Rich tax cheats targeted

Rich tax cheats could be costing Utah state government — and honest taxpayers — up to $100 million a year.

So says Rod Marelli, executive director of the state Tax Commission, who asked a legislative committee Wednesday if lawmakers are interested in greatly increasing fines and penalties for wealthy citizens who buy "illegal tax shelters," and imposing new penalties on those who sell the shelters.

Yes, responded members of the Revenue and Taxation Interim Study Committee. And before the 2006 Legislature in January, bills will be drafted to go after the tax cheats.

If those buying the shelters — called "tax cheats" during the meeting — were forced to pay what they really owe, the 920,000 Utahns who filed state income tax returns in 2005 could get a tax cut of $107. Or to put it another way, Utah individuals and families, on average, paid $107 more than they needed to because of wealthy people who paid little or no state income taxes.

Actually, said Marelli, the tax shelters can be purchased by anyone. But by and large, only those who have a huge tax bill — possibly because they had a capital gains of $1 million or more in a year — typically use them.

The federal Internal Revenue Service and Congress are cracking down on the "illegal" shelters, as are other states. If Utah doesn't greatly increase its financial penalties, tax shelter sellers will "flood the state" because the penalties are so light compared to the tax savings — a risk/benefits ratio that sellers routinely point out to potential buyers, Marelli said.

California legislators recently passed tougher laws on tax shelters but granted a 106-day amnesty that allowed people to pay pre-shelter taxes without incurring huge penalties and interest.

"They thought they might get $90 million; they got $1.3 billion," Marelli said, noting that many more people were using the shelters than state tax experts believed.

Extrapolate those numbers to Utah — a much smaller state with fewer taxpayers — and it comes out to between $50 million and $100 million lost here through similar tax shelters, which in many cases are being marketed nationwide, Marelli said.

"Should we have an amnesty program here?" asked Rep. Wayne Harper, R-West Jordan, so those buying the shelters could come forward voluntarily and pay their back taxes and the old interest and penalties.

"We never have had a successful one," said Marelli, who recalled a motor vehicle registration program that he called "turn in your neighbor," where citizens were supposed to report people who were driving unregistered cars and trucks.