long arm of tax law
FTB programs detect and prevent tax dodges
In our August issue of Tax News, we gave you some background on our Investigations program, and some of the tax crimes that special agents help to uncover and prosecute. In this issue, we give you a view into what it takes to become a special agent, and the impact they have on shutting down the tax gap.
Our Fraud Prevention and Detection group also pursues tax criminals. They focus on taxpayers and tax preparers who seek gain by illegally overstating credits and deductions, fabricating W-2 information, and claiming fraudulent refunds. Fraud detection and prevention occurs all year long, but is stepped up during the filing season, while returns are coming in for processing. This group works closely with the Investigations program, referring fraudulent tax preparer cases to Investigations for prosecution.
A lot of preparation goes into becoming an FTB special agent. Applicants who meet the education requirements (an accounting background, and college courses in criminology, criminal justice, and/or law enforcement), and who make it through the demanding selection process, have only cleared the first hurdle. Next, they must make it through the SIBC Academy (Specialized Investigators Basic Course), which prepares each student for an investigative position. Students must pass written, exercise, and scenario tests to demonstrate readiness for an investigative position.
The Investigations program works closely with other state and local agencies to build cases, and apprehend criminals. Special agent training reflects this partnership emphasis. Many arrests are made for both tax-related charges, and other criminal behaviors.
During the 16 weeks they spend at the Academy, special agent recruits receive hands-on training in arrest and control techniques, investigative case management, weapons training, role-play scenarios, and surveillance.
The potential for danger in this line of work is real, and is reflected in the hours of training devoted to public safety and officer safety. For example, recruits spend 72 hours in weapons training, 60 hours in arrest methods and defensive tactics training, and 36 hours in use of force, crimes in progress, and domestic violence training.
Learning how to safely deal with the criminal element goes hand in hand with training in building a successful case against tax criminals. Recruits spend many hours perfecting skills in methodical investigation and data gathering to document criminal behavior. Training in laws of arrest, search and seizure, investigative report writing, presentation of evidence, case management and sources of information, and administrative procedures account for almost 20 percent of their time in the Academy.
Many additional hours are devoted to a wide range of training experiences, including policing in the community, computers and computer crimes, crimes in progress, controlled substances, gang awareness, crimes against children, and many more.
The initial 16 weeks of training is the beginning of a special agent's training experience. After leaving the academy, recruits undergo six months of OJT, both in the classroom and in the field. Peace Officer Standards and Training (POST) requires ongoing training - a minimum of 24 hours of continuing professional training in any 24-month period, which includes 10 - 12 hours of "Perishable Skills Program" training. Our agents often exceed this minimum requirement, with quarterly training that includes Firearms, Defensive Tactics and Tactical Communications review, among other training classes.
Several of our special agents are POST-certified instructors, which requires update training every two years, in addition to the minimum training already described. To be an instructor at the academy requires yet more training. Instructor training ranges from 40 - 80 hours, depending on the specialty.
The value of so much special agent training is illustrated by cases like these:
- FTB received more than $271,000 from a bankruptcy trustee, which included tax, penalties, interest, and the cost of investigation. The special agent obtained a court order under the aggravated white-collar crime enhancement, enabling the state to preserve the subject's assets (real property) for restitution. The subjects failed to report more than $1.3 million from prepaid phone card sales for the years 1999, 2000, and 2001. Without evidence obtained from the residence and financial institutions through search warrants, it would have been difficult to make a successful tax evasion case against them.
- After a search warrant was executed on a Southern California attorney/CPA in early 2005, his CPA walked into an FTB field office with an amended 2003 tax return, and a check for more than $2.3 million. The subject is currently facing trial.
- A nationally known anti-tax crusader, who ran unsuccessfully for governor of California in 2002, and his wife, are currently standing trial for filing false returns (see "Orange county millionaire sentenced to tax evasion scheme" in Criminal Corner for more details on this case). They allegedly falsely reported their taxable personal income as zero for 1997 through 1999. The subject was involved with "We the People Foundation for Constitutional Education," a tax protest group that declares the government does not have the authority to withhold taxes from paychecks. During a search warrant execution of the subject's business, members of the group filmed, and shouted at special agents and Investigations staff as evidence was being loaded into a cargo van.
The payoff of special agent training: $16 million in revenue brought in by the Investigations program, on average, for the past two years.
Fraud prevention and detection
Tax law is complex, and sometimes taxpayers - and even tax preparers - make honest mistakes. FTB's information validation program performs edits on all returns, to check for mathematical errors, and to validate that credits, deductions, and refunds are claimed correctly. Returns that don't add up are flagged by our automated system, and closely examined by employees.
Every so often, we become aware of unscrupulous taxpayers or tax preparers trying to illegally game the system. They may fabricate data on a W-2, generate multiple fake W-2s, or in the case of tax preparers, inflate refunds on clients' returns. Our Fraud Prevention and Detection (FPD) group uses information from the Employment Development Department (EDD), employers, daycare providers, and informants to identify inaccurate or fraudulent refund claims. Electronic technology is used during return validation, and by FPD, to perform logic tests when looking for overstated claims.
FPD deals with a variety of fraudulent return issues, including Child Dependent Care Expenses Credit (CDC) claims, and fabricated W-2s. Many false claims are detected and stopped during initial return processing, prompting taxpayers, whose refunds have been disallowed or reduced, to contact their tax preparers with questions and complaints. The negative effect on their businesses causes many questionable tax preparers to think twice about any future attempts to indulge in fraudulent schemes.
FPD pays special attention to refundable credits. For instance, examining the accuracy of the Child and Dependent Care Expense Credit claims (the maximum refund is currently $1,050 for two or more qualifying persons) revealed that certain tax practitioners were excessively claiming the credit for their clients. As a result, FPD verifies the validity of many of these claims before releasing the refunds.
Much of the work done by FPD during the verification process is used to support both criminal and civil cases against tax preparers. During the 2005 calendar year, FPD identified approximately $10.3 million in fraudulent CDC claims and more than $7.3 million in false W-2 and other claims. FPD works closely with the Investigations program, compiling data on fraudulent tax preparers, for subsequent criminal prosecution.
Current law (Business and Professions Code 22250-22259) requires tax preparers to be registered with the California Tax Education Council (CTEC), or to be exempt from the requirement (CPAs, enrolled agents, attorneys, and certain banking officials are exempt). FTB is involved in a joint compliance effort with CTEC to identify tax preparers who prepare returns for a fee, but are not complying with this law. Members of the FPD group visit tax preparers on-site, and effective January 1, 2006, began issuing a $2,500 penalty (Revenue and Taxation Code Section 19167(d)) to noncompliant tax preparers. The penalty is issued when it is determined that the preparer is not registered with CTEC, and is not exempt from that requirement. If the tax preparer becomes compliant within 90 days, the penalty is removed. In this initial year, as of June 30, 2006, FTB visited more than 700 tax preparers, identified 75 as unregistered, and issued 30 penalties.