California Steps Up Criminal Tax Enforcement

California has a multi-agency task force known as the Revenue Recovery and Enforcement Team that was established to attack criminal tax evasion.  The stated goals of the team are:

(a) According to the State Board of Equalization, an estimated nine billion dollars ($9,000,000,000) in corporate, personal, and sales and use taxes goes uncollected in California each year, with unreported and underreported economic activity responsible for the vast majority of that total.

(b) Criminal tax evasion associated with underground economic activities hurts all Californians. Revenues to support government services are lost, workers are forced to go without basic employment protections, and legitimate businesses are confronted with unfair competition. Despite significant statewide efforts, California continues to lose billions of dollars in annual tax revenues due to the underground economy.

(c) The mission of the Labor Enforcement Task Force (LETF) and the Joint Enforcement Strike Force (JESF) is to combat the underground economy to ensure a level playing field for California businesses. However, these programs focus on labor violations while often overlooking or disregarding criminal tax evasion

The task force consist of

all of the following state entities:(1) Franchise Tax Board.(2) Department of Justice.(3) State Board of Equalization.(4) Employment Development Department.(b) In addition to the agencies listed in subdivision (a),

The following agencies may participate in the pilot program in an advisory capacity to the team 🙁 1) California Health and Human Services Agency. (2) Department of Consumer Affairs. (3) Department of Industrial Relations. (4) Department of Insurance. (5) Department of Motor Vehicles

Since creation of the task force in 2014 through the reporting period ending March 2015 there have been:

239 – complaints received

62 – complaints triaged to other agencies 

100 – complaints in preliminary or full investigation

8 – prosecution cases in process 

10 – cases successfully prosecuted 

$60,750,604 – unreported (identified from investigation) 

$2,184,992 – recovered (court-ordered restitution, audits billed, and investigative costs, evidence [dollars and assets]) 

$5,701,666 – potential recovery (anticipated billings; ongoing cases)

This is a pilot program, but it does have significance in that there is intra-state agency cooperation now in place which breaks down the prior firewalls between agencies.  The effect of the intra-state agency cooperation is best visualized in the labor area.

Example:  Assume that a California business has improperly used cash to pay wages, either in total to keep the personnel off the books, or in part to reduce payroll taxes and worker’s compensation insurance premiums.  Under the provision of Government Code Section 15920 the lead agency may now refer in other agencies for collaborative enforcement actions. 

There does not appear to be a limitation on the original source of the lead.  This means that if the IRS pursuant to the Information Exchange Agreement with the FTB provides a report of an income tax adjustment to the FTB, the FTB can, where appropriate now share that result with the other team members. 

The importance of coming forward and working out a resolution to state tax liabilities is more important than ever.  Whether the initial audit is a result of state agency action, or the result of an audit by the IRS or another state, the results in terms of risk of prosecution or substantial multi-agency audit deficiencies and penalties cannot be understated. Taxpayer’s who have enter the IRS Streamline Procedure to report previously unreported offshore accounts, should be aware that they will not receive a “closing agreement” from the IRS.  What that means is that they should assume that the IRS will report the results of filing amended returns to the FTB as soon as the amended return is processed.  In such cases it is in the taxpayer’s self-interest to file amended returns with the FTB concurrently with the federal amended returns.