California Doubles Down on Taxing the Underground Economy: What AB 1296 Could Mean for Tax Enforcement by SANDRA R. BROWN and TENZING TUNDEN
California is showing it is serious about taxing the underground economy. On September 13, Assembly Bill 1296 also known as “AB 1296”, was passed with unanimous consent by the California State Senate and California State Assembly. If signed into law, AB 1296 will authorize California tax agencies to exchange intelligence, data, documents, information, complaints, or lead referrals for the purpose of investigating illegal underground operations. Additionally, AB 1296 would permanently establish the Tax Recovery in the Underground Economy (TRUE) criminal enforcement program. TRUE is intended to be a multi-agency effort designed to continue Californian’s efforts to prosecute tax evasion, wage theft, and other economic crimes in the underground economy.
What is the Underground Economy?
The underground economy is comprised of any unlawful or “off the books” activities conducted by taxpayers that create an illegal or unfair business environment. In 2014, the California Department of Industrial Relations estimated that $8.4 billion to $28 billion was being lost in unpaid income, insurance, and sales taxes because of the underground economy. Investigative teams identified $482 million in unreported gross receipts and $60 million in associated tax loss to the state. Examples of some activities that facilitate an underground economy include: working without required permits or licenses, not complying with mandatory processes, evading taxes, underpaying employees, inaccurately reporting employee wages or hours and underreporting numbers of employees. Additionally, taxpayers who are involved in cash intensive legal (as opposed to illegal) businesses, such as construction, landscaping, restaurant, automotive repair, and garment businesses, are often (while not exclusively) a part of the underground economy. The realization that much of California’s legal cannabis business remains off the books suggest that the new legislation will impact the cannabis industry as well.
AB 1296 would establish a new joint task force which would replace what is now the disbanded task force, previously known as TRaCE. TRaCE, the Tax Recovery and Criminal Enforcement task force, created by AB 576, was a multi-agency team previously created to prosecute tax evasion in the underground economy in California. TRaCE, while only a pilot program and never formally enacted into law, nonetheless recovered over $25 million in lost tax revenue, victim restitution and investigative costs. As such, AB 1296, and its criminal enforcement program “TRUE”, if enacted, is expected to have similar if not greater success.
TRUE’s criminal enforcement program would consist of a joint task force which brings together the California Employment Development Department, US Department of Justice, California Department of Consumer Affairs, California Department of Industrial Relations, California Department of Tax and Fee Administration, Board of Equalization, and the Franchise Tax Board. Such joint task force is intended to promote a more effective and expansive enforcement program by placing multiple agencies together to share information and promote more effective enforcement, and potential prosecutions, over the underground economy. Ultimately, the funds recovered by this task force would be made available to benefit impacted workers, schools, law enforcement and the general community.
AB 1296’s Impact on Tax Enforcement in California
Public commentary by the California Attorney General has strongly suggested that “AB 1296 is an important measure that would substantially strengthen the state’s efforts to combat and deter underground economic crimes in California. Our workers, business owners, consumers, and taxpayers would be the biggest beneficiaries of a robust program.” In unanimously passing this bill, the states’ top cop has the support of the California legislature. If signed into law by the Governor, the clear message to all taxpayers engaged in business in the State of California, underground or above, is that there will be a renewed and concerted focus on the enforcement of California’s tax laws.
Sandra R. Brown is a principal at Hochman Salkin, Toscher Perez P.C., and specializes in representing individuals and organizations who are involved in criminal tax investigations, including related grand jury matters, court litigation and appeals, as well as representing and advising taxpayers involved in complex and sophisticated civil tax controversies, including representing and advising taxpayers in sensitive-issue audits and administrative appeals, as well as civil litigation in federal, state and tax court. Prior to joining the firm, Ms. Brown served as the Acting United States Attorney, the First Assistant United States Attorney and the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal).
Tenzing Tunden recently graduated from the Graduate Tax Program at NYU School of Law and the J.D. Program at UC Davis School of Law. During law school, Mr. Tunden served as an intern at the Franchise Tax Board Legal Division and at the Tax Division of the U.S. Attorney’s Office (N.D. Cal).
 Paul Jones, California Legislature Passes Several Tax Bills Before Adjourning (Sep. 18, 2019), Tax Notes, available at https://www.taxnotes.com/tax-notes-today-state/legislation-and-lawmaking/california-legislature-passes-several-tax-bills-adjourning/2019/09/18/29ycy.
 See California Department of Justice Office of Attorney General, Attorney General Becerra and Assemblymember Gonzalez Unveil Legislation to Strengthen Program to Combat California’s Law-Evading Underground Economy (Feb. 22, 2019), Press Release, available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-and-assemblymember-gonzalez-unveil-legislation.
 Id. at 3.
 Little Hoover Commission, Level The Playing Field: Put California’s Underground Economy Out of Business (Mar. 2015), at 1, available at https://arev.assembly.ca.gov/sites/arev.assembly.ca.gov/files/Little%20Hoover%20Commission%20Underground%20Economy.pdf.
 See Generally California Department of Tax and Fee Administration, Tax Recovery and Criminal Enforcement Task Force, available at https://www.cdtfa.ca.gov/trace/.
 See California Legislative Information, Assembly Floor Analysis AB 1296, Sep. 10, 2019, available At https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=201920200AB1296.