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State and Feds Partner to Crackdown on Illegal Tax Schemes

State Controller and FTB Chair Steve Westly announced today the Franchise Tax Board (FTB) and IRS have signed a joint agreement to detect, audit, and prosecute tax evaders involved in illegal and abusive tax shelter schemes.

"California loses hundreds of millions of state tax dollars each year as a result of these sophisticated tax schemes," Westly said. "This is legitimate tax money owed to the State of California that funds our schools, helps our elderly, and fuels our emergency and transportation services. With a record deficit currently plaguing our state, we are very motivated to pursue these cases," added Westly.

The FTB has seen an increase in abusive tax schemes in the past few years. The federal government says it loses billions of federal tax dollars each year because of abusive tax scheme deductions. The FTB estimates California lost as much as $2 billion in state tax money in the last four years.

The “memorandum of understanding” signed today outlines a plan where the FTB and IRS share leads, use their collective tax data bases to detect and track offenders, and increase their collective audit reach to bring offenders into compliance.

The IRS defines abusive tax schemes as transactions that offer tax benefits with no meaningful change in the taxpayer's control over or benefit from their income or assets. These transactions typically have no economic purpose other than reducing taxes, and use of multiple layers of domestic and foreign pass-through entities such as partnerships, S corporations, and limited liability companies. Another common abusive tax scheme involves sending money to offshore banks that issue debit/credit cards, providing the account owners cash without income tax.