Existing law, until January 1, 2019, establishes the Revenue Recovery and Collaborative Enforcement Team as a pilot program consisting of a team of agencies charged with specified duties that include developing a plan to document, review, and evaluate data and complaints, evaluating the benefits of a processing center to receive and analyze data, share complaints, and research leads, and providing agencies with investigative leads, as specified, to combat criminal tax evasion associated with the underground economy.

This bill would establish the Tax Recovery and Criminal Enforcement (TRaCE) Task Force in the Department of Justice to combat underground economic activities through a multiagency collaboration to, among other things, pool resources, collaborate and share data, including confidential tax and fee information, prosecute violations, and recover state revenue lost to the underground economy, as specified. This bill would require TRaCE Task Force investigative teams to be located in Sacramento, Los Angeles, San Diego, the San Francisco Bay area, and Fresno, under the direct oversight of the Department of Justice. The bill would establish a TRaCE Task Force executive board and TRaCE Task Force investigative team committees to ensure multiagency collaboration. The bill would require that information exchanged pursuant to these provisions retain its confidential status, as specified. The bill would require the TRaCE Task Force to develop a data analytics system that enhances the efficiency and effectiveness of the multiagency collaboration to the extent the Legislature appropriates funds for these purposes. The bill would require the Department of Justice, in consultation with the executive board of the TRaCE Task Force, to submit an annual report to the Legislature that includes specified information.

Existing law, until January 1, 2019, establishes the Revenue Recovery and Collaborative Enforcement Team as a pilot program consisting of a team of agencies charged with specified duties that include developing a plan to document, review, and evaluate data and complaints, evaluating the benefits of a processing center to receive and analyze data, share complaints, and research leads, and providing agencies with investigative leads, as specified, to combat criminal tax evasion associated with the underground economy.

This bill would establish the Tax Recovery and Criminal Enforcement (TRaCE) Task Force in the Department of Justice to combat underground economic activities through a multiagency collaboration to, among other things, pool resources, collaborate and share data, including confidential tax and fee information, prosecute violations, and recover state revenue lost to the underground economy, as specified. This bill would require TRaCE Task Force investigative teams to be located in Sacramento, Los Angeles, San Diego, the San Francisco Bay area, and Fresno. Fresno, under the direct oversight of the Department of Justice. The bill would establish a TRaCE Task Force executive board and TRaCE Task Force investigative team committees to ensure multiagency collaboration. The bill would require that information exchanged pursuant to these provisions retain its confidential status, as specified. The bill would require the TRaCE Task Force to develop a data analytics system that enhances the efficiency and effectiveness of the multiagency collaboration to the extent the Legislature appropriates funds for these purposes. The bill would require the Department of Justice, in consultation with the executive board of the TRaCE Task Force, to submit an annual report to the Legislature that includes specified information.

Existing law, until January 1, 2019, establishes the Revenue Recovery and Collaborative Enforcement Team as a pilot program consisting of a team of agencies charged with specified duties that include developing a plan to document, review, and evaluate data and complaints, evaluating the benefits of a processing center to receive and analyze data, share complaints, and research leads, and providing agencies with investigative leads, as specified, to combat criminal tax evasion associated with the underground economy.

This bill would establish the Tax Recovery and Criminal Enforcement (TRaCE) Task Force in the Department of Justice to combat underground economic activities through a multiagency collaboration to, among other things, pool resources, collaborate and share data, including confidential tax and fee information, prosecute violations, and recover state revenue lost to the underground economy, as specified. This bill would require TRaCE Task Force investigative teams to be located in Sacramento, Los Angeles, San Diego, the San Francisco Bay area, and Fresno. The bill would establish a TRaCE Task Force executive board and TRaCE Task Force investigative team committees to ensure multiagency collaboration. The bill would require that information exchanged pursuant to these provisions retain its confidential status, as specified. The bill would require the TRaCE Task Force to develop a data analytics system that enhances the efficiency and effectiveness of the multiagency collaboration to the extent the Legislature appropriates funds for these purposes. The bill would require the Department of Justice, in consultation with the executive board of the TRaCE Task Force, to submit an annual report to the Legislature that includes specified information.

Existing law, until January 1, 2019, establishes the Revenue Recovery and Collaborative Enforcement Team as a pilot program consisting of a team of agencies charged with specified duties that include developing a plan to document, review, and evaluate data and complaints, evaluating the benefits of a processing center to receive and analyze data, share complaints, and research leads, and providing agencies with investigative leads, as specified, to combat criminal tax evasion associated with the underground economy.

This bill would establish the Tax Recovery and Criminal Enforcement (TRaCE) Task Force in the Department of Justice to combat underground economic activities through a multiagency collaboration to, among other things, pool resources, collaborate and share data, prosecute violations, and recover state revenue lost to the underground economy, as specified. This bill would require TRaCE Task Force investigative teams to be located in Sacramento, Los Angeles, San Diego, the San Francisco Bay area, and Fresno. The bill would establish a TRaCE Task Force executive board and TRaCE Task Force investigative team committees to ensure multiagency collaboration. The bill would require that information exchanged pursuant to these provisions retain its confidential status, as specified. The bill would require the TRaCE Task Force to develop a data analytics system that enhances the efficiency and effectiveness of the multiagency collaboration to the extent the Legislature appropriates funds for these purposes. The bill would require the Department of Justice, in consultation with the executive board of the TRaCE Task Force, to submit an annual report to the Legislature that includes specified information.

Existing law, until January 1, 2019, establishes the Revenue Recovery and Collaborative Enforcement Team as a pilot program consisting of a team of agencies charged with specified duties that include developing a plan to document, review, and evaluate data and complaints, evaluating the benefits of a processing center to receive and analyze data, share complaints, and research leads, and providing agencies with investigative leads, as specified, to combat criminal tax evasion associated with the underground economy.

This bill would establish the Tax Recovery and Criminal Enforcement (TRaCE) Task Force in the Department of Justice to combat underground economic activities through a multi-agency multiagency collaboration to, among other things, pool resources, collaborate and share data, prosecute violations, and recover state revenue lost to the underground economy, as specified. This bill would require TRaCE teams to be located in Sacramento, Los Angeles, San Diego, the San Francisco Bay area, and Fresno. The bill would establish a TRaCE Task Force executive board and TRaCE team committees to ensure multi-agency multiagency collaboration. The bill would require that information exchanged pursuant to these provisions retain its confidential status, as specified. The bill would require the TRaCE Task Force to develop a data analytics system that enhances the efficiency and effectiveness of the multiagency collaboration to the extent the Legislature appropriates funds for these purposes. The bill would require the Department of Justice, in consultation with the executive board of the TRaCE Task Force Force, to submit an annual report to the Legislature a report on January 1, 2024, that includes specified information.

Existing law, until January 1, 2019, establishes the Revenue Recovery and Collaborative Enforcement Team as a pilot program consisting of a team of agencies charged with specified duties that include developing a plan to document, review, and evaluate data and complaints, evaluating the benefits of a processing center to receive and analyze data, share complaints, and research leads, and providing agencies with investigative leads, as specified, to combat criminal tax evasion associated with the underground economy.

This bill would establish the Tax Recovery and Criminal Enforcement (TRaCE) Task Force in the Department of Justice to combat underground economic activities through a multi-agency collaboration to, among other things, pool resources, collaborate and share data, prosecute violations, and recover state revenue lost to the underground economy, as specified. This bill would require TRaCE teams to be located in Sacramento, Los Angeles, San Diego, the San Francisco Bay area, and Fresno. The bill would establish a TRaCE Task Force executive board and TRaCE team committees to ensure multi-agency collaboration. The bill would require that information exchanged pursuant to these provisions retain its confidential status, as specified. The bill would require the TRaCE Task Force to submit to the Legislature a report on January 1, 2024, that includes specified information.

 VETO  

Bill No: SB 1272

Author: Galgiani (D) and Atkins (D), et al.

Amended: 8/20/18

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 4/4/18

AYES: McGuire, Nguyen, Beall, Hernandez, Lara, Moorlach

NO VOTE RECORDED: Hertzberg

SENATE PUBLIC SAFETY COMMITTEE: 7-0, 4/17/18

AYES: Skinner, Anderson, Bradford, Jackson, Mitchell, Stone, Wiener

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/25/18

AYES: Lara, Bates, Beall, Bradford, Hill, Nielsen, Wiener

SENATE FLOOR: 37-0, 5/30/18

AYES: Allen, Anderson, Atkins, Bates, Beall, Berryhill, Bradford, Dodd, Fuller, Gaines, Galgiani, Glazer, Hernandez, Hertzberg, Hill, Hueso, Jackson, Lara, Leyva, McGuire, Mitchell, Monning, Moorlach, Morrell, Newman, Nguyen, Nielsen, Pan, Portantino, Roth, Skinner, Stern, Stone, Vidak, Wieckowski, Wiener, Wilk

NO VOTE RECORDED: Cannella, De León

SENATE FLOOR: 39-0, 8/31/18

AYES: Allen, Anderson, Atkins, Bates, Beall, Bradford, Cannella, Chang, De León, Delgado, Dodd, Fuller, Gaines, Galgiani, Glazer, Hernandez, Hertzberg, Hill, Hueso, Jackson, Lara, Leyva, McGuire, Mitchell, Monning, Moorlach, Morrell, Nguyen, Nielsen, Pan, Portantino, Roth, Skinner, Stern, Stone, Vidak, Wieckowski, Wiener, Wilk

NO VOTE RECORDED: Berryhill

ASSEMBLY FLOOR: 79-0, 8/30/18 - See last page for vote

SUBJECT: Tax Recovery and Criminal Enforcement (TRaCE) Task Force

SOURCE: Attorney General Xavier Becerra

DIGEST:

This bill enacts the Tax Recovery and Criminal Enforcement Tax Force Act, which establishes the TRaCE Task Force in the Department of Justice (DOJ) to combat underground economic activities

ANALYSIS: Existing law enacts the Revenue Recovery and Collaborative Enforcement Team Act, which created the Revenue Recovery and Collaborative Enforcement (RRaCE) team to complement the state’s underground economy enforcement efforts (AB 576, V.M Perez, Chapter 614, Statutes of 2013). The RRaCE Act:

1. States its goal is to “serve the best interests of the state by combating criminal tax evasion associated with the underground economy.”
2. Includes on the team the Franchise Tax Board (FTB), Board of Equalization (BOE), and DOJ, and also allowed the Health and Human Services Agency, the Department of Consumer Affairs (DCA), the Department of Industrial Relations (DIR), the Employment Development Department (EDD), and the Department of Motor Vehicles to participate.
3. Establishes RRaCE as a pilot program which is set to expire on January 1, 2019.

