abusive tax shelters and other audit issues

Abusive Tax Shelters and Abusive Tax Shelters and Other Audit IssuesOther Audit Issues

Debbie Langsea Debbie Langsea

California Franchise Tax BoardCalifornia Franchise Tax Board

September 17, 2004September 17, 2004

Definition – Abusive Tax Shelter Definition – Abusive Tax Shelter

promoted with the promise of tax benefitspromoted with the promise of tax benefits predictable tax losses or consequences predictable tax losses or consequences no true or correlating economic loss of no true or correlating economic loss of

income or assetsincome or assets follows literal reading of the tax statute, but follows literal reading of the tax statute, but

applies the meaning inconsistent with the applies the meaning inconsistent with the purpose or intent of the tax statute purpose or intent of the tax statute

Characteristics – Abusive Tax SheltersCharacteristics – Abusive Tax Shelters

Separation of income and expensesSeparation of income and expenses Use of pass-through entitiesUse of pass-through entities Use of third-party accommodatorsUse of third-party accommodators Offshore foreign account or accommodatorOffshore foreign account or accommodator Double benefit for the same tax lossDouble benefit for the same tax loss Conducted over a short period of timeConducted over a short period of time

National Abusive Tax Shelter ProblemNational Abusive Tax Shelter Problem

FEDERAL: up to FEDERAL: up to $85 billion$85 billion loss over last loss over last decade decade (GAO estimate)(GAO estimate)

ALL STATES: up to ALL STATES: up to $12 billion$12 billion corporate corporate loss in 2001 loss in 2001 (MTC estimate)(MTC estimate)

CALIFORNIA: $600 million to CALIFORNIA: $600 million to $1 billion$1 billion loss annually loss annually (FTB estimate)(FTB estimate)

California Abusive Tax Shelter California Abusive Tax Shelter Compliance ProgramCompliance Program

Voluntary ComplianceVoluntary Compliance

DetectionDetection

EnforcementEnforcement

Voluntary ComplianceVoluntary Compliance

Educational Efforts: Educational Efforts: U.S. Senate Hearings, Press Conferences, Press U.S. Senate Hearings, Press Conferences, Press

Releases, Newspapers, Symposiums, Tax News, Releases, Newspapers, Symposiums, Tax News, and Presentationsand Presentations

Internet (Internet (www.ftb.ca.govwww.ftb.ca.gov), VCI e-mail address ), VCI e-mail address and telephone numberand telephone number

32,000 Letters: Taxpayers, Preparers, Promoters, 32,000 Letters: Taxpayers, Preparers, Promoters, and Accounting/Law Firm Employeesand Accounting/Law Firm Employees

40,000 Brochures, Quick References40,000 Brochures, Quick References

Voluntary Compliance Initiative Voluntary Compliance Initiative

California’s 106-Day VCI Program:California’s 106-Day VCI Program:

$1.4 Billion Additional Tax Revenues$1.4 Billion Additional Tax Revenues 1,200 Taxpayers1,200 Taxpayers 2,100 Tax Years2,100 Tax Years

VCI by TaxpayersVCI by Taxpayers

857

340

PIT CORP

VCI by RevenueVCI by Revenue

(in Million Dollars)

$972

$462

PIT CORP

VCI by States

Amounts = $0Amounts < $1 MillionAmounts > $1 MillionAmounts > $1 Billion

Detection – Information SharingDetection – Information Sharing

IRS ATAT Memorandum of Understanding IRS ATAT Memorandum of Understanding (Sept. 2003)(Sept. 2003)

States ATAT Memorandum of Agreement States ATAT Memorandum of Agreement (Feb. 2004)(Feb. 2004)

Detection – Reportable TransactionsDetection – Reportable Transactions

6 Reportable Transaction Categories:6 Reportable Transaction Categories: Listed TransactionsListed Transactions Confidential TransactionsConfidential Transactions Transactions with Contractual Protections Transactions with Contractual Protections

(contingency fees)(contingency fees) Loss TransactionsLoss Transactions Transactions with Significant Book-Tax Transactions with Significant Book-Tax

DifferencesDifferences Transactions with Brief Asset Holding PeriodTransactions with Brief Asset Holding Period

