Recently, I’ve been representing taxpayers investigated by State tax agencies for income, sales, worker’s compensation insurance, and payroll tax fraud issues. Even though the cases involved unreported income or cash payroll tax issues, California State law and procedures  are very different from the Federal rules that we are accustomed to. This article will cover the major differences between State and Federal criminal tax law and procedures in California and if you get to the end of the newsletter a bonus section outlining similarities.

1. STATUTE OF LIMITATIONS RULES ARE DIFFERENT

   California State criminal cases requires defense counsel to deal with different statute of limitations for different agencies. The EDD has a 5-year statute of limitations from the date the EDD had actual or constructive knowledge of the fraud and the CDTFA has a 4-year statute of limitations from the date that the CDTFA discovered the fraud which is arguably the date the civil agent referred the case criminally. 

   Contrast the State statute of limitations to Federal criminal tax cases which limit the statute of limitations to 6 years from the date the return was filed, which allows for more certainty and no extension of time-based on discovery or knowledge arguments.

2. STATE CASES REQUIRE YOU TO DEAL WITH MANY AGENCIES

   Another important difference is that State tax cases may require defense counsel to deal with multiple agencies at the same time because State agencies often share information between the Franchise Tax Board, Employment Development Department, California Department of Tax and Fee Administration (formerly BOE) and the State Department of Insurance. Many State tax cases originate from the TraCE task force now called TRUE (tax recovery in the underground economy criminal enforcement program). Therefore, State tax cases often require counsel to defend against a three or four-headed monster instead of just one in Federal tax cases.

3. STATE CRIMINAL THRESHOLDS ARE MUCH LOWER

   Another difference is that the threshold for a felony conviction and incarceration in State cases is so much lower compared to Federal cases. For example, just $25,000 of tax loss in a Sales Tax case annually is sufficient to raise the case from a misdemeanor to a felony. A taxpayer can be convicted of a felony grand theft charge for an amount as immaterial as $950.

   There are also State white collar enhancements that can be tacked on to require a state prison sentence instead of a county jail sentence. Contrast that with Federal cases that in general (ballpark amount) may require incarceration for taxpayers who fail to report approximately $1,000,000 of income over several years which computes roughly to a tax loss of $250,000-$300,000. The point is a much higher threshold tax loss amount for Federal tax cases.

4. ONE BAD APPLE CAN SPOIL THE WHOLE BUNCH

In the immortal words of Michael Jackson, one bad act can subject a taxpayer to multiple State criminal counts. In addition to the enhancements the same bad act in a State case, for example filing a false tax return can cause a taxpayer to be charged separately for tax evasion, filing a false tax return, failure to pay tax, and possession of sales suppression software all of which are separate felony counts. 

5. STATE CASES REQUIRE COUNSEL TO DEFEND MANY DIFFERENT FELONY COUNTS

Because sales tax and payroll tax are filed quarterly and because the statute of limitations allows the State investigators to go back for many quarters due to the statute of limitations starting from the date of discovery or knowledge of the fraud discussed above, a single tax case can be expanded to charge multiple quarters and counts, for example, I recently represented a case where the Deputy Attorney General charged my client with 86 separate felony counts and white collar enhancements.

6. SEARCH WARRANTS ARE ALMOST ALWAYS USED IN STATE CASES

Search warrants were executed at the home, cars, and offices of taxpayers in every State criminal case that I was involved in. State agents seized computers and financial and accounting records and interviewed employees and the taxpayer on the premises. Contrast this with Federal cases where search warrants were executed in relatively few cases because it has been my experience that the Federal government uses subpoenas to secure information from third parties to obtain evidence.

BONUS

If you had the patience to read the newsletter to this point you deserve a bonus. What about Similarities between State and Federal criminal tax cases?

As far as the similarities between Federal and State cases it is very important to do a forensic accounting analysis and to reduce the tax loss amount as much as possible for both Federal and California cases. When settling a Federal or California case early acceptance of responsibility (entering a plea if warranted by the facts and circumstances) and paying in as much of the ordered restitution as possible will help to reduce the length of any period of incarceration and in some cases may allow the taxpayer straight probation for their misdeeds. Of course, the ability to reduce the sentence is the Art Of Tax Representation.