This bill:

1. Enacts the TRaCE Tax Force Act, which establishes the TRaCE Task Force in DOJ to combat underground economic activities through a multi-agency collaboration to:
   1. Pool resources and leverage enforcement efforts,
   2. Collaborate and share data with state and federal partners, and
   3. Efficiently prosecute violations covering jurisdictions of multiple agencies to address the severity of the crimes, and impose appropriate penalties on contract violators.
   4. Recover state revenue lost to the underground economy.
2. Creates the TRaCE executive board to ensure efficient and effective multi-agency collaboration, consisting of representatives from the:
   1. Division of Law Enforcement at DOJ,
   2. Criminal Law Division at DOJ,
   3. Investigations and Special Operations Bureau at the California Department of Tax and Fee Administration (CDTFA),
   4. Criminal Investigations Bureau at FTB, and
   5. Investigation Division at EDD.
3. Allows the TRaCE Task Force to invite the following agencies to participate in its board in an advisory capacity when the agency enters into a written agreement with the voting members of the TRaCE Task Force executive board that governs its participation, which must also include provisions limiting the sharing of confidential information to specified circumstances:
   1. The California Health and Human Services Agency,
   2. The Department of Consumer Affairs,
   3. The Department of Industrial Relations,
   4. The Department of Insurance,
   5. The Department of Motor Vehicles,
   6. The Department of the California Highway Patrol,
   7. The Department of Alcoholic Beverage Control,
   8. The Bureau of Cannabis Control,
   9. The Contractors’ State Licensing Board, and,
   10. Other state and federal agencies, subject to the measure’s restrictions on the disclosure of confidential tax information.
4. Directs the executive board to meet as needed, but at least quarterly.
5. Requires five TRaCE Task Force investigative teams: one each in Fresno, Los Angeles, Sacramento, San Diego, and the San Francisco Bay Area, under the direct supervision of the Department of Justice.
6. Allows other agencies to participate in TRaCE investigative teams when the agency enters into a written agreement with the TRaCE executive board that governs its participation.
7. Requires each investigative team to have a committee established by the executive board to ensure effective and efficient multiagency cooperation in furtherance of the bill.
8. Requires duly authorized team members of investigative teams to exchange information, including intelligence, data, including confidential tax or fee information, documents, information, complaints, or lead referrals, for cases that involve tax and fee administration associated with underground economic activities. The information can be used to:
   1. Assess leads or referrals in order to determine if an investigation is warranted.
   2. Conduct investigations.
   3. Prosecute violations.
   4. Conduct data analytics.
   5. Enforce judgments.
9. Provides that voting members and advisory members can share confidential tax or fee information with other members of the investigatory team in cases that involve a known or suspected felony level tax or fee evasion crime when:
   1. The information is obtained by a voting member or advisory member of the TRaCE Task Force pursuant to existing law, agreements authorized by existing law, or by order of the Governor,
   2. A peace officer receives the information,
   3. The information is used for one of the purposes listed above,
   4. The person receiving the information has a legitimate need to know to assess leads, conduct an investigation, or prosecute a case, and,
   5. A nondisclosure agreement exists that prohibits the person receiving information from disclosing the information to any person that is not part of the TRaCE Task Force, or any other unauthorized person.
10. Bars any person involved with the TRaCE Task Force, or any person who has received knowledge from any agency from divulging or making known any confidential information received by the team.
11. Provides that any information shared retains its confidential status pursuant to each agency’s specific information confidentiality statutes, as well as any other applicable state law.
12. Prohibits members of the task force from sharing any federal tax information without permission of the Internal Revenue Service
13. Requires the TRaCE executive board to ensure the protection of confidential tax and fee information.
14. Provides that the TRaCE Task Force shall develop a data analytics system that enhances the efficiency and effectiveness of the multiagency collaboration to the extent the Legislature appropriates funds.
15. Requires DOJ in consultation with the Task Force to submit to the Legislature a report by January 1, 2020, and annually until January 1, 2024, that includes:
    1. The number of leads or complaints received during the reporting period.
    2. The number of cases investigated or prosecuted through civil action or criminal prosecution as a result of its work.
    3. The amount and final disposition of moneys collected through the TRaCE Task Force enforcement efforts.
    4. A list of the agencies that received confidential tax information.
    5. The number of instances, if any, of unauthorized or suspected unauthorized use, access, or disclosure of confidential tax information, including the number of instances of dating back to the task force’s inception.
    6. The status of the multiagency collaboration required by the Act.
    7. The status of any efforts to plan for, develop, and implement a data analytics system.
    8. Policy considerations to help advance the task force’s purpose.

Background

Prosecuting illegal activity in the underground economy is notoriously difficult: violators don’t file for businesses licenses or pay taxes, and compensate their employees in cash, leaving little to no paper trail. Oftentimes when authorities find violators, the taxes avoided don’t justify the costs of deploying more auditors and prosecutors. According to the Little Hoover Commission’s (LHC’s) March, 2015, report Level the Playing Field: Put California’s Underground Economy Out of Business, “the tentacles of the underground economy reach deep in California and that it plagues both businesses and workers.” The report estimated uncollected state revenue resulting from the underground economy between $8.5 and $10 billion, and contains chapters on the current leadership void, funding issues, lax penalties, and unclear laws.

In 1994, Governor Pete Wilson signed executive order W-66-93, creating the Joint Economic Strike Force (JESF), which was “responsible for enhancing the development and sharing of information necessary to combat the underground economy, to improve the coordination of enforcement activities, and to develop methods to pool, focus, and target enforcement resources.” JESF is led by the EDD and housed within its Underground Economy Operations, and is comprised of the DCA, agencies within DCA such as the Bureau of Automotive Repair (BAR) and the Contractors State License Board (CSLB), the FTB, the BOE (now the CDTFA), the Department of Insurance (CDI), the DOJ, the DIR, the Department of Alcoholic Beverage Control (ABC), the United States Department of Labor, and the Internal Revenue Service (IRS). JESF was codified by the Legislature (SB 1490, Johnston, Chapter 1117, Statutes of 1994), and publishes an annual report documenting its efforts.

In 2005, Governor Arnold Schwarzenegger’s established the Economic and Employment Enforcement Coalition (EEEC), housed in DIR, and comprised of investigators and auditors from DIR’s Division of Labor Standards Enforcement and Occupational Safety and Health, and includes EDD, DCA, BAR, CSLB, BOE, CDI, DOJ, and ABC. Governor Brown renamed the EEEC the DIR Labor Enforcement Task Force (LETF), effective January 1, 2012. LETF’s mission is “to combat the underground economy in order to ensure safe working conditions and proper payment of wages for workers; to create an environment in which legitimate businesses can thrive; and to support the collection of all California taxes, fees, and penalties due from employers.” Additionally, EDD receives audit leads from the IRS through the Questionable Employment Tax Practices Program.

When Governor Brown signed AB 576, he included a signing message noting the lack of a lead agency, and directed DIR to take the lead. However, BOE and DOJ created the TRaCE Task Force, and list BOE, FTB, DOJ, DMV, EDD, as well as the IRS, Federal Bureau of Investigation, and Homeland Security Investigations, as partners on its Web site. The LHC report notes:

“[AB 576] was supposed to fill a long-recognized need for a task force to focus on criminal tax evasion. Although the focus of the task force is primarily tax evasion, Governor Brown designated the Department of Industrial Relations as the RRaCE lead when he signed AB 576 into law, despite the fact that DIR is a labor-focused agency with no tax jurisdiction. Problematically, DIR does not have access to confidential tax information. Tax agencies have strict controls on how they use the sensitive information they receive from businesses and individuals, and face severe penalties for sharing it inappropriately. State tax agencies could lose their access to IRS data – key to unearthing underground economy-related financial crimes – if they share information with unauthorized parties. As a result, a legislatively-designated advisory member without access to tax information is leading a team of tax agencies to generate leads on tax-related crimes. The task force has existed for more than a year and has not yet generated any leads for state investigators.”

As a result, California has two separate task forces with nearly identical names pursing the same goals, but housed under the leadership of two distinct agencies. Both task forces have an executive board comprised of similar agencies to guide its operations. DIR leads RRaCE, while DOJ houses and operates the current TRaCE Task Force. The TRaCE board meets regularly, while RRaCE’s does not.

The LHC report adds:

“The simultaneous emergence of both RRaCE and TRaCE has been challenging and confusing for some of the agencies involved in both efforts. Departments are legislatively mandated to devote resources to RRaCE, which already has spent one of its six allotted years of the pilot project holding committee meetings and developing an operational framework. Significant information sharing challenges remain. Instead of augmenting the state’s underground economy enforcement efforts, the RRACE/TRaCE bifurcation could potentially spread limited resources even thinner.”

TRaCE reports that its efforts have been successful, stating that is has identified $210 million in unreported gross receipts, with $46 million in tax losses to the state, and recovered millions of dollars in lost tax revenue to the state. TRaCE also notes that housing the Task Force within DOJ provides more effective investigation and prosecution of offenses.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Assembly Appropriations Committee:

• General Fund (GF) costs, in the millions of dollars annually, for DOJ to implement the Task Force. Specifically, DOJ reports costs of $6.6 million in 2018-19, $12 million in 2019-20, and $11.5 million in 2020-21 and ongoing.
• GF costs, in the millions of dollars annually, for CDTFA to participate in the Task Force. CDTFA estimates costs of $1.7 million in 2018-19, $2.5 million in 2019-20, and $2.3 million in 2020-21 and ongoing.
• GF costs of $2.3 million in the first year and $1.8 million ongoing for EDD to participate in the Task Force.
• GF costs of $440,000 in 2018-19 and $ 360,000 in 2019-20 and ongoing for FTB to participate in the Task Force.
• Unknown increase in state tax revenues, potentially in the millions to tens of millions of dollars annually.

