BILL ANALYSIS
AB 2605
Page 1
Date of Hearing: April 19, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 2605 (De La Torre) - As Introduced: February 19, 2010
Majority vote. Fiscal committee.
SUBJECT : Income and corporation taxes: fraud reporting:
reward program
SUMMARY : Requires the Franchise Tax Board (FTB) to establish a
reward program under which individuals will receive a percentage
of collections if FTB proceeds with an administrative or
judicial action based on the individual's information.
Specifically, this bill :
1)Requires FTB to establish a reward program for information
resulting in the identification of underreported or unreported
income subject to tax under the Personal Income Tax (PIT) Law
or the Corporation Tax (CT) Law.
2)Provides that an individual shall receive at least 15%, but
not more than 30%, of the collected proceeds if FTB proceeds
with administrative or judicial action based on information
provided by the individual.
3)Provides that the determination of the amount of the reward
shall depend upon the extent to which the individual
substantially contributed to the administrative or judicial
action.
4)Provides that if an administrative or judicial action is one
based principally on disclosures of specified allegations
arising from an administrative or judicial hearing, from a
governmental report, hearing, audit, or investigation, or from
the news media, FTB may award a sum that it deems appropriate
that does not exceed 10% of collected proceeds.
5)Provides that the reward program shall apply to administrative
or judicial actions against any taxpayer whose tax liability
arose under the PIT Law or the CT Law, but in the case of a
person whose income is subject to PIT, only if the
individual's gross income exceeds $200,000 for any taxable
AB 2605
Page 2
year subject to the administrative or judicial action and the
tax, penalties, interest, additions to tax, and additional
amounts in dispute exceed $2,000,000.
6)Provides that a determination regarding the amount or denial
of a reward may, within 30 days of the determination, be
appealed to the State Board of Equalization (BOE).
7)Provides that no reward may be made under this bill based on
information submitted to FTB unless the information is
submitted under penalty of perjury.
8)Defines "collected proceeds" to include penalties, interests,
additions to tax, and any additional amounts.
9)Becomes operative January 1, 2011.
EXISTING LAW authorizes FTB to establish a reward program for
information resulting in the identification of underreported or
unreported income subject to tax.
FISCAL EFFECT : FTB estimates that this bill would result in a
revenue gain of $200,000 in fiscal year (FY) 2010-11, of
$350,000 in FY 2011-12, and of $400,000 in FY 2012-13.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
Tax fraud is always wrong, but it's even worse during tough
economic times. We want to encourage Californians to act
now and report income tax fraud. AB 2605 will protect the
informant form harassment and also reward the informant for
their courage to come forward with information that will
help the State of California.
Tax fraud includes deliberately underreporting or omitting
income, overstating the amount of deductions, keeping two
sets of books, making false entries in books and records,
claiming personal expenses as business expenses, claiming
false deductions, and hiding or transferring assets or
income. AB 2605 will help reduce tax fraud and rewards
those individuals that help the state during these tough
economic times.
AB 2605
Page 3
Specifically, this bill will allow the FTB [to] offer a
monetary reward to motivate citizens to bring alleged
violations of tax laws to the attention of FTB. AB 2605
will protect the informant from harassment and also reward
the informant for their courage to come forward with
information that will help the State of California.
2)Opponents claim that this bill provides "a tremendous
incentive for people to betray one another using dishonest
tactics to gain information in the interest of financial gain.
Katz-Harris Taxpayers' Bill of Rights states: "The amount of
revenue collected or assessed by the board shall not be used?
(1) To evaluate individual officers or employees; (2) To
impose or suggest production quotas or goals." Opponents
claim that this bill runs contrary to the spirit of these
provisions, which is to prevent taxpayer harassment by
prohibiting employees from receiving remuneration or
advancement based on revenue collected."
3)Committee Staff Comments :
a) Undesirable Behavior : A reward program raises the issue
of encouraging individuals to use dishonest tactics to gain
information in the interest of financial gain. As a way of
mitigating fear, this bill restricts the reward program's
application under the PIT to situations where the
individual's income is over $200,000 and where the amount
in dispute exceeds $2 million. This reward program would
not apply to most PIT filers. As a way of further
protecting small businesses that are PIT filers from
disgruntled employees and competitors, committee staff
recommends that the threshold be raised from $200,000 to
$250,000.
