[Congressional Record Volume 145, Number 114 (Thursday, August 5, 1999)]
[Extensions of Remarks]
[Pages E1773-E1775]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                   ABUSES BY STATE TAXING AUTHORITIES

                                 ______
                                 

                           HON. JERRY WELLER

                              of illinois

                    in the house of representatives

                        Thursday, August 5, 1999

  Mr. WELLER. Mr. Speaker, I submit for the Record the following 
letter:

     Hon. David Walker,
     Comptroller General of the United States,
     Washington, DC.
       Dear Mr. Walker: I am writing to request an investigation 
     by the United States General Accounting Office (``GAO'') of 
     alleged abuses by State taxing authorities against former 
     residents.
       As a Member of the Oversight Subcommittee of the House Ways 
     and Means Committee, I spent significant time last year 
     addressing the issue of taxpayer abuses by the Internal 
     Revenue Service. As a result of our work, and Congressional 
     and GAO investigations, many serious tax violations and 
     wrongdoings were uncovered within the IRS. Last year, 
     Congress held a series of hearings on the issue and addressed 
     these serious problems by passing significant reforms and 
     taxpayer protections as part of the ``Internal Revenue 
     Service Restructuring and Reform Act of 1998.''
       I am, therefore, disturbed to learn that while we addressed 
     taxpayer abuses at the federal level, there may be just as 
     many oppressive actions occurring throughout the country at 
     the State level. A recent Forbes Magazine article entitled 
     ``Tax torture, local style'' (July 6, 1998), highlights the 
     fact that ``[T]here are at least half as many revenue agents 
     working for the states as the federal government'' and 
     ``[C]ollectively, they are just as oppressive as the feds.'' 
     See, Attached Article. In another recent article, the Los 
     Angeles Times reported that the state taxing authority, the 
     California Franchise Tax Board, ``is second in size and scope 
     only to the Internal Revenue Service--and by all accounts the 
     state agency is the more efficient, more aggressive and more 
     relentless of the two'' and ``there is little to stop the 
     agency from becoming more aggressive.'' See, attached 
     article, ``State Agency Rivals IRS in Toughness,'' Los 
     Angeles Times (August 2, 1999, page 1).
       The Forbes article lists a number of state tax department 
     problems including: (1) privacy violations by California, 
     Connecticut, and Kentucky; (2) criminal or dubious activities 
     by Connecticut, Indiana, Kentucky, New Mexico, North 
     Carolina, Oklahoma, and Wisconsin; and (3) mass erroneous 
     tax-due bills by Arizona, California, Indiana, Michigan, and 
     Ohio. In addition, my office has recently received materials 
     from taxpayers alleging abuse by State taxing agencies (e.g., 
     materials from Mr. Gil Hyatt alleging a number of abuses by 
     the California Franchise Tax Board (``FTB'') against former 
     residents of the State of California). See, Attachment.
       I believe this issue is important and deserves study and a 
     full investigation by the GAO. Should taxpayer abuses exist 
     at the State level against former residents, I would consider 
     recommending any and all appropriate legislation to address 
     these deplorable activities and encourage State's Attorney 
     Generals to begin separate investigations into such actions. 
     We should do whatever we can to protect the rights of our 
     citizens against overzealous Federal or State tax agencies.
       I look forward to working with you and your staff on this 
     important investigation.
           Sincerely,