SUPPORT: (Verified 10/8/18)

Attorney General Xavier Becerra (source)

Brand Security Corporation

California Construction and Industrial Materials Association

California District Attorneys Association

California Labor Federation

California Landscape Contractors Association

California Pool and Spa Association

California State Association of Electrical Workers

California State Council of Laborers

California State Pipe Trades Council

Flasher Barricade Association

International Anti Counterfeiting Association

International Union of Elevator Constructors

Laborers International Union of North America

Little Hoover Commission

Louis Vuitton

Prada

Rolex

Sacramento-Sierra Building and Construction Trades Council

SEIU California

State Building and Construction Trades Council

Western States Council of Sheet Metal Workers

OPPOSITION: (Verified 10/8/18)

None received

ARGUMENTS IN SUPPORT: According to the author, “the TRaCE Task Force is a multi-agency effort that focuses on investigating and prosecuting individuals involved in the underground economy. The state’s underground economy can be as large as $140 billion annually. And, as a result, the state loses an estimated $8.5 billion in corporate, personal, and sales and use taxes each year. Needless to say, these are significant uncollected revenues that are desperately needed to fund basic government services – an amount relatively equivalent to the state’s rainy day fund lost each year. SB 1272 is vital given the persistent and significant negative effects of the underground economy including labor law violations, consumer risks, unfair competition and lost tax revenues to the state.”

GOVERNOR'S VETO MESSAGE:

I am returning Senate Bill 1272 without my signature.

This bill creates the Tax Recovery and Criminal Enforcement Tax Force within the Department of Justice to combat underground economic activities.

I am sympathetic to rooting out businesses that engage in unfair competition and mistreatment of workers. This is an area of great interest to me, and one which I have worked on as Attorney General and as Governor.

This bill, however, codifies a task force that is already operational via MOU [memorandum of understanding] and establishes a permanent program within the Department of Justice with an ill-defined and potentially unlimited scope of operations. I am reluctant to do this without additional and more detailed scrutiny through the budget process.

ASSEMBLY FLOOR: 79-0, 8/30/18

AYES: Acosta, Aguiar-Curry, Travis Allen, Arambula, Baker, Berman, Bigelow, Bloom, Bonta, Brough, Burke, Caballero, Calderon, Carrillo, Cervantes, Chau, Chávez, Chen, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dahle, Daly, Eggman, Flora, Fong, Frazier, Friedman, Gabriel, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gonzalez Fletcher, Gray, Grayson, Harper, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, Obernolte, O'Donnell, Patterson, Quirk, Quirk-Silva, Reyes, Rivas, Rodriguez, Rubio, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Voepel, Waldron, Weber, Wood, Rendon

NO VOTE RECORDED: Ting

Prepared by: Colin Grinnell / GOV. & F. / (916) 651-4119

10/9/18 10:57:36

**** END ****

 UNFINISHED BUSINESS  

Bill No: SB 1272

Author:

:

Vote:

SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 4/4/18

AYES: McGuire, Nguyen, Beall, Hernandez, Lara, Moorlach

NO VOTE RECORDED: Hertzberg

SENATE PUBLIC SAFETY COMMITTEE: 7-0, 4/17/18

AYES: Skinner, Anderson, Bradford, Jackson, Mitchell, Stone, Wiener

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/25/18

AYES: Lara, Bates, Beall, Bradford, Hill, Nielsen, Wiener

SENATE FLOOR: 37-0, 5/30/18

AYES: Allen, Anderson, Atkins, Bates, Beall, Berryhill, Bradford, Dodd, Fuller, Gaines, Galgiani, Glazer, Hernandez, Hertzberg, Hill, Hueso, Jackson, Lara, Leyva, McGuire, Mitchell, Monning, Moorlach, Morrell, Newman, Nguyen, Nielsen, Pan, Portantino, Roth, Skinner, Stern, Stone, Vidak, Wieckowski, Wiener, Wilk

NO VOTE RECORDED: Cannella, De León

ASSEMBLY FLOOR: 79-0, 8/30/18 - See last page for vote

SUBJECT:

SOURCE: Attorney General Xavier Becerra

DIGEST:

This bill enacts the Tax Recovery and Criminal Enforcement Tax Force Act, which establishes the TRaCE Task Force in the Department of Justice (DOJ) to combat underground economic activities.

Assembly Amendments

specify the agencies that the TRaCE task force can invite to join its executive board in an advisory capacity; make explicit that DOJ directly oversees investigative teams; clarify the process for other agencies to be included on the TRaCE executive board and investigative teams; specify, further, the role and duties of the executive board and investigative teams; limit and specify the circumstances under which TRaCE and participating agencies can share confidential tax information; require the executive board to oversee the use of confidential information; and add information that mist be included in the report submitted by the DOJ.

ANALYSIS: Existing law enacts the Revenue Recovery and Collaborative Enforcement Team Act, which created the Revenue Recovery and Collaborative Enforcement (RRaCE) team to complement the state’s underground economy enforcement efforts (AB 576, V.M Perez, Chapter 614, Statutes of 2013). The RRaCE Act:

1. States its goal is to “serve the best interests of the state by combating criminal tax evasion associated with the underground economy.”
2. Includes on the team the Franchise Tax Board (FTB), Board of Equalization (BOE), and DOJ, and also allowed the Health and Human Services Agency, the Department of Consumer Affairs (DCA), the Department of Industrial Relations (DIR), the Employment Development Department (EDD), and the Department of Motor Vehicles to participate.
3. Establishes RRaCE as a pilot program which is set to expire on January 1, 2019.

This bill:

1. Enacts the TRaCE Tax Force Act, which establishes the TRaCE Task Force in DOJ to combat underground economic activities through a multi-agency collaboration to:
   1. Pool resources and leverage enforcement efforts,
   2. Collaborate and share data with state and federal partners, and
   3. Efficiently prosecute violations covering jurisdictions of multiple agencies to address the severity of the crimes, and impose appropriate penalties on contract violators.
   4. Recover state revenue lost to the underground economy.
2. Creates the TRaCE executive board to ensure efficient and effective multi-agency collaboration, consisting of representatives from the:
   1. Division of Law Enforcement at DOJ,
   2. Criminal Law Division at DOJ,
   3. Investigations and Special Operations Bureau at the California Department of Tax and Fee Administration (CDTFA),
   4. Criminal Investigations Bureau at FTB, and
   5. Investigation Division at EDD.
3. Allows the TRaCE Task Force to invite the following agencies to participate in its board in an advisory capacity when the agency enters into a written agreement with the voting members of the TRaCE Task Force executive board that governs its participation, which must also include provisions limiting the sharing of confidential information to specified circumstances:
   1. The California Health and Human Services Agency,
   2. The Department of Consumer Affairs,
   3. The Department of Industrial Relations,
   4. The Department of Insurance,
   5. The Department of Motor Vehicles,
   6. The Department of the California Highway Patrol,
   7. The Department of Alcoholic Beverage Control,
   8. The Bureau of Cannabis Control,
   9. The Contractors’ State Licensing Board, and,
   10. Other state and federal agencies, subject to the measure’s restrictions on the disclosure of confidential tax information.
4. Directs the executive board to meet as needed, but at least quarterly.
5. Requires five TRaCE Task Force investigative teams: one each in Fresno, Los Angeles, Sacramento, San Diego, and the San Francisco Bay Area, under the direct supervision of the Department of Justice.
6. Allows other agencies to participate in TRaCE investigative teams when the agency enters into a written agreement with the TRaCE executive board that governs its participation.
7. Requires each investigative team to have a committee established by the executive board to ensure effective and efficient multiagency cooperation in furtherance of the bill.
8. Requires duly authorized team members of investigative teams to exchange information, including intelligence, data, including confidential tax or fee information, documents, information, complaints, or lead referrals, for cases that involve tax and fee administration associated with underground economic activities. The information can be used to:
   1. Assess leads or referrals in order to determine if an investigation is warranted.
   2. Conduct investigations.
   3. Prosecute violations.
   4. Conduct data analytics.
   5. Enforce judgments.
9. Provides that voting members and advisory members can share confidential tax or fee information with other members of the investigatory team in cases that involve a known or suspected felony level tax or fee evasion crime when:
   1. The information is obtained by a voting member or advisory member of the TRaCE Task Force pursuant to existing law, agreements authorized by existing law, or by order of the Governor,
   2. A peace officer receives the information,
   3. The information is used for one of the purposes listed above,
   4. The person receiving the information has a legitimate need to know to assess leads, conduct an investigation, or prosecute a case, and,
   5. A nondisclosure agreement exists that prohibits the person receiving information from disclosing the information to any person that is not part of the TRaCE Task Force, or any other unauthorized person.
10. Bars any person involved with the TRaCE Task Force, or any person who has received knowledge from any agency from divulging or making known any confidential information received by the team.
11. Provides that any information shared retains its confidential status pursuant to each agency’s specific information confidentiality statutes, as well as any other applicable state law.
12. Prohibits members of the task force from sharing any federal tax information without permission of the Internal Revenue Service
13. Requires the TRaCE executive board to ensure the protection of confidential tax and fee information.
14. Provides that the TRaCE Task Force shall develop a data analytics system that enhances the efficiency and effectiveness of the multiagency collaboration to the extent the Legislature appropriates funds.
15. Requires DOJ in consultation with the Task Force to submit to the Legislature a report by January 1, 2020, and annually until January 1, 2024, that includes:
    1. The number of leads or complaints received during the reporting period.
    2. The number of cases investigated or prosecuted through civil action or criminal prosecution as a result of its work.
    3. The amount and final disposition of moneys collected through the TRaCE Task Force enforcement efforts.
    4. A list of the agencies that received confidential tax information.
    5. The number of instances, if any, of unauthorized or suspected unauthorized use, access, or disclosure of confidential tax information, including the number of instances of dating back to the task force’s inception.
    6. The status of the multiagency collaboration required by the Act.
    7. The status of any efforts to plan for, develop, and implement a data analytics system.
    8. Policy considerations to help advance the task force’s purpose.

Background

Prosecuting illegal activity in the underground economy is notoriously difficult: violators don’t file for businesses licenses or pay taxes, and compensate their employees in cash, leaving little to no paper trail. Oftentimes when authorities find violators, the taxes avoided don’t justify the costs of deploying more auditors and prosecutors. According to the Little Hoover Commission’s (LHC’s) March, 2015, report Level the Playing Field: Put California’s Underground Economy Out of Business, “the tentacles of the underground economy reach deep in California and that it plagues both businesses and workers.” The report estimated uncollected state revenue resulting from the underground economy between $8.5 and $10 billion, and contains chapters on the current leadership void, funding issues, lax penalties, and unclear laws.