Disgruntled employees and competitors are likely to be among
the primary informants under this bill. This raises
several policy concerns. On the one hand, businesses
should be paying their taxes. On the other hand, creating
a reward program is likely to encourage retaliation from
disgruntled employees and competitors whose motives go
beyond financial gain.
b) Identity Disclosure: This bill provides that a reward
will not be made unless the information is submitted under
AB 2605
Page 4
penalty of perjury. FTB, under Revenue and Taxation Code
(R&TC) Section 19559, may not disclose information if the
FTB determines the disclosure would identify a confidential
informant. R&TC Section 19542 also makes it a misdemeanor
for an FTB employee to disclose information except as
permitted. Though the FTB attempts to keep all informant
identity confidential, there may be instances where
disclosure of the information is compelled by law.
An informant whose identity has been disclosed may be exposed
to liability without any form of protection by FTB. There
is nothing in this bill that guarantees that an individual
will be protected under the reward program from
retaliation, presumably from the audited taxpayer. An
informant whose identity becomes known may also suffer
blacklisting, retaliation against family and friends,
physical harm, loss of job, and other social and economic
losses. Outside of litigation, informants face the real
threat of retaliation without a sense of protection.
c) Wrongly Accused: Assuming that some informants will be
competitors or disgruntled employees, audited individuals
and businesses may seek legal action for incurred damages.
d) BOE Appeal Process: This bill provides that a
determination regarding the amount or denial of an award
may be appealed to BOE within 30 days of the determination.
Because a taxpayer is not barred from challenging the
denial of an award or the amount of the award in Superior
Court, the author may want to eliminate this provision to
save on administrative costs.
e) Hard Cap: Allowing a reward ranging from 15% to 30% of
the proceeds collected creates a lot of discretion for FTB,
allowing informants the ability to challenge the amount.
In order to reduce the amount of litigation, the author may
wish to set a hard cap on all rewards or a fixed percentage
of the proceeds collected. Specifically, Committee staff
suggests that this bill set a clear limit of 25% with a cap
of $250,000.
f) Reward: This bill should clearly indicate when the
reward is to be received by the informant. Also, FTB may
allow a tax liability to be paid over time. This bill does
AB 2605
Page 5
not provide guidance as to how the reward will be funded in
such a situation. If the reward is equal to 15% of
proceeds collected and FTB receives 10% of the tax
liability in the first year, FTB will not have the funds to
pay the full amount of the reward in the first year. This
bill should clearly indicate how a reward will be funded if
proceeds are collected over a period of time. The author
may want to amend this bill in order to pay out awards only
after all proceeds have been collected.
g) Most informants will go to the Internal Revenue Service
(IRS): Most informants will provide information to the IRS
before providing information to FTB because rewards would
be greater at the federal level. The IRS will also be
handling a greater percentage of the cases because FTB
primarily focuses on California law.
h) Will this proposal encourage greater reporting? There
are two important factors that may encourage greater
reporting. First, reward amounts will increase. This bill
raises the award amount to a minimum of 15%, far greater
then the maximum of 10% allowed under current law. Second,
this reward program pays for itself. The current reward
program is unfunded, deterring most informants. Instead of
having the Legislature fund the program, this bill pays
rewards directly from the collected proceeds. However, the
limited application of this program to the PIT may offset
part or all of the increased reporting. According to FTB,
the agency will conduct about 30 audits per year.
4)FTB Comments:
a) Criteria for reward: This bill allows a reward of at
least 15%, but not more than 30%, of the proceeds collected
from administrative or judicial action. This bill,
however, does not provide guidance for evaluating the
significance of information when deciding the final award
amount. It is recommended that this bill be amended to
allow for a set amount of either 15% or 30% to minimize
disputes.
b) Payment of Reward: This bill does not indicate when a
reward shall be paid. Also, this bill does not contemplate
the possibility of a taxpayer filing for a refund. If FTB
pays out a reward and the taxpayer later files for a refund
AB 2605
Page 6
with the Superior Court, the rewards paid out would be
lost. FTB recommends that this bill be amended to require
that all remedies be exhausted and that the statute of
limitation for contesting any tax and penalties expire
before the FTB is required to pay a reward.
c) Former Employees: This bill does not specify whether a
former employee of a state tax collection agency would be
eligible for a reward. Former state employees may have
obtained taxpayer information during their employment and
could use the information to obtain a reward. The author
may want to amend this bill to exclude former employees
from being eligible for a reward.
REGISTERED SUPPORT / OPPOSITION :
Support
None on File
Opposition
California Taxpayer's Association
Analysis Prepared by : Oksana Jaffe/ M. David Ruff / Carlos
Anguiano / REV. & TAX. / (916) 319-2098