Those mammoth losses caught the attention of California Assemblyman Dario Frommer. If the federal government has gotten short shrift, he asked, how much has been lost by his state alone? He went to the state's revenue service, the Franchise Tax Board (FTB), which confirmed his suspicions: Every year California lost hundreds of millions of dollars to illegal tax shelters. In fewer than two years, the number of abusive tax shelters identified by California tax officials swelled from 40 to 400.
So Frommer and the FTB, worked together to pass a new law that aims to boost the Golden State's dwindling revenues by reeling in wealthy individual and corporate tax cheats. The first step in crafting the new policy was to acknowledge the system's current limitations. Previously, the FTB had few resources to pursue tax evaders within the tight four-year statute of limitations in place at the time; while it could catch a few cheats, many more got away easily. Worse still, even when the FTB found and prosecuted evaders, the penalties it could impose were so insignificant as to be meaningless. Those caught promoting shelters were fined a mere $1,000, and the delinquent taxpayers themselves paid only 20 percent of their illegal transaction. "That's nothing," Frommer said. "That's not even a slap on the wrist."
Legislation enacted by the California Legislature in 2003, A.B. 1601, targets the bogus tax shelters that individuals and corporations use to illegally avoid paying taxes. The law strengthens existing penalties for both promoting and taking advantage of illegal shelters, and it removes obstacles that keep law enforcement authorities and the state's FTB from conducting investigations. These steps, along with a one-time voluntary compliance initiative aimed at targeted shelter abusers, have already allowed the state to draw in significant new revenue. In 2006, it brought in more than $1 billion. "We can not cut services to middle-class Americans while the ultra rich are not paying their share in taxes," said Frommer.
The law set out to make it economically disadvantageous for reluctant taxpayers to risk illegal schemes. First, it extends the statute of assessment on returns from four years to eight years, essentially doubling the number of suspicious taxpayers the FTB can investigate. Meanwhile, those caught promoting tax shelters will have to pay fines equaling one-half the income they earned from sheltering each transaction, instead of just a $1,000 fine. And the cheating taxpayers themselves will also have to pay up to 50 percent of the income they failed to report.
Back when legislators were just beginning to come to grips with the sheer magnitude of California's economic crisis, many, fearing the worst, took the budget straight to the cutting board, looking to trim expenditures. But some like Frommer wanted to make sure they were looking at the other side of the ledger, too. He asked, "How can we make sure we're getting all of the revenue we are rightfully owed?"
A recent analysis of the California effort by the California Legislative Analyst's Office (LAO) shows that a total of 1,202 taxpayers participated in the voluntary compliance initiative raising gross revenues in excess of $1.4 billion. Due to pending appeals and federal action, the LAO can not forecast exactly how much the state has gained in net revenues from illegal tax sheltering law changes. However, after adjusting for the estimated effects of these factors they predict gains of about $700 million.
Following California's lead, Connecticut, New York, Illinois, Minnesota, and Arizona created similar statewide initiatives to allow taxpayers involved in abusive tax sheltering the opportunity to come forward and repay the tax liabilities without facing civil or criminal charges.
Similar concerns have arisen in other states as well. So, in March 2004, 34 states and New York City signed a joint agreement to share information on abusive tax shelters and those promoting illegal transactions. Since then, seven more states and the District of Columbia have joined. The document lays out a formal structure for states to notify one another when they discover new schemes, to coordinate enforcement efforts, and to share ideas for new statutes like that in California.
Interest and penalty waivers. The most common feature of an amnesty program is the waiver of all penalties and a complete or partial waiver of interest.
Taxes and tax periods. In general, amnesty programs apply to most taxes administered by a taxing agency and to all tax periods open under the statute of limitations (SOL). However, some states may limit the type of taxes and the length of look back for administrative case or other reasons.
Definition of "qualifying taxpayer" varies by state. In general, amnesty programs are designed to be broadly applicable. Accordingly, they often apply to taxpayers currently filing returns, as well as to those that have not registered with the taxing agency. In addition, state programs may apply to taxpayers currently under audit or in the administrative appeals process. Almost always excluded from amnesty are taxpayers that are under a criminal investigation or those that have been convicted of violating a state revenue law.
Watch for waiver of appeal rights. To guarantee that amnesty collections are not subsequently reduced by refund claims, various states require taxpayers to waive their rights to payments made under amnesty.
Publicity. The success of an amnesty program is often tied to how well the program is publicized.
Arizona's Tax Shelter Voluntary Compliance Initiative:
http://www.revenue.state.az.us/ATATProgram/
Sinoma's%20VCI%20FAQ%2002-10-05.pdf
'Connecticut Abusive Tax Shelter Compliance Initiative':
http://www.ct.gov/drs/cwp/view.asp?a=1436&q=274318
Illinois Department of Revenue Information Bulletin:
http://www.revenue.state.il.us/publications/
bulletins/2005/Fy200517.pdf
Minnesota Department of Revenue:
http://www.taxes.state.mn.us/tax_preparers/
other_supporting_content/revcon2005_06.shtml
California Franchise Tax Board (FTB), Penalties for Abusive Tax Shelters
www.ftb.ca.gov/law/tax_shelter/penalties.html
California Senate Bill 614, 2003
info.sen.ca.gov/pub/03-04/bill/sen/sb_0601-0650/sb_614_bill_20031002_chaptered.html
FTB Crackdown on Tax Shelters
www.ftb.ca.gov/aboutFTB/press/Archive/2003/03_90.html
Abusive Tax Shelters: Impact of Recent California Legislation:
http://www.lao.ca.gov/2006/abusive_tax_shelters/
abusive_tax_shelters_012706.pdf
FTB Anti-Abusive Tax Shelter Agreement
www.ftb.ca.gov/aboutFTB/press/archive/2004/04_32.html
FTB Glossary on Abusive Tax Shelters
www.ftb.ca.gov/law/tax_shelter/glossary.html
New Dem Of the Week: Dario Frommer, Democratic Leadership Council, August 25, 2003
www.dlc.org/ndol_ci.cfm?contentid=252011
&kaid=104&subid=115
Office of California State Controller
P.O. Box 942850
Sacramento, California 94250-5872
(916) 445-2636
Dan Okenfuss
Office of Assembly Majority Leader Dario Frommer
State Capitol
P.O. Box 942849
Sacramento, CA 94249-0043
(916) 319-2043
Paul Weinstein, Jr.
Chief Operating Officer
Progressive Policy Institute
600 Pennsylvania Avenue, SE, Suite 400
Washington, DC 20003
(202) 547-0001
(202) 544-5014 (fax)
pweinstein@ppionline
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