Detection - TaxpayersDetection - Taxpayers

INVESTORS INVESTORS

NEW Registration and Reporting Requirements:NEW Registration and Reporting Requirements:

Disclose Reportable TransactionsDisclose Reportable Transactions Disclose Listed Transactions from 2/28/00Disclose Listed Transactions from 2/28/00

Detection - PromotersDetection - Promoters

PROMOTERSPROMOTERS

NEW Registration and Reporting Requirements:NEW Registration and Reporting Requirements:

Register Tax Shelters or Listed Transactions (from Register Tax Shelters or Listed Transactions (from 2/28/00)2/28/00)

Provide List of Investors for Reportable Provide List of Investors for Reportable

Transactions or LTransactions or Listed Transactions (from isted Transactions (from 2/28/00)2/28/00)

EnforcementEnforcement

Conduct investor and promoter auditsConduct investor and promoter audits Establish Abusive Tax Shelter UnitEstablish Abusive Tax Shelter Unit Pursue leads, investors lists, registrations, and Pursue leads, investors lists, registrations, and

other informational sourcesother informational sources Issue subpoenasIssue subpoenas Focus on promoters, firms, financial Focus on promoters, firms, financial

intermediaries, and insurance companiesintermediaries, and insurance companies Assess abusive tax shelter penaltiesAssess abusive tax shelter penalties Evaluate for criminal prosecutionEvaluate for criminal prosecution

Enforcement - TaxpayersEnforcement - Taxpayers

Investor PenaltyInvestor Penalty AmountAmount

Noneconomic SubstanceNoneconomic Substance 20%-40%20%-40%

Reportable TransactionReportable Transaction 20%-30%20%-30%

Interest Based Interest Based 100% interest100% interest

Failure to Disclose TransactionFailure to Disclose Transaction $15,000-$30,000$15,000-$30,000

Accuracy RelatedAccuracy Related 20%20%

Enforcement - PromotersEnforcement - Promoters

Promoter PenaltyPromoter Penalty AmountAmount

Failure to Register ReportableFailure to Register Reportable $15,000$15,000

Failure to Register Listed TransactionFailure to Register Listed Transaction$100,000 or 50%-75% $100,000 or 50%-75%

gross incomegross income

Failure to Maintain Investor ListFailure to Maintain Investor List $10,000/day$10,000/day

Failure to Provide Listed TransactionFailure to Provide Listed Transaction $100,000 or 50%$100,000 or 50%

PreparerPreparer $1,000-$5,000$1,000-$5,000

PromoterPromoter 50% gross income50% gross income

Enforcement - OtherEnforcement - Other

Other Abusive Tax Shelter Curtailments:Other Abusive Tax Shelter Curtailments: No suspension of interestNo suspension of interest Doubles statute of limitations to 8 yearsDoubles statute of limitations to 8 years Enhances subpoena provisionsEnhances subpoena provisions Ability to enjoin promoters Ability to enjoin promoters Increases interest on amended returns Increases interest on amended returns Eliminates accountant confidentialityEliminates accountant confidentiality

Other Audit IssuesOther Audit Issues

Tax CreditsTax Credits Individuals - Schedule AIndividuals - Schedule A

– Mortgage interest deductionMortgage interest deduction– Theft loss deductionTheft loss deduction– Charitable contributions (abusive tax shelters)Charitable contributions (abusive tax shelters)

Other Audit Issues Other Audit Issues

Individuals - Schedule DIndividuals - Schedule D– Mark to Market electionsMark to Market elections– Inflated basis (abusive tax shelters)Inflated basis (abusive tax shelters)

Corporations Corporations – Cash distributionsCash distributions– Dividend received deductionDividend received deduction

Other Audit IssuesOther Audit Issues

S corporationsS corporations– Acceleration of installment sale income Acceleration of installment sale income – Built in Gains tax on assetsBuilt in Gains tax on assets– Relocation of intangible assetsRelocation of intangible assets

Partnerships (abusive tax shelters)Partnerships (abusive tax shelters)

Additional information can be Additional information can be found on our website at:found on our website at:

www.ftb.ca.govwww.ftb.ca.gov