abusive tax shelters and other audit issues
DESCRIPTION
Abusive Tax Shelters and Other Audit Issues. Debbie Langsea California Franchise Tax Board September 17, 2004. Definition – Abusive Tax Shelter. promoted with the promise of tax benefits predictable tax losses or consequences no true or correlating economic loss of income or assets - PowerPoint PPT PresentationTRANSCRIPT
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