California Tax Cheats Urged to Fix Returns or Pay Penalties

About 7,500 Californians who may have used illegal tax shelters will soon receive letters from the Franchise Tax Board, urging them to fix their state tax returns or face new penalties.

"During these difficult financial times, when we are making tough choices, everyone needs to play by the rules,” board chair and state Controller Steve Westly said Wednesday.

The board now has more enforcement tools to curb the use of abusive tax shelters. Legislation signed in October created seven new and greatly increased penalties for investing in illegal tax shelters.

The board’s so-called Voluntary Compliance Initiative gives taxpayers one chance to come forward and amend their state tax returns before the state enforces the tougher penalties. Taxpayers and businesses have an April 15, 2004 deadline to fix their returns and pay the tax and interest they owe.

The Franchise Tax Board estimates that California lost as much as $2 billion in tax revenue over the last four years due to abusive tax schemes, which generally have no business purpose except to hide income and reduce taxes.

On the national level, the new Public Company Accounting Oversight Board has vowed to look for evidence that accounting firms have marketed abusive tax shelters.

The IRS has also made abusive tax shelters a top priority, and is working with California on its efforts.

The Franchise Tax Board has already identified more than 350 taxpayers investing in abusive tax shelters. The potential revenue from those cases is estimated at $400 million, but the board says that California will not collect the money for several years because the audits and administrative appeal process takes that long to resolve.

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