the state was protected, the taxpayer's compliance history, and the specific controls adopted to prevent recurrence. An unexplained request was insufficient.

Common questions

Q: Was the historical EFT penalty 10%?

A: Yes. The ruling quotes section 19011 as imposing 10% of the amount paid by another method.

Q: Did a staffing mistake establish reasonable cause?

A: Not where only one employee had been trained. FTB expected backup capability.

Q: Could that same staffing mistake still receive relief?

A: Yes under section 21015 in Situation 2 because of prior compliance and meaningful corrective action.

Q: Did early receipt of a check eliminate the penalty?

A: No. Situation 3 denied relief despite timely receipt and deposit.

Q: What happened when the taxpayer ignored repeated EFT notices?

A: FTB denied both reasonable-cause and discretionary relief.

Citations and references

• Cal. Rev. & Tax. Code § 19011
• Cal. Rev. & Tax. Code § 21015
• Historical FTB Form 3815, Electronic Funds Transfer Authorization Agreement

Source

• Landing page: California FTB Legal Rulings
• Official HTML: Legal Ruling 1996-4

Original ruling text

Home

Legal ruling 1996-4

July 3, 1996

Subject: Revenue and Taxation Code Section 21015--Relief from Penalty Imposed Under Section 19011 (Electronic Funds Transfer Penalty)

Issue

What are some examples of situations in which the Franchise Tax Board (FTB) will or will not use Revenue and Taxation Code section 21015 to refrain from imposing or waive the penalty imposed under Revenue and Taxation Code section 19011?

Facts

Situation 1: Taxpayer has completed an Electronic Funds Transfer (EFT) authorization agreement (FTB form 3815), but fails to make the next payment thereafter using EFT.

Situation 2: Taxpayer has completed FTB form 3815 and has successfully remitted several EFT payments but fails to remit a subsequent payment by EFT. Taxpayer writes to FTB explaining that the reason the payment was not made by EFT was that the only individual who knew that payments had to be made by EFT was not working on the date the payment was due so "someone else" in the tax department just made the mistake of sending payment by check. Taxpayer also explains that everyone in the tax department has now been made aware of the EFT requirement and has been trained on the requirements of the bank so that future payments would be by EFT.

Situation 3: Taxpayer has completed FTB form 3815, but remits the next payment thereafter by check. The payment is received prior to the due date and deposited by FTB by the same date that an EFT payment would have been deposited. Taxpayer states that it intends to remit all future payments by EFT.

Situation 4: Taxpayer has failed to complete FTB form 3815, after FTB has sent repeated notifications to the taxpayer that it meets the requirements to pay by EFT and that it must complete FTB form 3815 and make all future payments by EFT. Taxpayer has continued to make payments by other than EFT means.

Law and Analysis

Under Revenue and Taxation Code section 21015, the Franchise Tax Board has discretionary authority, effective January 1, 1996, to either refrain from imposing or to waive penalties required by section 19011 (penalty for failure to pay by Electronic Funds Transfer.) The determination must be made, "on a case-by-case basis, that the failure to comply did not jeopardize the best interests of the state and is not due to any willful neglect or any intent not to comply." This authority is limited to penalties that may be or were assessed or imposed on or after January 1, 1995.

Under Revenue and Taxation Code section 19011, any taxpayer required to remit payment by electronic funds transfer who makes payment by other means "shall pay a penalty of 10 percent of the amount paid, unless it is shown that the failure to make payment as required was for reasonable cause and was not the result of willful neglect."

Where reasonable cause is established, there is no need to look to section 21015 for relief from the penalty. Where reasonable cause is not established, the provisions of section 21015 will be considered and applied on a case-by-case basis. Below are some examples of the application of section 21015.

Holdings

Revenue and Taxation Code section 21015 will be applied to the above factual situations as follows:

Situation 1: The EFT penalty is automatically imposed when a payment is received by other than EFT means. Because the FTB does not know why EFT was not used by the taxpayer, the penalty will not be waived. If the taxpayer provides information to FTB explaining the reason for the failure, the FTB may waive the penalty for reasonable cause or under the provisions of section 21015 if appropriate.

Situation 2: Because a reasonable course of action would have been that the taxpayer should have had more than one person trained to make payments by EFT prior to the due date of the payment, the penalty would not be waived for reasonable cause. However, because the taxpayer has demonstrated an intent to comply by remitting several payments by EFT and by taking steps to ensure the problem would not be repeated in the future, FTB would waive the penalty under section 21015.

Situation 3: This situation would neither constitute reasonable cause nor an appropriate situation for application of section 21015. An unexplained failure to make payments by EFT without an explanation of the method the taxpayer intends to follow to ensure future compliance with EFT requirements does not demonstrate an intent to comply with the statutory requirements. The taxpayer has a duty to comply with the statute.

Situation 4: This situation would neither constitute reasonable cause nor an appropriate situation for application of section 21015. An unexplained failure to return a completed FTB form 3815 and to make payments by EFT does not demonstrate an intent to comply with the statutory requirements. The taxpayer has a duty to comply with the statute.

Drafting Information

The principal author of this notice is Karen D. Smith of the Franchise Tax Board Legal Branch. For further information regarding this notice, contact Ms. Smith at the Franchise Tax Board Legal Branch, P.O. Box 1720, Rancho Cordova, CA 95721-1720.

Last updated: 09/24/2025