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Tax News
Bridging the tax gap

In previous issues of Tax News, we identified components of the Tax Gap (July 2006), common types of underreported income (August 2006), and common mistakes made in reporting expenses (September 2006). So, what is the FTB doing to bridge the tax gap?

We have mobilized compliance groups to focus on key contributors to the tax gap. Each compliance group identifies the enforcement and taxpayer education efforts to deal with these areas of noncompliance:

  • Fraudulent Tax Preparers - Focuses on detection, enforcement, and remediation of tax preparers who persistently underreport income, and overstate deductions.
  • Underreported Income - Uses existing departmental data in different ways to identify taxpayers who underreport income. Recognizing what taxpayers fail to report requires new detection methods and audit techniques.
  • Abusive Tax Shelters - Concentrates on combating abusive tax avoidance transactions.
  • Abusive Tax Shelter Promoters - Sets up penalties on practitioners and advisors who promote potentially abusive tax shelters.

In addition to creating these targeted noncompliance groups, we are expanding our existing activities and programs by:

  • Establishing more education and outreach programs to increase public awareness of the Tax Gap, and its effect on California and its taxpayers.
  • Conducting more audits on sole proprietors. Most analyses of the tax gap estimate that sole proprietors make up the highest percentage of individual taxpayers who underreport their income. We are specifically looking at sole proprietors of businesses with a high potential of underreporting their income or overstating deductions. Businesses with sizeable cash transactions tend to have a higher percentage of under-reported income.
  • Encouraging voluntary compliance. We send letters to notify individuals of potential noncompliance items on their return. This notification gives them the chance to amend their returns and correct errors, before we open an audit.
  • Increasing income-matching efforts using federal Form 1099s, W-2s, and other information shared by government agencies to identify California nonfilers, and underreported income. FTB plans to collaborate with the Internal Revenue Service on tax gap issues. Through these efforts, both individually and jointly, FTB will continue to identify and remove areas of noncompliance contributing to the Tax Gap.