                                                 Jerry Weller,

     Member of Congress.
                                  ____


                          THE WIDESPREAD ABUSE

  When Congress passed the Internal Revenue Service Restructuring and 
Reform Act of 1998, an era of tyranny at the IRS came to an end. 
Congressional hearings revealed story after story of taxpayer abuse by 
the IRS. The stories of abuse so inflamed the public and Congress that 
sweeping reform soon followed. But taxpayers abuse is still as 
prevalent as ever--only the perpetrators of this abuse are the state 
taxing agencies. In its rush to reform the IRS, Congress overlooked a 
whole other level of taxpayer abuse at the state level. This type of 
abuse by state taxing agencies has received attention from the press. 
In the article ``Tax torture, local style,'' William Barrett discusses 
the ``extortion,'' ``sweepingly false declarations of taxes,'' ``false 
notices,'' ``[p]rivacy violations,'' and ``criminal or dubious 
activities'' by state taxing agencies. (William Barrett, Forbes, July 
6, 1998). Many states have resorted to the same type of abusive tactics 
for which their federal counterpart--the IRS--was reprimanded by 
Congress.
  In many cases, a state taxing agency has even exceeded the IRS in its 
recklessness and abusiveness. In a front-page LA Times article entitled 
``State Agency Rivals IRS in Toughness'', Liz Pulliam compares the FTB 
unfavorably with the IRS--``the Franchise Tax Board is second in size 
and scope only to the Internal Revenue Service--and by all accounts the 
state agency is the more efficient, more aggressive and more relentless 
of the two''. (Liz Pulliam, ``State Agency Rivals IRS in Toughness'', 
L.A. Times, August 2, 1999, at A1). She also quotes Mr. Dean Andal, a 
former FTB Board member, who criticizes the FTB as ``brutal'' and 
``hard and sometimes arbitrary'' and states that ``there is little to 
stop the agency from becoming more aggressive'' (Pulliam, supra).
  States are particularly abusive towards former residents who have 
moved to another state. Moving to another state is a common occurrence 
in the U.S., where citizens have the constitutional right to travel to 
and establish residency in any state in the United States. In 1996, 
Congress passed legislation which prevents states from taxing the 
pensions of retirees living in other states. This congressional 
legislation illustrates the need for federal intervention in order to 
prevent states from overreaching in their pursuit of tax revenue. 
Unfortunately, this action by Congress only focused on one small avenue 
in which states illegally pursue nonresidents for additional taxes. 
Another tactic is to assess a tax on citizens leaving the state by 
contesting when the former resident moved out of the state. Years after 
a citizen has relocated to another state, the state taxing agency will 
open a ``residency audit'' to extort a former resident.***HD***The 
Abuse Exemplified: The California Franchise Tax Board
  The abusive taxing tactics used by states is best illustrated by the 
California Franchise Tax Board (FTB), as indicated in the LA Times 
article supra:
  ``[The FTB] is tainted by arrogance and a stubborn unwillingness to 
compromise.''
  ``For two years in a row, corporate tax executives have ranked 
California's [FTB] among the toughest, least fair and least predictable 
state tax agencies in the country.''


                    State Is Ranked Most Aggressive

  Many corporate taxpayers agree. In both 1997 and 1998, company tax 
executives ranked California at the top of a `worst offenders' list 
compiled by CFO magazine to rate the tax agencies of the 50 states. . . 
. The state [California] was described as among the least predictable 
in administering tax policy and among the most likely to take a black-
and-white stance on unclear areas of tax law. (Pulliam, supra).
  The FTB particularly targets for abuse Nevada residents who formerly 
resided in California. The FTB agents are well trained in targeting 
such nonresidents. For example, the FTB targets wealthy and famous 
people living in gated affluent communities of Las Vegas. Agents 
develop a list of potential victims compiled from property rolls, tax 
records, and newspaper accounts. This list is supplemented by trips 
into the wealthy neighborhoods of Las Vegas in order to survey former 
California residents. Wealthy and famous individuals are the preferred 
targets because they are particularly vulnerable to threats of 
violating their privacy and causing them bad publicity. The FTB then 
audits the victim's financial and personal affairs. This includes 
agents making periodic trips across state lines in order to secretly 
survey victims. The agents trespass onto the victim's property, record 
the victim's movements, and even probe the victim's garbage and mail 
all while making sure to avoid contact with the victim. All of this is 
done stealthily, without the

[[Page E1774]]