In 1994, Governor Pete Wilson signed executive order W-66-93, creating the Joint Economic Strike Force (JESF), which was “responsible for enhancing the development and sharing of information necessary to combat the underground economy, to improve the coordination of enforcement activities, and to develop methods to pool, focus, and target enforcement resources.” JESF is led by the EDD and housed within its Underground Economy Operations, and is comprised of the DCA, agencies within DCA such as the Bureau of Automotive Repair (BAR) and the Contractors State License Board (CSLB), the FTB, the BOE (now the CDTFA), the Department of Insurance (CDI), the DOJ, the DIR, the Department of Alcoholic Beverage Control (ABC), the United States Department of Labor, and the Internal Revenue Service (IRS). JESF was codified by the Legislature (SB 1490, Johnston, Chapter 1117, Statutes of 1994), and publishes an annual report documenting its efforts.

In 2005, Governor Arnold Schwarzenegger’s established the Economic and Employment Enforcement Coalition (EEEC), housed in DIR, and comprised of investigators and auditors from DIR’s Division of Labor Standards Enforcement and Occupational Safety and Health, and includes EDD, DCA, BAR, CSLB, BOE, CDI, DOJ, and ABC. Governor Brown renamed the EEEC the DIR Labor Enforcement Task Force (LETF), effective January 1, 2012. LETF’s mission is “to combat the underground economy in order to ensure safe working conditions and proper payment of wages for workers; to create an environment in which legitimate businesses can thrive; and to support the collection of all California taxes, fees, and penalties due from employers.” Additionally, EDD receives audit leads from the IRS through the Questionable Employment Tax Practices Program.

When Governor Brown signed AB 576, he included a signing message noting the lack of a lead agency, and directed DIR to take the lead. However, BOE and DOJ created the TRaCE Task Force, and list BOE, FTB, DOJ, DMV, EDD, as well as the IRS, Federal Bureau of Investigation, and Homeland Security Investigations, as partners on its Web site. The LHC report notes:

“[AB 576] was supposed to fill a long-recognized need for a task force to focus on criminal tax evasion. Although the focus of the task force is primarily tax evasion, Governor Brown designated the Department of Industrial Relations as the RRaCE lead when he signed AB 576 into law, despite the fact that DIR is a labor-focused agency with no tax jurisdiction. Problematically, DIR does not have access to confidential tax information. Tax agencies have strict controls on how they use the sensitive information they receive from businesses and individuals, and face severe penalties for sharing it inappropriately. State tax agencies could lose their access to IRS data – key to unearthing underground economy-related financial crimes – if they share information with unauthorized parties. As a result, a legislatively-designated advisory member without access to tax information is leading a team of tax agencies to generate leads on tax-related crimes. The task force has existed for more than a year and has not yet generated any leads for state investigators.”

As a result, California has two separate task forces with nearly identical names pursing the same goals, but housed under the leadership of two distinct agencies. Both task forces have an executive board comprised of similar agencies to guide its operations. DIR leads RRaCE, while DOJ houses and operates the current TRaCE Task Force. The TRaCE board meets regularly, while RRaCE’s does not.

The LHC report adds:

“The simultaneous emergence of both RRaCE and TRaCE has been challenging and confusing for some of the agencies involved in both efforts. Departments are legislatively mandated to devote resources to RRaCE, which already has spent one of its six allotted years of the pilot project holding committee meetings and developing an operational framework. Significant information sharing challenges remain. Instead of augmenting the state’s underground economy enforcement efforts, the RRACE/TRaCE bifurcation could potentially spread limited resources even thinner.”

TRaCE reports that its efforts have been successful, stating that is has identified $210 million in unreported gross receipts, with $46 million in tax losses to the state, and recovered millions of dollars in lost tax revenue to the state. TRaCE also notes that housing the Task Force within DOJ provides more effective investigation and prosecution of offenses.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Assembly Appropriations Committee:

• General Fund (GF) costs, in the millions of dollars annually, for DOJ to implement the Task Force. Specifically, DOJ reports costs of $6.6 million in 2018-19, $12 million in 2019-20, and $11.5 million in 2020-21 and ongoing.
• GF costs, in the millions of dollars annually, for CDTFA to participate in the Task Force. CDTFA estimates costs of $1.7 million in 2018-19, $2.5 million in 2019-20, and $2.3 million in 2020-21 and ongoing.
• GF costs of $2.3 million in the first year and $1.8 million ongoing for EDD to participate in the Task Force.
• GF costs of $440,000 in 2018-19 and $ 360,000 in 2019-20 and ongoing for FTB to participate in the Task Force.
• Unknown increase in state tax revenues, potentially in the millions to tens of millions of dollars annually.

SUPPORT: (Verified 8/23/18)

Attorney General Xavier Becerra (source)

Brand Security Corporation

California Construction and Industrial Materials Association

California District Attorneys Association

California Labor Federation

California Landscape Contractors Association

California Pool and Spa Association

California State Association of Electrical Workers

California State Council of Laborers

California State Pipe Trades Council

Flasher Barricade Association

International Anti Counterfeiting Association

International Union of Elevator Constructors

Laborers International Union of North America

Little Hoover Commission

Louis Vuitton

Prada

Rolex

Sacramento-Sierra Building and Construction Trades Council

SEIU California

State Building and Construction Trades Council

Western States Council of Sheet Metal Workers

OPPOSITION: (Verified 8/23/18)

None received

ARGUMENTS IN SUPPORT: According to the author, “the TRaCE Task Force is a multi-agency effort that focuses on investigating and prosecuting individuals involved in the underground economy. The state’s underground economy can be as large as $140 billion annually. And, as a result, the state loses an estimated $8.5 billion in corporate, personal, and sales and use taxes each year. Needless to say, these are significant uncollected revenues that are desperately needed to fund basic government services – an amount relatively equivalent to the state’s rainy day fund lost each year. SB 1272 is vital given the persistent and significant negative effects of the underground economy including labor law violations, consumer risks, unfair competition and lost tax revenues to the state.”

ASSEMBLY FLOOR: 79-0, 8/30/18

AYES: Acosta, Aguiar-Curry, Travis Allen, Arambula, Baker, Berman, Bigelow, Bloom, Bonta, Brough, Burke, Caballero, Calderon, Carrillo, Cervantes, Chau, Chávez, Chen, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dahle, Daly, Eggman, Flora, Fong, Frazier, Friedman, Gabriel, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gonzalez Fletcher, Gray, Grayson, Harper, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, Obernolte, O'Donnell, Patterson, Quirk, Quirk-Silva, Reyes, Rivas, Rodriguez, Rubio, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Voepel, Waldron, Weber, Wood, Rendon

NO VOTE RECORDED: Ting

Prepared by:

8/30/18 20:54:28

**** END ****

SENATE THIRD READING

STR Bill Id:SB 1272

Author:(Galgiani and Atkins)

As Amended Ver:August 20, 2018

Majority vote

SENATE VOTE: 37-0

SUMMARY: Establishes the Tax Recovery and Criminal Enforcement (TRACE) Task Force in the Department of Justice (DOJ) to combat underground economic activities. Specifically, this bill:

1. Establishes the TRACE Task Force in DOJ to combat underground economic activities through a multiagency collaboration to do, to the extent practicable, the following:
   1. Pool resources and leverage enforcement efforts;
   2. Collaborate and share data with state and federal partners;
   3. Efficiently prosecute violations covering jurisdictions of multiple agencies to address the severity of the crimes and impose appropriate penalties on convicted violators; and
   4. Recover state revenue lost to the underground economy.
2. Specifies that the TRACE Task Force shall include an executive board to ensure efficient and effective multiagency collaboration in furtherance of this act. The executive board shall consist of the following voting members:
   1. A representative from the Division of Law Enforcement at the Department of Justice;
   2. A representative from the Criminal Law Division at the Department of Justice;
   3. A representative from the Investigations and Special Operations Bureau at the California Department of Tax and Fee Administration;
   4. A representative from the Criminal Investigation Bureau at the Franchise Tax Board; and
   5. A representative from the Investigation Division at the Employment Development Department.
3. Allows the TRACE Task Force to invite the following state agencies to join the executive board in an advisory capacity:
   1. California Health and Human Services Agency;
   2. Department of Consumer Affairs;
   3. Department of Industrial Relations;
   4. Department of Insurance;
   5. Department of Motor Vehicles;
   6. Department of the California Highway Patrol;
   7. Department of the Alcoholic Beverage Control;
   8. Bureau of Cannabis Control; and
   9. The Contractors' State License Board.
4. Allows the TRACE Task Force to, as the executive board deems appropriate, invite other state and federal agencies to join the executive board in a membership or advisory capacity, as specified, and require a written agreement.
5. States that the addition of an agency to the TRACE Task Force executive board shall be by written agreement and the written agreement shall govern the participation of the agency joining the investigative team.
6. State that the written agreement between the voting members of the executive board and the agency shall include provisions ensuring that confidential information is shared only when necessary to assess leads, conduct an investigation, or prosecute a case.
7. States that the TRACE Task Force shall include TRACE teams located in Sacramento, Los Angeles, San Diego, the San Francisco Bay Area, and Fresno.
8. Specifies that each TRACE investigative team shall have a committee established by the TRACE Task Force executive board to ensure efficient and effective multiagency collaboration in each region in furtherance of this act.
9. Provides that the TRACE Task Force executive board and each TRACE team committee shall meet as needed, but at least quarterly, to conduct its business.
10. States that for cases that involve tax and fee administration associated with underground economic activities, authorized members of the TRACE Task Force, employed by specified agencies, shall exchange intelligence, data, including confidential tax or fee information, documents, information, complaints, or lead referrals for investigatory purposes, as specified.
11. Prevents exchange of confidential information with specified advisory members unless certain criteria is met.
12. Specifies that any person who was or has been involved in the TRACE Task Force, as specified, or any person who has at any time obtained that knowledge shall not divulge, or make known in any manner not provided by law, any of the confidential information received by, or reported to, the TRACE Task Force.
13. Provides that confidential information exchanged pursuant the investigatory role of the TRACE Task Force shall retain its confidential status and shall otherwise remain subject to specified confidentiality provisions.
14. States that a member of the TRACE Task Force shall not exchange federal tax data without authorization from the Internal Revenue Service.
15. States that the TRACE Task Force shall, to the extent the Legislature appropriates funds for purposes of this section, develop a data analytics system that enhances the efficiency and effectiveness of the multiagency collaboration described in the provisions of this bill.
16. Specifies that on or before January 1, 2020, and annually thereafter, DOJ in consultation with the executive board of the TRACE Task Force shall submit a report to the Legislature that includes, but is not limited to, the following information:
    1. The number of leads or complaints received by the TRACE Task Force during the reporting period;
    2. The number of cases investigated or prosecuted through civil action or criminal prosecution as a result of the work of the TRACE Task Force;
    3. The amount and final disposition of moneys collected through TRACE Task Force enforcement efforts;
    4. The status of the multiagency collaboration required by this act;
    5. The status of any efforts to plan for, develop, and implement a data analytics system that enhances the efficiency and effectiveness of the multiagency collaboration set forth in this act; and
    6. Policy considerations, if any, to help advance the purpose of the TRACE Task Force.
17. Establishes a sunset date for the reporting requirements of January 1, 2024.

