Under scrutiny.

At an Aug. 5 press conference, Steve Westley, California's controller and chair of the Franchise Tax Board, announced that the FTB is beginning 150 new audits of suspected abusive tax shelters. This is in addition to the 265 tax shelter cases the FTB already is reviewing.

Additionally, the FTB and the IRS Small Business and Self-Employed Division are finalizing a memorandum of understanding to facilitate the transfer of knowledge and information regarding tax shelters to avoid duplication of effort. The memorandum provides for sharing of names of investors suspected of involvement in abusive tax schemes.

JOINING FORCES

This memorandum is part of an ongoing cooperation between the FTB and IRS that has seen the FTB publicizing the IRS voluntary compliance initiatives--opportunities for individuals to come forward and avoid costly penalties. As part of that outreach effort, taxpayers are being encouraged to participate in those initiatives for California purposes as well.

Taxpayers participating in the federal Offshore Voluntary Compliance Initiative are encouraged to file California amended returns by Oct. 15 to avoid civil fraud penalties and criminal prosecution.

In July, FTB participants in a tax shelter symposium indicated that they are considering additional memorandums of understanding that would include other IRS divisions. In a July 16 Wall Street Journal article, Westley was quoted as saying, "It is time to crack down. It's a way to work more effectively together and get more bang for the buck."

Under the memorandum, the FTB and IRS are planning a coordinated approach that will allow effective use of resources and information sharing at the front end of investigations rather than at the end, which has been the process. Each agency hopes the memorandum will multiply its investigative power.

According to the IRS, the first attack will be on promoters who market tax shelters to wealthy individuals, professionals and small companies. Audited taxpayers are asked to identify the promoters of the tax shelter and the IRS and FTB believe that about 15 percent of the promoters are located in California, but many more promoters sell to California taxpayers from outside the state.

At the July 16 symposium speakers estimated California's loss from corporate tax sheltering at about $1 billion annually. Legislation introduced in California, AB 1601 (Frommer) and SB 614 (Cedillo) is designed to crack down on abusive tax shelters by increasing penalties on taxpayers, marketers and promoters, and extend the statute of limitations for abusive tax shelters.

PROTECTING LEGITIMATE TAX PLANNING 

CalCPA is working with the Legislature, California Bankers Association, California Taxpayers Association and the State Bar Tax Section to make sure, to the extent possible, that the legislation conforms to federal definitions and does not inadvertently impact tax practitioners and taxpayers engaged in legitimate tax planning activities.

California is the first state to sign a memorandum of understanding with the IRS to identify evaders. If the state is successful in working with the IRS to conduct joint investigations, impose penalties and generate revenue, it won't be the last.

At press time, Sen. Chuck Grassley announced that he would seek amendments to H.R. 6, The Energy Policy Act of 2003, which would increase the penalties for corporate participants (those with gross receipts in excess of $10 million) in abusive tax shelters as well as high-net worth (net worth exceeding $2 million) taxpayers.

In addition to requiring the payment of increased penalties, reports leading to would be made to the SEC if the individual or corporation is a registrant. Compliance. Last year Sen. Grassley authored legislation to end abusive tax shelters. An analysis of Grassley's new proposal was not available at press time.

E-FILING MANDATORY

The budget package Gov. Gray Davis signed included provisions that require any tax practitioner using tax preparation software and filing 100 or more individual tax returns in 2003 to e-file unless there is a reasonable cause for not e-filing or the taxpayer refuses to e-file or the tax practitioner is not an accepted by the IRS for e-filing. Tax preparers who fail to e-file will be subject to a $50 penalty for each return. Practitioners who are rejected by the IRS for e-filing are encouraged to correct their problems with the IRS so that they may be approved and participate in the state's mandate. The FTB has identified all practitioners that this new requirement applies to and has issued invitations to them to participate in the fifth annual e-filing conference. Contact the FTB for additional information at www.ftb.ca.gov.

Bruce C. Allen is CalCPA's director of government relations.