California offers amnesty for investors in abusive tax shelters

California has launched a tax amnesty program for people who used abusive tax shelters or offshore financial arrangements to evade or avoid state taxes.

The California Franchise Tax Board announced the initiative, called “Voluntary Compliance Initiative 2,” earlier this week. Participants in the program can avoid most penalties and criminal prosecution, the tax board says. The filing period for the amnesty program ends Oct. 31.

The San Francisco Chronicle reports that the tax board has contacted 47,000 taxpayers who might be eligible.

Government crackdown on tax attorney fraud continues

The US Justice Department has accused Scott Waage, a tax lawyer in San Diego, of using illegal tax schemes to withhold $10.8 million in clients’ assets that should have been paid to the IRS.

The complaint alleging Waage’s use of fraudulent tax shelters comes on the heels of another complaint filed against attorneys Charles Klink and Caleb Grodsky, who allegedly used an illegal tax scheme designed to help them avoid paying corporate taxes on income generated from the sale of their clients' business assets, according to the National Law Journal (subscription required).

According to the complaint, Waage advertised himself as a “visionary tax attorney.” He started his own law firm, now titled Strategic Law Group, which allegedly promoted illegal tax schemes that Waage used (for his own assets as well as those of his clients) to defraud the government of millions of dollars.

Deutsche Bank pays for selling tax fraud schemes

Deutsche Bank AG has agreed to pay $553.6 million and admit to criminal wrongdoing to settle allegations that it helped U.S. clients avoid paying taxes by using fraudulent tax shelters.

The German bank will not be further prosecuted for its use of about 15 tax shelters, involving over 2,100 clients from 1996 through 2002, following a nonprosecution agreement with the IRS. The Wall Street Journal notes that some of the relevant tax shelters were marketed by KPMG LLP and Jenkins & Gilchrist PC, both of which have agreed to separate payments and penalties.

In the signed agreement, Deutsche Bank admitted that the transactions pertaining to the tax shelters were “intended to create the appearance of investment activity, but taxpayers were entering into these transactions for the primary purpose of avoiding taxes, as opposed to making profits on the transactions.”

Court of Appeals upholds conviction in tax shelter case

The conviction of ex-KPMG LLP senior manager John Larson was upheld by a U.S. appeals court, which confirmed that the prosecution’s evidence supported the finding that tax shelters sold by Larson were “marketed solely as tax evasion schemes.”

This ruling follows from the U.S.’s initial accusation of 17 ex-KPMG executives and two others of selling shelters that cost the treasury $2 billion in lost revenue. The judge in that 2007 case dismissed charges against all but four defendants and assigned Larson a $6 million-dollar fine. The most recent decision of the appeals court has ordered that this fine be recalculated as $3 million, the legal limit given that Larson’s calculation of harm and loss was made without a jury finding.

Larson has been sentenced to 10 years in prison. In 2007, KPMG paid a $456 million fine for its sale of illegal tax shelters, and charges against it were dismissed.

Prosecutors indict web of players involved in tax shelters

Seven people involved in setting up tax shelters sold to wealthy individuals were indicted by federal authorities, including the chairman and chief executive of BDO Seidman and a well-known tax attorney.

Those indicted include BDO Seidman executive Denis Field and tax attorney Paul M. Daugerdas, according to The New York Times.

The indictment said one shelter, known as SOS, was sold to 550 wealthy clients and generated $3.9 billion in bogus tax losses in two years, the Times reported.

The Times said the indictments are the largest crackdown on tax shelter promoters since mid-2005. At that time, the accounting firm KPMG admitted to wrongdoing over its work with questionable shelters and paid $456 million to the government to settle the case.

Congress considers bill to stop use of offshore tax havens

Congress is considering bills to curb use of offshore tax havens to evade U.S. taxes through a variety of measures.

Similar bills were introduced by Sen. Carl Levin (D-MI) and others in the Senate and U.S. Rep. Lloyd Doggett (D-Texas) and Rep. Rosa DeLauro (D-CT) in the House. Sen. Carl Levin (D-MI) filed an earlier version of the Stop Tax Haven Abuse Act in 2007, which then Sen. Barrack Obama supported. But the bill didn't pass.

"With White House leadership, we can finally win approval of our legislation to shut down offshore tax cheats," Doggett said in a statement. The steps proposed include treating foreign corporations managed and controlled in the United States as domestic corporations for income tax purposes

See Levin's statement about the legislation and The National Law Journal's report on the lobbying efforts. (Subscription required.)

Court decision favoring tax shelter is an aberration, IRS official says

A recent court decision rejected an argument by the Internal Revenue Service that the defendant had invested in an improper tax shelter, but as a Wall Street Journal columnist says, "Don't rush into that tax shelter just yet."

The Journal's Tax Report surmises that:

Many investors battling the Internal Revenue Service in high-stakes tax-shelter cases may take some hope from the government's defeat . . . . But IRS lawyers view the decision as merely a temporary setback on the road to annihilating the badly battered shelter business. Indeed, the government has won most recent cases involving shelters.

One lawyer predicted the court decision in the tax shelter case would be reversed on appeal.