EXISTING LAW:

1. Contains various provisions criminalizing tax evasion. (See e.g. Revenue and Taxation Code Sections 7152 to 7153.5 [false and fraudulent returns regarding sales and use taxes], 19701 et seq. [income tax evasion].)
2. Establishes the Revenue Recovery and Collaborative Enforcement Team as a pilot program.
3. States that the Revenue Recovery and Collaborative Enforcement Team shall include all of the following state entities:
   1. Franchise Tax Board;
   2. Department of Justice;
   3. State Board of Equalization; and,
   4. Employment Development Department.
4. Allows the following agencies to participate in the pilot program in an advisory capacity to the team:
   1. California Health and Human Services Agency;
   2. Department of Consumer Affairs;
   3. Department of Industrial Relations;
   4. Department of Insurance; and,
   5. Department of Motor Vehicles.
5. States that Revenue Recovery and Collaborative Enforcement Team is to serve the best interests of the state by combating criminal tax evasion associated with the underground economy, directs the team to do all of the following:
   1. Develop a plan for a central intake process and organizational structure to document, review, and evaluate data and complaints;
   2. Evaluate the benefits of a processing center to receive and analyze data, share complaints, and research leads from the input of specified agencies; and
   3. Provide participating and nonparticipating agencies with investigative leads where collaboration opportunities exist for felony-level criminal investigations, including, but not limited to, referring leads to agencies with appropriate enforcement jurisdiction.
6. Establishes a sunset date of January 1, 2019, for Revenue Recovery and Collaborative Enforcement Team pilot program.
7. States that the director of the Employment Development Department, or his or her designee, shall serve as Chairperson of the Joint Enforcement Strike Force on the Underground Economy (JESF).
8. Specifies that the strike force shall include, but not be limited to, representatives of the Employment Development Department, the Department of Consumer Affairs, the Department of Industrial Relations, and the Office of Criminal Justice Planning.
9. Provides that other agencies that are not part of the administration, such as the Franchise Tax Board, the State Board of Equalization, and the Department of Justice, are encouraged to participate in the strike force.
10. Specifies that JESF has the following duties:
    1. To facilitate and encourage the development and sharing of information by the participating agencies necessary to combat the underground economy;
    2. To improve the coordination of activities among the participating agencies;
    3. To develop methods to pool, focus, and target the enforcement resources of the participating agencies in order to deter tax evasion and maximize recoveries from blatant tax evaders and violators of cash-pay reporting laws; and,
    4. To reduce enforcement costs wherever possible by eliminating duplicative audits and investigations.
11. Specifies that JESF shall report to the Governor and the Legislature annually during the period of its existence.

FISCAL EFFECT: According to the Assembly Appropriations Committee:

1. General Fund (GF) costs, in the millions of dollars annually, for DOJ to implement the task force. Specifically, DOJ reports costs of $6.6 million in 2018-19, $12 million in 2019-20, and $11.5 million in 2020-21 and ongoing.
2. GF costs, in the millions of dollars annually, for CDTFA to participate in the task force. CDTFA estimates costs of $1.7 million in 2018-19, $2.5 million in 2019-20, and $2.3 million in 2020-21 and ongoing.
3. GF costs of $2.3 million in the first year and $1.8 million ongoing for EDD to participate in the task force.
4. GF costs of $440,000 in 2018-19 and $ 360,000 in 2019-20 and ongoing for FTB to participate in the task force.
5. Unknown increase in state tax revenues, potentially in the millions to tens of millions of dollars annually.

COMMENTS: According to the author, "The TRaCE Task Force is a multi-agency effort that focuses on investigating and prosecuting individuals involved in the underground economy. The state's underground economy can be as large as $140 billion annually. And, as a result, the state loses an estimated $8.5 billion in corporate, personal, and sales and use taxes each year. Needless to say, these are significant uncollected revenues that are desperately needed to fund basic government services – an amount relatively equivalent to the state's rainy day fund lost each year. SB 1272 is vital given the persistent and significant negative effects of the underground economy including labor law violations, consumer risks, unfair competition and lost tax revenues to the state.''

Please see the policy committee analysis for a full discussion of this bill.

Analysis Prepared by: David Billingsley / PUB. S. / (916) 319-3744 FN: 0004160

Date of Hearing: August 8, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

SBPCA Bill Id:SB 1272

Author:(Galgiani) – As Amended Ver:July 3, 2018

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill establishes the Tax Recovery and Criminal Enforcement (TRACE) Task Force in the Department of Justice (DOJ) to combat underground economic activities. Specifically, this bill:

1. Establishes the TRACE Task Force in DOJ to combat underground economic activities through a multiagency collaboration including DOJ, the California Department of Tax and Fee Administration (CDTFA) , the Franchise Tax Board (FTB), and the Employment Development Department (EDD), to efficiently prosecute violations covering jurisdictions of multiple agencies and recover state revenue lost to the underground economy.
   
2. States that for cases that involve tax and fee administration associated with underground economic activities, duly authorized members of TRACE Task Force investigative teams, as specified, and members of the teams and committees shall exchange intelligence, data, including confidential tax or fee information, documents, information, complaints, or lead referrals for investigatory purposes.
   
3. States that the TRACE Task Force shall, to the extent the Legislature appropriates funds for purposes of this section, develop a data analytics system that enhances the efficiency and effectiveness of the multiagency collaboration described in the provisions of this bill.
   
4. Specifies that on or before January 1, 2020, and for four years thereafter, DOJ in consultation with the executive board of the TRACE Task Force shall submit a report to the Legislature that includes specified information.

FISCAL EFFECT:

1. GF costs, in the millions of dollars annually, for DOJ to implement the task force. Specifically, DOJ reports costs of $6.6 million in 2018-19, $12 million in 2019-20, and $11.5 million in 2020-21 and ongoing.
2. GF costs, in the millions of dollars annually, for CDTFA to participate in the task force. CDTFA estimates costs of $1.7 million in 2018-19, $2.5 million in 2019-20, and $2.3 million in 2020-21 and ongoing.
3. GF costs of $2.3 million in the first year and $1.8 million ongoing for EDD to participate in the task force.
4. GF costs of $440,000 in 2018-19 and $ 360,000 in 2019-20 and ongoing for FTB to participate in the task force.
5. Unknown increase in state tax revenues, potentially in the millions to tens of millions of dollars annually.

COMMENTS:

1. Background. AB 576 (Author:V. Manuel Pérez), Chapter 614, Statutes of 2013, created the Revenue Recovery and Collaborative Enforcement Team, to collaborate in combating criminal tax evasion associated with the underground economy. The pilot program allows team members to exchange information for the purpose of investigating criminal tax evasion associated with the underground economy. There is a sunset date of January 1, 2019, on the pilot program. This bill would expand and make permanent the program initially established by AB 576.
2. Purpose. This bill is sponsored by the attorney general. According to the author:

The TRaCE Task Force is a multi-agency effort that focuses on investigating and prosecuting individuals involved in the underground economy. The state’s underground economy can be as large as $140 billion annually. And, as a result, the state loses an estimated $8.5 billion in corporate, personal, and sales and use taxes each year. Needless to say, these are significant uncollected revenues that are desperately needed to fund basic government services – an amount relatively equivalent to the state’s rainy day fund lost each year. SB 1272 is vital given the persistent and significant negative effects of the underground economy including labor law violations, consumer risks, unfair competition and lost tax revenues to the state.

Analysis Prepared by: Jessica Peters / APPR. / (916) 319-2081

Date of Hearing: June 25, 2018

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

SBPCA Bill Id:SB 1272

Author:(Galgiani and Atkins) – As Amended Ver:June 13, 2018

Majority vote. Fiscal committee.

SENATE VOTE: 37-0

SUBJECT: Tax Recovery and Criminal Enforcement (TRaCE) Task Force.

SUMMARY: Establishes the Tax Recovery and Criminal Enforcement (TRaCE) Task Force within the Department of Justice (DOJ) to combat the underground economy. Specifically, this bill:

