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State of California Franchise Tax Board

Taxpayers Under IRS Audit Urged to Apply for VCI

Penalty Waiver Program Ends April 15

State Controller and Franchise Tax Board (FTB) Chair Steve Westly today urged corporate and individual taxpayers who have used abusive tax shelters or who are under federal audit for abusive tax shelters to participate in the state's Voluntary Compliance Initiative. This program, which allows taxpayers to voluntarily amend their tax returns before harsh penalties take effect, will come to an end on April 15.

"Although many Californians may have unwittingly used illegal tax shelters, they still need to come forward now in order to avoid tough penalties that kick in after April 15," Westly said.

California has recently obtained thousands of leads from the Internal Revenue Service, states, and other sources that help identify investors, promoters, and tax schemes involved in sheltering income.

Legislation signed in October 2003 (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 new law. To date, the FTB has collected more than $1361 million through this program.

Estimates show California loses $600 million to $1 billion in tax money annually through abusive tax sheltering. Abusive tax shelters are transactions marketed with the promise of tax benefits with no correlating economic losses. Most involve the use of multiple layers of domestic and foreign pass-through entities such as partnerships, S corporations, and limited liability companies.

To learn more about the FTB’s Voluntary Compliance Initiative, visit our Website at

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