The state Franchise Tax Board's latest tax amnesty program brought in $350 million from those who had underreported their income through tax shelters and offshore accounts.
More than 1,000 taxpayers confessed to underpaid taxes in exchange for the state's offer to waive penalties and the possibility of prosecution. Businesses made up $100 million of the catch, though the overwhelming majority of participants were individuals. Those who should have but didn't participate in the program, which ran from August through October, can be hit by huge penalties and tax audits for up to 12 years back, the tax board warns.
"If these taxpayers have the chance to come in without penalties and become tax compliant, then it's good for everybody," said Michael Cornez, tax counsel for the board.
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Many states have used tax amnesties to generate short-term cash in the persistent economic downturn. The programs are not without controversy, however. Some tax lawyers argue that they unfairly paint taxpayers who didn't know the rules as intentional tax evaders. Some academics worry that too many amnesties will encourage the idea that it's OK to cheat on taxes because everything will be forgiven later.
"If you run tax amnesties too often, you’re actually incentivizing people to not pay on time because they know that there will be an amnesty coming up, and they can always get back into the good graces of government," said Kim Rueben, senior fellow with the Tax Policy Center.
In 2004, California ran a "voluntary compliance initiative" similar to the recent one. It netted $1.3 billion. A broader tax amnesty in 2005 brought in $3.2 billion. Franchise Tax Board spokesman Daniel Tahara said this year's haul was much lower because so many people already had come in under previous programs.
San Francisco tax attorney Steve Moskowitz said this year's program was structured so that participants had to admit to intentionally evading taxes.
"I found that horribly offensive," Moskowitz said. "A lot of people inadvertently violated a law they hadn’t even heard of."
Moskowitz said some immigrants don't know they have to pay taxes on foreign income and would like to come clean when they find out. But admitting tax avoidance in the amnesty program, he said, could potentially get them in trouble later.
Moskowitz also argued that the punishment for those who didn't participate – tax audits for up to 12 years instead of eight – is unconstitutional.
Cornez, the Franchise Tax Board's tax counsel, said the $50 million in additional taxes from offshore accounts came in small amounts from a large number of taxpayers, many of whom probably just didn't know the rules. Cornez also noted the program adhered to the state bill authorizing the amnesty, which was approved by Gov. Jerry Brown in March.
Cornez said it takes years for government auditors to catch up with the latest trends in tax shelters. Auditors look for transactions that have no business purpose other than to create a tax benefit.
"There's a cat-and-mouse game," he said. "We're still looking at these transactions that occurred five to eight years ago."
Under one scheme, investors promise to pay a certain amount of money to someone in the oil drilling business. They can then write off that debt as a tax deduction under a special oil drilling tax benefit, Cornez said. But the investors don’t actually pay the debts – just a commission to the orchestrator of the scheme. Sometimes, there’s no actual drilling.
The Franchise Tax Board uses a broader definition of an abusive tax avoidance transaction than the Internal Revenue Service, said Michelle Ferreira, shareholder at Greenberg Traurig. State authorities also are more aggressive in enforcement, she said, declining to settle cases, as the federal government often does.
That makes the amnesty program a good deal, even for those who think they've been unfairly accused of evading taxes and face years of litigation to resolve their cases.
"If you have a case against the state, it's frankly cheaper to pay them the tax in exchange for getting rid of the penalties, and then you can get on with your lives," Ferreira said.
Some people turn down the amnesty because they'd rather be vindicated in court, Ferreira said. Others worry that if they confess to underpaid taxes to the state, the IRS will come knocking.
Still others, of course, just don't want to pay.