1. Requires, as part of the TRaCE program, multiple agencies to do the following:
   1. Pool resources and leverage enforcement efforts;
   2. Collaborate and share data with state and federal partners;
   3. Efficiently prosecute violations covering jurisdictions of multiple agencies to address the severity of the crimes and impose appropriate penalties on convicted violators; and,
   4. Recover state revenue lost to the underground economy.
2. Provides that the TRaCE task force shall include an executive board to ensure efficient and effective multiagency collaboration in furtherance of the goals of this bill.
3. Provides that the executive board shall consist of representatives from the following agencies:
   1. DOJ, Law Enforcement Division and Criminal Law Division;
   2. California Department of Tax and Fee Administration (DTF), Investigations and Special Operations Bureau;
   3. Franchise Tax Board (FTB), Criminal Investigation Bureau; and,
   4. Employment Development Department (EDD), Investigation Division.
4. Allows TRaCE, as the executive board deems appropriate, to invite other state and federal agencies to join the executive board in a membership or advisory capacity. The addition of an agency to the executive board shall be through a written agreement, and the agreement shall govern the participation of the agency joining the task force.
5. Provides for TRaCE task force teams in Sacramento, Los Angeles, San Diego, the San Francisco Bay Area, and Fresno.
6. Requires that each TRaCE team have a committee established by the executive board to ensure efficient and effective multiagency collaboration in each region.
7. Requires the executive board and each TRaCE task force to meet as needed, but at least quarterly, to conduct its business.
8. Requires TRaCE to exchange intelligence, data, including confidential tax or fee information, documents, information, complaints, or lead referrals for cases that involve tax or fee administration associated with underground economic activities.
9. Provides that authorized agents employed by a state or federal agency invited to join the executive board may exchange intelligence, data, documents, information, complaints, or lead referrals.
10. Requires intelligence, data, including confidential tax or fee information, documents, information, complaints, and lead referrals to:
    1. Assess leads or referrals in order to determine if an investigation is warranted;
    2. Conduct investigations;
    3. Prosecute violations;
    4. Conduct data analytics; and,
    5. Enforce judgments.
11. Prohibits a person who has been involved in TRaCE, or a person who has obtained knowledge through TRaCE personnel, from divulging or making known any of the confidential information received by, or reported to, the TRaCE Task Force that is not authorized by law. Confidential information authorized to be exchanged pursuant to the TRaCE program shall retain its confidential status, subject to specified confidentiality provisions.
12. Prohibits a member of the TRaCE Task Force from exchanging federal tax data without authorization from the Internal Revenue Service (IRS).
13. Requires, if the Legislature appropriates funds, the TRaCE Task Force to develop a data analytics system that enhances the efficiency and effectiveness of the multiagency collaboration.
14. Requires the DOJ to submit, on or before January 1, 2020, and annually thereafter, a report to the Legislature that includes, but is not limited to, the following information:
    1. The number of leads or complaints received;
    2. The number of cases investigated or prosecuted through civil action or criminal prosecution;
    3. The amount and final disposition of moneys collected;
    4. The status of the multiagency collaboration;
    5. The status of any efforts to plan for, develop, and implement a data analytics system that enhances the efficiency and effectiveness of the multiagency collaboration; and,
    6. Policy considerations, if any, to help advance the purpose of the TRaCE Task Force.
15. Requires the report to be submitted in compliance with Government Code Section 9795.
16. Repeals the annual reporting requirement on January 1, 2024.
17. Makes findings and declarations.

EXISTING LAW:

1. Establishes the Revenue Recovery and Collaborative Enforcement (RRaCE) Team pilot program, which includes the FTB, DOJ, State Board of Equalization (BOE), and EDD, in addition to other agencies that serve in an advisory capacity.
2. Requires RRaCE to meet as needed, but at least once quarterly.
3. Allows duly authorized team members to exchange intelligence, data, documents, information, complaints, or lead referrals for the purpose of investigating criminal tax evasion associated with underground economic activities. The exchanged information remains confidential.
4. Requires the team to operate as a pilot program using existing funding from the four lead agencies and prohibits requests for additional funding for the pilot program until after the program meets its report to the Legislature.
5. Sunsets the RRaCE pilot program on January 1, 2019.
6. Establishes the EDD. Among its many duties, the EDD administers the collection, accounting, and auditing of payroll taxes and maintains employment records for millions of California workers.
7. Establishes the FTB as a three-person board comprised of the State Controller, the Director of the Department of Finance, and the Chair of the BOE. Among its many duties, the FTB is charged with administering the state's Personal Income Tax Law and the Corporation Tax Law.
8. Requires various state entities, including DTF, BOE, FTB, and DOJ, to enforce laws relating to the taxation and legal operation of businesses throughout the state under their respective jurisdictions.
9. Prohibits the disclosure of any taxpayer information, except as specifically authorized by statute. Generally, disclosure is authorized to other state tax agencies, federal tax agencies, and the Multistate Tax Commission solely for tax administration purposes.
10. Provides that the unauthorized disclosure of state tax information is a misdemeanor and the unauthorized disclosure of federal tax information is a felony.

FISCAL EFFECT: According to the FTB, "[b]ecause it is difficult to predict the frequency and the value of future task force criminal investigation actions, the revenue impact is unknown." A different state agency estimates general fund revenue gains of $6.47 million in fiscal year (FY) 2018-19, $9.51 million in FY 2019-20, and $8.7 million in FY 2020-21.

COMMENTS:

1. The author has provided the following statement in support of this bill:

The TRaCE Task Force is a multi-agency effort that focuses on investigating and prosecuting individuals involved in the underground economy. The state's underground economy can be as large as $140 billion annually. And, as a result, the state loses an estimated $8.5 billion in corporate, personal, and sales and use taxes each year. Needless to say, these are significant uncollected revenues that are desperately needed to fund basic government services – an amount relatively equivalent to the state's rainy day fund lost each year. SB 1272 is vital given the persistent and significant negative effects of the underground economy including labor law violations, consumer risks, unfair competition and lost tax revenues to the state.

1. Proponents state that "SB 1272 will help in the effort to combat the state's growing underground economy. The measure creates the [TRaCE] Taskforce within the [DOJ], and expands the program through teams in highly populated parts of the state, including Sacramento, Los Angeles, San Diego, the Bay Area, and Fresno. SB 1272 seeks to ensure coordination between several governmental entities, including the California [DOJ], [DTF], [FTB], and [EDD], to combat wage theft, and tax evasion in the underground economy."
2. Committee Staff Comments:
   1. Background: On October 26, 1993, the Governor signed Executive Order W-66-93, which established the Strike Force. The Governor subsequently signed legislation placing the Executive Order's provisions into law effective January 1, 1995. (Unemployment Insurance Code Section 329.)
      

The Strike Force, which is chaired by the EDD's Director, is responsible for both developing and sharing information necessary to combat the underground economy. The Strike Force also works to improve the coordination of enforcement activities, and to develop methods to target the enforcement resources of participating agencies. The Strike Force is empowered to form "joint enforcement teams" when appropriate to utilize the investigative and enforcement capabilities of the Strike Force's members. In addition to the EDD, the Strike Force's formal membership is comprised of the Department of Consumer Affairs, the Department of Industrial Relations (DIR), the Department of Insurance, and the Office of Criminal Justice Planning. The FTB, the BOE, and the DOJ are each encouraged, under existing law, to participate in the Strike Force's activities. The Strike Force is required to report to the Governor and the Legislature annually regarding its activities.

DIR also works to combat the underground economy in California through its Labor Enforcement Task Force. In this joint effort between state agencies and affected communities, information and resources are shared to ensure workers receive proper payment of wages and are provided a safe working environment. In addition, the Labor Enforcement Task Force works to ensure that California receives all employment taxes, fees, and penalties due from employers. The Labor Enforcement Task Force is comprised of the Division of Occupational Safety and Health, Division of Labor Standards Enforcement, DIR, EDD, Contractor's State Licensing Board, Bureau of Automotive Repair, DTF, California Department of Insurance, Bureau of Automotive Repair, Alcohol Beverage Control, and State Attorney General.

In 2013, the Legislature enacted the RRaCE Team Act, which created the RRaCE team to complement the state's underground economy enforcement efforts (AB 576 (V. Manuel Pérez), Chapter 614, Statutes of 2013). The team includes FTB, BOE, and DOJ, and AB 576 also allowed the Health and Human Services Agency, DCA, DIR, EDD, and the Department of Motor Vehicles to participate. The Legislature established RRaCE with its own specific goal, which was to "serve the best interests of the state by combating criminal tax evasion associated with the underground economy." AB 576 established RRaCE as a pilot program, which is set to expire on January 1, 2019.

When Governor Brown signed AB 576, he included a signing message noting the lack of a lead agency, and directed DIR to take the lead. In response, BOE and DOJ focused efforts on a TRaCE task force, and listed BOE, FTB, DOJ, the Department of Motor Vehicles, EDD, as well as the IRS, Federal Bureau of Investigation (FBI), and Homeland Security Investigations (HIS), as partners on its website. The Little Hoover Commission report notes:

[AB 576] was supposed to fill a long-recognized need for a task force to focus on criminal tax evasion. Although the focus of the task force is primarily tax evasion, Governor Brown designated the Department of Industrial Relations as the RRaCE lead when he signed AB 576 into law, despite the fact that DIR is a labor-focused agency with no tax jurisdiction. Problematically, DIR does not have access to confidential tax information. Tax agencies have strict controls on how they use the sensitive information they receive from businesses and individuals, and face severe penalties for sharing it inappropriately. State tax agencies could lose their access to IRS data – key to unearthing underground economy-related financial crimes – if they share information with unauthorized parties. As a result, a legislatively-designated advisory member without access to tax information is leading a team of tax agencies to generate leads on tax-related crimes. The task force has existed for more than a year and has not yet generated any leads for state investigators.

As a result, California has two separate task forces with nearly identical names pursuing the same goals, but housed under the leadership of two distinct agencies. Both task forces have an executive board comprised of similar agencies to guide operations. DIR leads RRaCE, while DOJ houses and operates the current TRaCE task force. The Little Hoover Commission further notes that "[t]he simultaneous emergence of both RRaCE and TRaCE has been challenging and confusing for some of the agencies involved in both efforts. Departments are legislatively mandated to devote resources to RRaCE, which already has spent one of its six allotted years of the pilot project holding committee meetings and developing an operational framework. Significant information-sharing challenges remain. Instead of augmenting the state's underground economy enforcement efforts, the RRACE/TRaCE bifurcation could potentially spread limited resources even thinner."

