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"In these difficult financial times,
the Department of Revenue is doing all that it can to assure that we
collect all the taxes due and owing Illinois," said Illinois Revenue
Director Brian Hamer. "We will identify taxpayers using these
illegal schemes and collect the taxes they owe."
Hamer said the signing of the
cooperation agreement was part of a three-pronged effort to combat
tax abuse in Illinois. Other parts of the effort are:
1. An agreement signed last September
with the IRS to coordinate efforts and share data on illegal schemes
to evade both federal and state taxes. Illinois recently received
more than 1,000 potential leads from the IRS.
2. A legislative proposal to require
taxpayers who participate in potentially abusive transactions to
inform the Department of Revenue or face a significant penalty.
"These actions, together with the tax
loophole closings proposed as part of the FY 05 budget, should make
Illinois taxation more fair for all taxpayers," Hamer said. "When a
taxpayer avoids tax, all other taxpayers pay more."
Hamer said that the department will
scrutinize the accounting and law firms that create and peddle these
transactions as well as the businesses and individuals that purchase
and use these schemes.
"Abusive tax avoidance transactions
have become a threat to the fiscal health of our states," explained
Stephen M. Cordi, deputy comptroller for Maryland and president of
the Federation of Tax Administrators, the association of state tax
agencies that coordinated the new agreement. "These schemes depend
on dozens of layers of transactions -- each one intended to bury the
taxable income a little deeper. The layers are then scattered among
any number of states. We can only uncover these types of schemes by
sharing knowledge and by having a close working relationship with
our sister states."
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The abusive transactions are those that
have no economic substance and are entered into solely to avoid tax.
The IRS has a list of such transactions at
www.irs.gov. A typical example is a
contingent liability whereby a business transfers liabilities to a
subsidiary, receives preferred stock equal to the liabilities, then
sells a portion of the stock and creates, on paper, a significant
capital loss.
Other transactions include employee
leasing schemes, abusive trust arrangements and use of tiered
entities to hide income. The PBS program "Frontline" featured a
number of such schemes in a report entitled "Tax Me If You Can."
State tax agencies routinely share
information with one another. The new agreement provides a formal
structure for the states to notify one another when they uncover one
of these new schemes, to share insights on new compliance thinking,
and to point out potentially fruitful directions for audit
exploration.
The
following states signed the March 4 agreement: Alabama, Arizona,
Arkansas, California, Colorado, Connecticut, Delaware, Hawaii,
Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Minnesota,
Missouri, Nebraska, New Jersey, New Mexico, New York, North
Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South
Carolina, Tennessee, Utah, Vermont, Virginia, Washington, West
Virginia and Wisconsin.
[Illinois
Department of Revenue news release]
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