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New Program Cracks Down on Illegal Tax Shelters

Controller Westly Urges Californians to Correct Tax Returns

To ensure that all Californians follow the law, Franchise Tax Board Chair and Controller Steve Westly today urged Californians and businesses who may have used illegal tax shelters to come forward now to avoid new penalties.

The Franchise Tax Board today sent letters to 7,500 people and companies who may have invested in illegal tax shelters, encouraging them to voluntarily amend their state tax returns now to avoid penalties later.

"Unless every Californian follows the law, our schools will lose vital funding,“ Westly said. ”During these difficult financial times, when we are making tough choices, everyone needs to play by the rules."

Westly is also deeply concerned about those who peddle abusive tax shelters to willing and unwitting taxpayers. "We need to focus on the promoters that are systematically violating the law and advising clients to enter into illegal tax shelters," Westly added.

Legislation signed in October (SB 614, Cedillo & Burton; AB 1601, Frommer) provides the FTB with more enforcement tools to curtail the use of abusive tax shelters. Among other enforcement provisions, the new law greatly increases penalties for investing in illegal tax shelters.

The Voluntary Compliance Initiative is a one-time chance for taxpayers who used abusive tax shelters to come forward and amend their state tax returns before the state starts pursuing the harsher penalties authorized by the new law. Interested taxpayers have until April 15, 2004 to amend their returns and fully pay the tax and interest due.

Estimates show California loses from $600 million to $1 billion in tax money annually through abusive tax sheltering. Abusive tax shelters typically have no economic purpose other than reducing taxes. Most involve the use of multiple layers of domestic and foreign pass-through entities such as partnerships, S corporations, and limited liability companies.

In September, the FTB and IRS signed a joint agreement that outlines a plan in which the two tax agencies share leads, use their collective tax databases to detect and track offenders, and increase their collective audit reach to bring offenders into compliance.