• 1. How was TRaCE created? It is unclear to Committee staff how TRaCE is operational given that AB 576 only authorized the sharing of information within RRaCE. According to the TRaCE Web site, "[t]he [TRaCE] Task Force is a pilot program facilitated by California Assembly Bill 576, [RRaCE] Team Act.” However, according to a report submitted to the Legislature by the DIR as part of the RRaCE pilot program requirements, TRaCE was created with a memorandum of understanding (MOU), and was later adopted by RRaCE^[1]. Additionally, according to a core member of the TRaCE task force, TRaCE was actually formed prior to RRaCE. As such, it does not appear that TRaCE was a byproduct of RRaCE, nor created in response to the Governor appointing DIR as the lead agency for the RRaCE task force. Instead, TRaCE appears to be a program operating in a similar structure and with similar goals as RRaCE, but clearly not as a program authorized by the Legislature.
  2. What does this bill do? This bill would establish the TRaCE task force within the DOJ to combat the underground economy. To the extent practicable, the task force would pool resources and leverage enforcement efforts, collaborate and share data, efficiently prosecute multi-jurisdictional violations and impose appropriate penalties, and recover state revenues. This bill would also establish the TRaCE executive board to ensure efficient and effective multiagency collaboration. Duly authorized members of the TRaCE task force would be allowed to exchange intelligence; data, including confidential tax or fee information; documents; information; complaints; or lead referrals. Furthermore, the executive board may, as it deems appropriate, invite other state and federal agencies to join the executive board in a membership or advisory capacity. These provisions are very similar to those outlined with the RRaCE pilot program. In fact, this bill appears to be modeled after the legislation that enacted RRaCE.
  3. Why bother coming to the Legislature? As noted earlier, the TRaCE task force was created through an MOU and began operating prior to the enactment of AB 576. It appears that the TRaCE task force was created and operates in an unofficial capacity, pointing to legislation when it benefits the task force but also ignoring legislation when it does not. For example, it appears that members of the TRaCE task force may have attempted to legitimize the existence of the TRaCE program through the enactment of RRaCE. As noted earlier, the TRaCE Web site claims that TRaCE was created as part of RRaCE; this is impossible since the Legislature was not made aware of TRaCE until after AB 576 had been enacted. Although TRaCE points to AB 576 for its existence, TRaCE currently ignores and exceeds the authority provided under AB 576 with respect to the sharing of confidential information. Existing law limits the agencies that may participate as part of the RRaCE program. Government Code Section 15914 does not include the FBI, HIS, IRS, or ABC. Despite a lack of statutory authority, MOUs have been used to add these agencies to the TRaCE task force. The TRaCE task force has clearly done its best to operate outside the parameters outlined by the Legislature while still pointing to the law to validate its existence. The Committee may wish to ask proponents of this bill why legislation is needed since the TRaCE task force has been investigating and exchanging information without statutory authority since inception. Furthermore, there is nothing to suggest that the operation of TRaCE would cease on January 1, 2019 since TRaCE exists only through MOUs.
  4. Pilot program: Although the RRaCE pilot program has been in existence since 2014, the success of the program and its accomplishments are not clear in so far as it is difficult to distinguish between the efforts and RRaCE and TRaCE. Despite being two separate programs, it is difficult to find information that outlines solely the workings and accomplishments of RRaCE, making it is difficult to objectively assess RRaCE's ability to combat the underground economy. This bill would like the Legislature to codify and provide broad authority to the TRaCE task force, which was never considered nor authorized by statute. Before permanently enacting the TRaCE task force, the Committee may wish to first enact a TRaCE pilot program that sunsets in five years to better inform the Legislature. Additionally, as provided in AB 576, the TRaCE pilot program should arguably utilize existing agency funding.
  5. Unfettered power to share information: This bill allows the executive board to share information with any state or federal agency that it deems appropriate. The Legislature zealously protects sensitive financial and tax information. Such authority to exchange and disclose information would be incredibly broad and unprecedented. Not only would the executive board be able to share information with any state or federal agency that the board deems appropriate, but the exchange of information would not be approved or even reported to the Legislature. The Committee may wish to consider restricting the sharing of sensitive taxpayer information only within the four agencies outlined in this bill, and affirmatively denying the TRaCE task force's ability, even through an MOU, to share information with other agencies when operating as part of the TRaCE task force. Sharing of information with state or federal agencies not listed within this bill should arguably require subsequent legislative action.
  6. Reporting requirement: As part of the RRaCE program, AB 576 required a report to the Legislature on the pilot program. The report was due on or before December 1, 2017, but was not made available until April of 2018. This bill also requires the TRaCE task force to submit a report by January 1, 2020, that includes information on the number of leads; the number of cases investigated or prosecuted through civil action or criminal prosecution; the amount and final disposition of moneys collected; the status of any efforts to plan for, develop, and implement a data analytics system that enhances the efficiency and effectiveness of the multiagency collaboration; and, policy considerations, if any, to help advance the purpose of the TRaCE task force. In addition to the existing reporting requirements, the Committee may wish to include the number of instances, if any, of unauthorized or suspected unauthorized access, use and/or disclosure of confidential information. This information should include such incidents going back to the inception of TRaCE, including incidents that were reported to other members of TRaCE as required by the MOUs.
  7. Double-referral: This bill was heard in the Assembly Committee on Public Safety, on June 19, 2018, and passed that committee 7-to-0.
  8. Prior Legislation:
     1. AB 576 (V. Manuel Pérez) Chapter 614, Statutes of 2013, created the RRaCE Team Act pilot program consisting of specified agencies to collaborate in combating those engaged in the underground economy.
     2. SB 1185 (Price), of the 2011-12 Legislative Session, would have created the "Centralized Intelligence Partnership" with multiple agencies to collaborate to prosecute violators engaged in illegal activity as part of the underground economy. SB 1185 was held on the Assembly Appropriations Committee's Suspense File.

REGISTERED SUPPORT / OPPOSITION:

Support

California Attorney General (Sponsor)

California District Attorneys Office

California Landscape Contractors Association

California Pool & Spa Association

Sacramento-Sierra's Building & Construction Trades Council

Opposition

None on file

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098

1. Department of Industrial Relations, Revenue Recovery and Collaborative Enforcement Team Act, Report to the Legislature, April 2018. ↑

Date of Hearing: June 19, 2018

Counsel: Sandy Uribe

ASSEMBLY COMMITTEE ON PUBLIC SAFETY

Reginald Byron Jones-Sawyer, Sr., Chair

SBPCA Bill Id:SB 1272

Author:(Galgiani) – As Amended Ver:June 13, 2018

SUMMARY: Establishes the Tax Recovery and Criminal Enforcement (TRACE) Task Force in the Department of Justice (DOJ) to combat underground economic activities. Specifically, this bill:

1. Establishes the TRACE Task Force in DOJ to combat underground economic activities through a multiagency collaboration to do, to the extent practicable, the following:
   
   1. Pool resources and leverage enforcement efforts;
      
   2. Collaborate and share data with state and federal partners;
      
   3. Efficiently prosecute violations covering jurisdictions of multiple agencies to address the severity of the crimes and impose appropriate penalties on convicted violators; and
      
   4. Recover state revenue lost to the underground economy.
      
2. Specifies that the TRACE Task Force shall include an executive board to ensure efficient and effective multiagency collaboration in furtherance of this act. The executive board shall consist of the following members:
   
   1. A representative from the Division of Law Enforcement at the Department of Justice;
      
   2. A representative from the Criminal Law Division at the Department of Justice;
      
   3. A representative from the Investigations and Special Operations Bureau at the California Department of Tax and Fee Administration;
      
   4. A representative from the Criminal Investigation Bureau at the Franchise Tax Board; and
      
   5. A representative from the Investigation Division at the Employment Development Department.
      
3. Allows the TRACE Task Force to, as the executive board deems appropriate, invite other state and federal agencies to join the executive board in a membership or advisory capacity, as specified.
   
4.  States that the TRACE Task Force shall include TRACE teams located in Sacramento, Los Angeles, San Diego, the San Francisco Bay Area, and Fresno.
   
5. States that the addition of an agency to a TRACE Task Force investigative team shall be by written agreement and the written agreement shall govern the participation of the agency joining the investigative team.
   
6. Specifies that each TRACE investigative team shall have a committee established by the TRACE Task Force executive board to ensure efficient and effective multiagency collaboration in each region in furtherance of this act.
   
7. Provides that the TRACE Task Force executive board and each TRACE team committee shall meet as needed, but at least quarterly, to conduct its business.
   
8.  States that for cases that involve tax and fee administration associated with underground economic activities, duly authorized members of TRACE Task Force investigative teams, as specified, and members of the teams and committees shall exchange intelligence, data, including confidential tax or fee information, documents, information, complaints, or lead referrals for investigatory purposes.
   
9. Allows authorized agents employed by a state or federal agency invited to join the executive board, to exchange intelligence, data, including confidential tax or fee information, documents, information, complains, or lead referrals with the TRACE Task Force for investigatory purposes.
   
10. State that the intelligence, data, documents, information, complaints, and lead referrals exchange pursuant to this section shall be used for the following purposes:
    
    1. To assess leads or referrals in order to determine if an investigation is warranted pursuant to this act;
       
    2. To conduct investigations; and
       
    3. To prosecute violations;
       
    4. To conduct data analytics; and
       
    5. To enforce judgments.
       
11. Specifies that any person who was or has been involved in the TRACE Task Force, as specified, or any person who has at any time obtained that knowledge shall not divulge, or make known in any manner not provided by law, any of the confidential information received by, or reported to, the TRACE Task Force.
    
12. Provides that confidential information exchanged pursuant the investigatory role of the TRACE Task Force shall retain its confidential status and shall otherwise remain subject to specified confidentiality provisions.
    
13. States that a member of the TRACE Task Force shall not exchange federal tax data without authorization from the Internal Revenue Service.
    
14.  States that the TRACE Task Force shall, to the extent the Legislature appropriates funds for purposes of this section, develop a data analytics system that enhances the efficiency and effectiveness of the multiagency collaboration described in the provisions of this bill.
    
15.  Specifies that on or before January 1, 2020, and annually thereafter, DOJ in consultation with the executive board of the TRACE Task Force shall submit a report to the Legislature that includes, but is not limited to, the following information:
    
    1. The number of leads or complaints received by the TRACE Task Force during the reporting period;
       
    2. The number of cases investigated or prosecuted through civil action or criminal prosecution as a result of the work of the TRACE Task Force;
       
    3. The amount and final disposition of moneys collected through TRACE Task Force enforcement efforts;
       
    4. The status of the multiagency collaboration required by this act;
       
    5. The status of any efforts to plan for, develop, and implement a data analytics system that enhances the efficiency and effectiveness of the multiagency collaboration set forth in this act; and
       
    6. Policy considerations, if any, to help advance the purpose of the TRACE Task Force.
       
16. Establishes a sunset date for the reporting requirements of January 1, 2024.
    

EXISTING LAW:

1. Provides that all property is taxable unless otherwise provided by the California Constitution or the laws of the United States. (Cal. Const., Art. XIII, sec. 1.)
   
2. Establishes the Board of Equalization (BOE) which administers sales and use taxes, excise taxes, special taxes, and the state’s fee programs. (Cal. Const., Art. XIII, sec. 17.)
   
3. Allows taxes on or measured by income to be imposed on persons, corporations, or other entities as prescribed by law. (Cal. Const., Art. XIII, sec. 26.)
   
4. Contains various provisions criminalizing tax evasion. (See e.g. Rev. & Tax Code, §§ 7152-7153.5 [false and fraudulent returns regarding sales and use taxes], 19701 et seq. [income tax evasion].)
   
