State Reaps $3 Billion in Overdue Taxes

State officials say $3.2 billion has come into California coffers through a tax amnesty program that is sparking a national debate over how aggressive governments should be in pressuring corporations to pay all they owe.

One of the Legislature’s top tax experts disclosed the latest deposit total Thursday, predicting that the state will probably keep most of that money, even though a large part of it remains in dispute. The state is in dire need of revenue as lawmakers try to close a budget gap now estimated at $8.6 billion.

At least $2.5 billion of the payments, most of which arrived last weekend as the amnesty program expired, is being challenged by companies that nevertheless paid to avoid harsh new penalties taking effect this month. Accountants for the companies say they will aggressively pursue refunds.

Assembly Revenue and Taxation Committee Chairman Johan Klehs (D-San Leandro), who said he was briefed by tax authorities Thursday, predicted that many of the refund requests would be rejected.

“I don’t think anybody sees anything close to $2 billion going back to the taxpayers on this thing,” he said. “There just isn’t that much in payments from companies that are innocent. These companies are sophisticated taxpayers. They know what they are doing. They filed for amnesty for a reason.”

As the state Franchise Tax Board pores over the more than 91,000 amnesty applications -- they range from low-income taxpayers making good on a few dollars skimmed off returns a decade ago to multinational corporations with payments in the millions -- national tax experts are watching closely.

Some analysts say state tax agencies must take drastic measures as big accounting firms help corporations find new ways to game the system.

“California has become very aggressive,” said Richard Pomp, a professor of law at the University of Connecticut. “But the accounting firms have also become very aggressive. The ripples of this will be felt across the country.”

The amnesty program initially was aimed at individual taxpayers and small businesses that weren’t reporting all of their income or have taken more deductions than they may be allowed. The general amnesty, the state’s first in two decades, allowed individuals and corporations owing income or sales taxes to pay up without facing financial penalties or criminal sanctions.

Many had already been notified by the state that they may be delinquent in their tax payments and received letters inviting them to participate.

The program included tough new penalties -- a 50% surcharge on interest due on unpaid taxes -- which caught the attention of corporations.

The amnesty program also presented problems for companies, which, under new federal disclosure rules, faced the prospect of reporting that the state had assessed them multimillion-dollar penalties for skimping on their taxes.

“You don’t want to be the subject of a front-page story in the Wall Street Journal about getting hit with a 50% tax penalty,” said Rex Halverson, director of state and local taxes at the accounting firm KPMG.

In some instances, the disputes between California and companies date back a decade or more.

Tim Hayes, an accountant at Deloitte Tax in San Francisco, said one of his clients was fighting over a tax debt dating back years that could be between $300,000 and $1.4 million. To protect against possible penalties that could exceed the actual tax debt, the client made an $800,000 payment last week.

“This is the arithmetic people were doing,” Hayes said.

Hayes noted that publicly traded companies would need to disclose significant tax liabilities in public filings -- and that could “look bad in financial reports.”

“The California amnesty program penalizes anyone whose return is not absolutely perfect,” Hayes said.

Lenny Goldberg of the California Tax Reform Assn., a group that advocates for low-income taxpayers and unions, said he has little sympathy for companies caught in state tax officials’ nets.

“In a lot of these cases, the disputes are dragging on because they are paying accounting firms to get in there, stonewall for them and make it as contentious as possible,” he said. “They make a living out of getting everything they do to get corporations not to pay taxes. They try to be as uncooperative as possible, and then they make complaints about audits and requests for information.”

Steven Sheffrin, director of the Center for State and Local Taxation at UC Davis, agreed that accounting firms have become increasingly aggressive in shielding revenue from the state.

“They try out ideas in different states and shop them around,” he said. “Some might sound dubious, but they worked in a state or two, so they will try them out.”

The accounting firms scoff at the suggestion they brought this on themselves.

“I have examples of audits going on eight, 10, 12 years, and it is not at all due to the taxpayer,” said Halverson of KPMG. “There are cases where there are files the Franchise Tax Board can’t find, or misplaced, or has sat on for years. I have appeals where no one looks at the file for six or eight years. That is ridiculous.”

Times staff writer Scott Reckard contributed to this report.