In 2003 and 2011 California Legislators passed laws that increased the Franchise Tax Board’s (FTB) ability to enforce taxing laws and crack down on abusive tax evasion schemes. Some of the measures included; increasing the time period to conduct audits, greater registration requirements, and increased penalties for both investing in and promoting illegal tax shelters. As evidence of its continuing efforts the FTB recently announced that Victor George Kawana, 53, and Blair Stover, 51, each a one-third owner of Kruse Mennillo, LLP have been arrested on charges of conspiracy and tax evasion.
In a FTB release, the men are accused of allegedly encouraging more than 100 clients to participate in an “abusive tax avoidance transaction” or “ATAT” during the years of 2002 through 2005. Generally, ATATs range from frivolous tax schemes to highly technical and abusive tax shelters that are marketed to taxpayers by promoters selling tax advice. Here, Kawana and Stover instructed their clients to exploit an ATAT involving the creation of Nevada corporations and Roth IRA or Employee Stock Options Plan (ESOP) as the sole shareholders with no valid business purpose other than tax avoidance. The sham transactions resulted in a cost to the state of 7.6 million in tax liability. Both face three felony counts of aiding in the preparation of false state income tax returns and one felony count of conspiracy. Each count carries a maximum sentence of three years in state prison.
According to U.S. Government Accountability Office (GAO), while trend data on taxpayer’s use of ATATs is limited, the problem exists and is continually changing. Although there has been a decline in marketing of ATATs to large corporations and wealthy individuals, they have become more international in nature. California sought to address this problem in 2011 by passing Senate Bill 86 which instituted a second voluntary compliance initiative (VCI 2) for California taxpayers with offshore financial arrangements or who participated in abusive tax avoidance transactions (ATATs). VCI 2 ran from August 1, 2011 to October 31, 2011.
The state of California’s push to collect revenue given the state’s budgetary crisis is driving the FTB’s efforts. It is important to be educated on what constitutes an ATAT in California, which is much broader than the federal definitions of abusive tax shelters and transactions that lack economic substance.