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State of California Franchise Tax Board

Controller Westly Vows to Reduce the Tax Gap

State Loses an Estimated $6.5 Billion in Income Taxes Annually

State Controller and Franchise Tax Board (FTB) Chair Steve Westly today announced that the state will do all it can to recover the billions of dollars owed by Californians who continue to cheat the system. Westly spoke at a day-long symposium convened by the FTB to address California's $6.5 billion tax gap.

"California loses billions of dollars each year because a growing number of people choose not to pay their taxes," said Controller Westly. "What tax cheats don't understand is that honest taxpayers wind up footing the bill and that is intolerable."

Board of Equalization Chair and FTB Board Member John Chiang led the discussion, along with Professor Joseph Bankman from Stanford University; Alan Plumley from the IRS National Office of Research; Joshua D. Rosenberg, Professor, USF School of Law; Jack Blum, Senior Counsel, Finance Sector Compliance Advisors and former U.S. Senate Investigator; and Lynn Freer, Enrolled Agent and President, Spidell Publishing.

"Six-and-one-half -billion dollars in investments for our state's infrastructure, public's safety, and children's education is lost each year due to uncollected state income taxes," said Chiang. "The discussion I led today identified strategies to close the tax gap, combat offshore tax shelters, and recover $300 million from our underground economy."

The tax gap is the difference between the amount of taxes legally owed and voluntarily paid. The underground pay-by-cash economy, abusive tax shelters, and non-filing or nonpayment of taxes are partly responsible for the tax gap.

But the greatest source of the tax gap is underreported income. Many taxpayers purposely or unwittingly are part of the underground economy, which is comprised of many components ranging from contractors who make cash payments to their employees, families who pay household employees in cash (nannies, tutors, housekeepers, landscapers), unlicensed contractors who usually work for cash, waitresses and waiters who conceal their tips, professionals who trade or barter services with one another, and participants in swap meets.

Specific tax gap reduction initiatives include:

  1. Enhanced detection of tax preparers filing fraudulent tax returns.
  2. Audit staff augmentation.
  3. Added information sources to identify nonfilers.
  4. Informant reward program.
  5. Underground economy criminal investigations.
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