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Abusive Tax Shelters

Abusive Tax Shelters. Debbie Langsea California Franchise Tax Board October 28, 2004. National Abusive Tax Shelter Problem. FEDERAL: up to $85 billion loss over last decade (GAO estimate) ALL STATES: up to $12 billion corporate loss in 2001 (MTC estimate)

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Abusive Tax Shelters

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  1. Abusive Tax Shelters Debbie Langsea California Franchise Tax Board October 28, 2004

  2. National Abusive Tax Shelter Problem • FEDERAL: up to $85 billion loss over last decade (GAO estimate) • ALL STATES: up to $12 billion corporate loss in 2001 (MTC estimate) • CALIFORNIA: $600 million to $1 billion loss annually (FTB estimate)

  3. California General Fund Revenues (Amount in billions)

  4. Capital Gains and Options Income 1998 - 2002 ($ Billions)

  5. 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 • follows literal reading of the tax statute, but applies the meaning inconsistent with the purpose or intent of the tax statute

  6. Characteristics – Abusive Tax Shelters • Separation of income and expenses • Use of pass-through entities • Use of third-party accommodators • Offshore foreign account or accommodator • Double benefit for the same tax loss • Conducted over a short period of time

  7. California Abusive Tax Shelter Compliance Program • Voluntary Compliance • Detection • Enforcement

  8. Voluntary Compliance Educational Efforts: • U.S. Senate Hearings, Press Conferences, Press Releases, Newspapers, Symposiums, Tax News, and Presentations • Internet (www.ftb.ca.gov), VCI e-mail address and telephone number • 32,000 Letters: Taxpayers, Preparers, Promoters, and Accounting/Law Firm Employees • 40,000 Brochures, Quick References

  9. Voluntary Compliance Initiative California’s 106-Day VCI Program: • $1.4 Billion Additional Tax Revenues • 1,200 Taxpayers • 2,100 Tax Years

  10. VCI by Taxpayers

  11. VCI by Revenue

  12. VCI by Tax Years

  13. VCI by States Amounts > $1 Million Amounts > $1 Billion Amounts < $1 Million Amounts = $0

  14. Detection – Information Sharing • IRS ATAT Memorandum of Understanding (Sept. 2003) • States ATAT Memorandum of Agreement (Feb. 2004)

  15. Detection – Reportable Transactions 6 Reportable Transaction Categories: • Listed Transactions • Confidential Transactions • Transactions with Contractual Protections (contingency fees) • Loss Transactions • Transactions with Significant Book-Tax Differences • Transactions with Brief Asset Holding Period

  16. Detection - Taxpayers INVESTORS NEW Registration and Reporting Requirements: • Disclose Reportable Transactions • Disclose Listed Transactions from 2/28/00

  17. Detection - Promoters PROMOTERS NEW Registration and Reporting Requirements: • Register Tax Shelters or Listed Transactions (from 2/28/00) • Provide List of Investors for Reportable Transactions or Listed Transactions (from 2/28/00)

  18. Enforcement • Conduct investor and promoter audits • Establish Abusive Tax Shelter Unit • Pursue leads, investors lists, registrations, and other informational sources • Issue subpoenas • Focus on promoters, firms, financial intermediaries, and insurance companies • Assess abusive tax shelter penalties • Evaluate for criminal prosecution

  19. Enforcement - Taxpayers

  20. Enforcement - Promoters

  21. Enforcement - Other Other Abusive Tax Shelter Curtailments: • No suspension of interest • Doubles statute of limitations to 8 years • Enhances subpoena provisions • Ability to enjoin promoters • Increases interest on amended returns • Eliminates accountant confidentiality

  22. Recent Updates • Federal Tax Shelter Legislation • Federal District Court Decisions • Federal Settlements • Federal De-listed Transaction

  23. Comparison of Tax Shelter Laws

  24. What’s New Summary? Investors Beware? Investors Victory? • Long Term Capital Management vs. IRS – • Penalties can be applicable even with a legal opinion regarding the transaction • Revision to IRS settlement terms – cost to settle with the IRS has gone up • Federal legislation passed enhancing penalties and registration requirements • Black & Decker vs. IRS • Summary decision held Black & Decker contingent liability transaction had economic substance • Judge did not perform any analysis of profit motive • IRS is reviewing appeal options • Delisting of the PORC transaction

  25. Additional information can be found on our website at:www.ftb.ca.gov

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