knowledge of the Nevada authorities. If the agents are caught in the 
act, they falsely claim immunity for their auditing tactics under color 
of authority and they claim a false constitutional right to collect 
taxes in Nevada--all while violating the constitutional rights of their 
victims and the sovereignty of Nevada. This is not a legitimate 
investigation, but a covert operation to uncover private information 
for what is best characterized as extortion of the victim.
  The FTB hires inexperienced and unsuccessful recruits as auditors. 
Many of these auditors are untrained and unsupervised. They are given 
training manuals that they do not study. The training materials are 
illustrated with such sadistic cartoons as a skull-and-crossbones on 
the cover of the penalties section (which is to illustrate how to 
pirate an additional 75% override on the tax assessment). They have 
little or no legal background or training and do not know nor do they 
care about the victim's Constitutional rights. They except legal 
cliches and case law from other audits and insert them throughout their 
workpapers indiscriminently. They mimic comments that they read that 
supports the FTB's position and they ignore information about supports 
the victim's position. Some auditores are so inept that they actually 
use pseudonyms from ``boilerplate'' and training manuals audits (e.g., 
Marie Assistant) in their own audits because they do not understand 
such an obvious step as the need to replace the pseudonyms in the 
``boilerplate'' audits with the actual names of the individuals in the 
particular case under audit. These are the kind of people that 
California has charged with the awesome power of auditing taxpayers--
``the power to tax is the power to destroy.''
  The FTB gathers large quantities of private information about the 
victim during the audit. The FTB goes to the victim's adversaries, who 
are not privy to the victim's private information, and offer them a way 
to help dispose of their adversary, the FIB's victim, by concocting 
damaging victims evidence against the FTB's victim. A bitter ex-spouse 
or ex-girlfriend, an estranged relative, or a vengeful former employee 
are preferred. The FTB avoids contacting the victim's friends, and 
close relatives who are privy to the victim's private information 
because such witnesses would undermine the FTB's attack on the victim. 
The FTB has actually sent out intimidating and harassing letters to the 
victim's friends, colleagues, and business associates and has even gone 
so far as to audit these people apparently to intimidate and harrass 
them, to isolate the victim, and to deprive the victim of the support 
that he or she needs at such a crucial time. The FTB's apparent intent 
is to have the victim embattled by adversaries and separated from 
supporters. ``They tend to look at every audit as a battle. In the gray 
areas, they push the evelope rather than work out a reasonable 
compromise.'' (Pulliam, supra).
  The FTB auditors boldly admit to emphasizing bad evidence for the 
taxpayer and ignoring good evidence for the taxpayer. In one of the 
FTB's largest residency audits, the auditor trumped-up a large 
assessment with penalties based on false affidavits from the victim's 
adversaries while completely ignoring all of the victim's close 
relatives, friends, and associates. Also in this same audit, the 
auditor relied on about the fifty false California connections while 
ignoring a thousand solid Nevada connections and preempted submission 
of thousands-more solid Nevada connections by the victim. Even more 
significant, the thousands of Nevada connections involved thousands-of-
times more value (purchase offers on custom homes,
  The California Legislature was so suspicious of and concerned about 
the FTB that it passed the Taxpayer's Bill of Rights statute, which 
among other things, forbids the FTB from evaluating employees based 
upon revenue collected or assessed or upon revenue collected or 
assessed or upon production quotas. The law also states that the head 
of the FTB must certify in writing annually to the California State 
Legislature that the FTB has not evaluated employees based upon revenue 
collected or assessed or quotas. But this certification is misleading 
since, by an indications, promotions and rewards still go to those FTB 
employees who bring in the most revenue. And quotas by different names 
abound in the FTB. Once FTB employee rapidly progressed from a low-
ranking auditor to a high-prestigage position for making one of the 
FTB's largest residency assessments ever. FTB auditors must generate 
over $1,000 of revenue for every hour charged to an audit. A quota 
system is indicated in the LA Times article supra: ``The agency [FTB] 
added 362 auditors between 1992 and 1996, promising the legislative 
that the new positions would boost collections.''
  Furthermore, there is little supervising of FTB auditors. Instead, 
this type of auditing and tax collection appears to be encouraged by 
management. The FTB claims to have layers of review in order to ensure 
accuracy and fairness; however, these layers actually proliferate the 
fraud of the FTB auditors. The auditor's supervisors do not get 
involved in the audits, instead relying completely on an auditor's 
self-serving narrative report in reviewing an audit without any regard 
for the victim's evidence or arguments. Unbelievably, FTB auditors and 
management get credit for assessments and get promotions and rewards 
immediately after the audit even though the assessments may never be 
collected at all and any collection may be decades away. This 
encourages excessive tax assessments for immediate promotions and 
rewards, but the feedback that it was a bad audit may be more than a 
decade away.
  The legal department gets involved in reviewing penalties, but 
indications are that the lawyers encourage unwarranted penalties to 
force a settlement rather than provide an independent review. This is 
confirmed by the fact that the FTB audit and protest proceedings are 
expressly exempted from the California administrative proceedings act 
to permit the FTB to proceed in violation of the victim's 
Constitutional right to due process. The FTB implies that the 
``protest` proceeding is an independent review of an objective protest 
officer, when it fact it is a contination of the investigation to 
gather more information, to attempt to force the victim into an 
extortionate settlement, and to prepare the FTB's case for any appeal 
by the victim to the next stage of the administrative proceeding. The 
victim tells his case to a wolf-in-sheep's-clothing, misleading the 
victim into presenting his or her case to an independent reviewer when 
in fact the protest officer is an important part of the FTB's abuse. 
The FTB's denial of due process to a victim under the sham that the 
audit and the protest are merely investigations is untenable and will 
be easily declared unconstitutional when challenged. The FTB has 
deprived victims of their Constitutional rights for too 
long.***HD***THE FTB'S PLOT--FALSIFY THE OFFICIAL RECORDS
  By contesting the residency of former California residents who have 
moved from the state, the FTB assesses additional taxes on money earned 
after the former resident moved from California. This type of treatment 
of nonresidents is a blatant violation of the victim's Constitutional 
right to move between states. Despite overwhelming evidence to the 
contrary from the victim, the FTB will often allege a residence date 
that allows it to encompass as much additional tax revenue as possible. 
In order to support its outlandish residency date, the FTB will 
disregard the victim's substantial Nevada connections, will overly 
emphasize and rely upon minimal (and often erroneous) California 
connections, will distort Nevada connections into California 
connections, and will devise nonexistent California connections.

  The FTB maintains, for example, that a six-month lease on an 
apartment in Nevada and opening escrow on a custom home purchased in 
Nevada are not Nevada residency connections. The FTB has gone so far as 
to actually maintain that, for purposes of residency, a former 
California resident can only claim to have resided in a Nevada 
apartment if: 1) the apartment complex has security gates, 2) the 
apartment is left ``trashed'' after moving out, 3) the apartment 
managers can provide information on the movements of the tenant (even 
after several years have passed since the tenant lived there), and 4) 
poor people do not reside in the apartment complex.
  Furthermore, the FTB maintains that a former California resident is 
only permitted to sell a California house to a stranger and that a 
former California resident is only permitted to reside in a Nevada 
house if he can prove the Nevada house was not purchased for investment 
or appreciation and only if the Nevada house has security gates. The 
FTB asserts that California voter registration and obtaining a 
California driver's license are significant California residency 
connections, but disregards the same actions when taken in Nevada as 
mere formalities that are easy to do and not relevant to the issue of 
Nevada residency despite the FTB's own regulations and decades of case 
law to the contrary. All of these holdings can be found in the FTB's 
own audit files.
  Unbelievably, the FTB relies on the following considerations as 
supporting California residency:
  An overnight stay in a California motel is a California residency 
connection while a six-month lease on an apartment in Nevada is not a 
Nevada residency connection.
  A bank account in a Nevada bank is a California residency connection 
because the Nevada bank also has a California branch.
  A mail-order purchase made from Nevada to a California mail order 
provider for delivery of merchandise to a Nevada home is a California 
residency connection even though the mail order purchase was made from 
Nevada by a Nevadan and was delivered to a Nevada address.
  This type of California mail-order purchase is a sham purchase 
because, the FTB argues, the Nevadan could have bought the product in 
Nevada and saved the cost of freight.
  The FTB uses circular reasoning by concocting a late Nevada residency 
date and then

[[Page E1775]]

alleging that purchases made in Nevada after the concocted Nevada 
residency date are California residency connections for the period 
before this concocted Nevada residency date in order to attempt to 
support this date.
  Actual Nevada receipts are not Nevada connections while false 
California receipts that the FTB concocts are California connections.
  A credit-card purchase made in Nevada for use in a Nevada house is a 
California residency connection if the credit-card charge, unknown to 
the Nevadan, is cleared through a California credit-card office.
  A California driver's license, surrendered to the Nevada DMV upon 
obtaining a Nevada driver's license, is a California residency 
connection because the surrendered California driver's license had not 
yet expired while the Nevada driver's license is not a Nevada residency 
connection because it is easy to get.
  Gifts sent by a Nevadan to an adult child or a grandchild living in 
California constitutes a California residency connection.
  Checks drawn on a Nevada bank are California residency connection 
even though the checks were written in Nevada by a Nevada resident to 
Nevada workers for work done on a Nevada house and where the checks 
were even cashed in Nevada; and a regulated investment company open-
ended fund (a mutual-fund money-market account) was deemed by the FTB 
auditor to be a California bank account constituting a California 
residency connection and a basis for a fraud determination even though 
the FTB Legal branch gave a legal opinion stating that the regulated 
investment company is not a bank and normally not a California 
residency connection.
  This is only a partial list of the kind of absurd considerations that 
the FTB will use to rationalize its residency determinations. Such far-
fetched and concocted California connections are what the FTB relies 
upon to support its residency determinations--the FTB must make the 
most of what it has available and what it can concoct in order to 
extort California income taxes from nonresidents.

                          ____________________