5. Establishes the Revenue Recovery and Collaborative Enforcement Team as a pilot program. (Gov. Code, § 15912.)
   
6.  States that the Revenue Recovery and Collaborative Enforcement Team shall include all of the following state entities:
   
   1. Franchise Tax Board;
      
   2. Department of Justice;
      
   3. State Board of Equalization; and,
      
   4.  Employment Development Department. (Gov. Code, § 15914, subd. (a).)
      
7. Allows the following agencies to participate in the pilot program in an advisory capacity to the team:
   
   1. California Health and Human Services Agency;
      
   2. Department of Consumer Affairs;
      
   3. Department of Industrial Relations;
      
   4. Department of Insurance; and,
      
   5. Department of Motor Vehicles. (Gov. Code, § 15914, subd. (b).)
      
8.  States that Revenue Recovery and Collaborative Enforcement Team is to serve the best interests of the state by combating criminal tax evasion associated with the underground economy, directs the team to do all of the following:
   
   1. Develop a plan for a central intake process and organizational structure to document, review, and evaluate data and complaints;
      
   2. Evaluate the benefits of a processing center to receive and analyze data, share complaints, and research leads from the input of specified agencies; and
      
   3. Provide participating and nonparticipating agencies with investigative leads where collaboration opportunities exist for felony-level criminal investigations, including, but not limited to, referring leads to agencies with appropriate enforcement jurisdiction. (Gov. Code, § 15918.)
      
9. Establishes a sunset date of January 1, 2019, for Revenue Recovery and Collaborative Enforcement Team pilot program. (Gov. Code, § 15924.)
   
10. States that the director of the Employment Development Department, or his or her designee, shall serve as Chairperson of the Joint Enforcement Strike Force on the Underground Economy (JESF). (Unemp. Ins. Code, § 329, subd. (a).)
11. Specifies that the strike force shall include, but not be limited to, representatives of the Employment Development Department, the Department of Consumer Affairs, the Department of Industrial Relations, and the Office of Criminal Justice Planning. (Unemp. Ins. Code, § 329, subd. (a).)
12. Provides that other agencies that are not part of the administration, such as the Franchise Tax Board, the State Board of Equalization, and the Department of Justice, are encouraged to participate in the strike force. (Unemp. Ins. Code, § 329, subd. (a).)
13. Specifies that JESF has the following duties:
    1. To facilitate and encourage the development and sharing of information by the participating agencies necessary to combat the underground economy;
    2. To improve the coordination of activities among the participating agencies;
    3. To develop methods to pool, focus, and target the enforcement resources of the participating agencies in order to deter tax evasion and maximize recoveries from blatant tax evaders and violators of cash-pay reporting laws; and,
       
    4. To reduce enforcement costs wherever possible by eliminating duplicative audits and investigations. (Unemp. Ins. Code, § 329, subd. (b).)
       
14. States that JESF shall also be empowered to: 
    1. Form joint enforcement teams when appropriate to utilize the collective investigative and enforcement capabilities of the participating members;
    2. Establish committees and rules of procedure to carry out the activities of the strike force;
    3. To solicit the cooperation and participation of district attorneys and other state and local agencies in carrying out the objectives of the strike force;
    4. Establish procedures for soliciting referrals from the public, including, but not limited to, an advertised telephone hotline;
    5. Develop procedures for improved information sharing among the participating agencies, such as shared automated information data base systems, the use of a common business identification number, and a centralized debt collection system;
    6. Develop procedures to permit the participating agencies to use more efficient and effective civil sanctions in lieu of criminal actions wherever possible; and
    7. Evaluate, based on its activities, the need for any statutory change to accomplish specified objectives. (Unemp. Ins. Code, § 329, subd. (c).)
15. Specifies that JESF shall report to the Governor and the Legislature annually during the period of its existence. (Unemp. Ins. Code, § 329, subd. (d).)

FISCAL EFFECT: Unknown.

COMMENTS:

1. Author's Statement: According to the author, "The TRaCE Task Force is a multi-agency effort that focuses on investigating and prosecuting individuals involved in the underground economy. The state’s underground economy can be as large as $140 billion annually. And, as a result, the state loses an estimated $8.5 billion in corporate, personal, and sales and use taxes each year. Needless to say, these are significant uncollected revenues that are desperately needed to fund basic government services – an amount relatively equivalent to the state’s rainy day fund lost each year. SB 1272 is vital given the persistent and significant negative effects of the underground economy including labor law violations, consumer risks, unfair competition and lost tax revenues to the state.”
   
2. Underground Economy: The underground economy is comprised of individuals and businesses that use various schemes to conceal their activities and evade their tax liabilities by avoiding licensing, regulatory, labor, and tax agencies. Businesses in the underground economy may deliberately fail to report work to appropriate government agencies, obtain proper permits, secure the appropriate insurance, provide sufficient safety and skills training to workers, or pay fees, taxes, or minimum wages. Other evasive practices include paying workers a lower wage than stated on payroll reports, misclassifying workers as independent contractors to avoid paying employee-level fees and taxes, and misreporting profits and material costs to avoid taxes. (California and the Underground Economy, UCLA Labor Center, April 2013.)
   

The UCLA Labor Center notes it is difficult to calculate the size of the underground economy because underground businesses are not participating in systems that would allow for data collection . The UCLA Labor Center acknowledges that the statistics on the extent of the informal economy are unreliable and vary widely. The few numbers that do exist on the size of the underground economy are largely based on national estimates. The California Employment Development Department, based on their analysis of Internal Revenue Service date, estimates California’s underground economy at $60 - $140 billion annually. (Id.)

1. Existing Pilot Program Involving DOJ Which Targets the Underground Economy: AB 576 (Author:V. Manuel Pérez) Chapter 614, Statutes of 2013, created the “Centralized Intelligence Partnership” pilot program consisting of specified agencies to collaborate in combating those engaged in the underground economy. The bill established a pilot program to create a multiagency team consisting of the Franchise Tax Board, DOJ, State Board of Equalization, and Employment Development Department, to be known as the Revenue Recovery and Collaborative Enforcement Team, to collaborate in combating criminal tax evasion associated with the underground economy by, among other activities, developing a plan for a central intake process and organizational structure to document, review, and evaluate data and complaints. AB 576 authorized other specified state entities to participate in the pilot program in an advisory capacity. The pilot program allows team members to exchange information for the purpose of investigating criminal tax evasion associated with the underground economy. There is a sunset date of January 1, 2019 on the pilot program. This bill would expand and make permanent the program initially established by AB 576.
   
2. Other Existing Task Forces Targeting the Underground Economy: The Joint Enforcement Strike Force (JESF), the Employment Enforcement Task Force (EETF), and the Labor Enforcement Task Force (LETF) both have the power to investigate and combat California’s underground economy.
   
   Joint Enforcement Task Force: The Joint Enforcement Strike Force (JESF) is a coalition of California State government enforcement agencies that work together and in partnership with local and federal agencies to combat the underground economy to ensure a level playing field for California businesses. The JESF’s goals are intended to help restore economic stability and to improve working conditions and consumer and worker protection in the State.

The goals of the JESF are to:

• Eliminate unfair business competition.

• Protect workers by ensuring they receive all compensation, benefits, and worker protections they are entitled to by law relating to their employment.

• Protect the consumer by ensuring all businesses are properly licensed and they adhere to the State’s consumer protection regulations.

• Reduce the burden on law-abiding citizens and businesses by ensuring all businesses and individuals comply with the State’s licensing, regulatory, and payroll tax laws.

• Reduce the tax gap by increasing voluntary compliance with the State’s payroll tax laws to maximize the State’s General and Special Fund revenues.

Governor Pete Wilson’s Executive Order W-66-93 created JESF on October 26, 1993. Subsequently, in 1995, the Governor signed SB 1490 which placed the provisions of the Executive Order into the California Unemployment Insurance Code. The Employment Development Department (EDD) is the lead agency for the JESF, and the Director of EDD is the chairperson. JESF is responsible for developing and sharing of information necessary to combat the underground economy, improve the coordination of enforcement activities, and develop methods to pool, focus, and target enforcement resources. JESF’s membership is comprised of EDD, multiple agencies within Department of Consumer Affairs, multiple divisions within the Department of Industrial Relations (DIR), Department of Insurance, Franchise Tax Board, Board of Equalization (BOE), CA Department of Alcoholic Beverage Control, Internal Revenue Service, and the DOJ. (http://www.edd.ca.gov/Payroll_Taxes/Joint_Enforcement_Strike_Force.htm)

Labor Enforcement Task Force: Under the direction of the Department of Industrial Relations, the LETF is a coalition of the California State government enforcement agencies to share information and resources to ensure employees are paid properly and have safe work conditions and honest, law-abiding businesses. The participating agencies are the DIR, Division of Labor Standards Enforcement (DLSE), the Division of Occupational Safety and Health (OSHA), Employment Development Department (EDD), Board of Equalization (BOE), California Department of Insurance, the State Attorney General, Alcoholic Beverage Control, the Department of Consumer Affairs, Contractor’s State Licensing Board (CSLC), and BAR. (http://www.dir.ca.gov/letf/letf.html)

Working together with combined authority, LETF teams have access to a fuller range of enforcement tools than does each agency on its own:

DLSE has the authority under Labor Code section 90 to access all places of employment. Other LETF partners do not have this full authority. DLSE may also issue stop orders requiring employers to cease illegal operations immediately.

OSHA has the authority to issue citations for serious, willful, and repeat violations. OSHA may also issue an order prohibiting use where a condition or practice exists that creates an imminent hazard to the safety and health of employees.

EDD has authority under Unemployment Insurance Code section 1092 to require employers to provide records for inspection anytime during the employing unit’s business hours.

CSLB is able to suspend contractors’ licenses until the penalties issued by DLSE and EDD are 2 paid. Penalties are far more likely to be paid promptly when the license is suspended until payment.

LETF states that joint enforcement offers a couple of advantages. First, because LETF inspection teams comprise members from multiple agencies, one LETF inspection has less impact on business operations than multiple separate inspections by the individual agencies. Second, when several agencies working together do find egregious employer misconduct, the ensuing publicity has a deterrent effect that is much more powerful than if only a single agency were enforcing. (LETF Report to the California Legislature 2015.)

Most of participants the of the TRACE Task Force would overlap with JESF and LETF.

1. Argument in Support: According to Attorney General, Xavier Becerra, “The underground economy takes its heaviest toll on hard working Californians of every stripe. Many workers go without basic rights and protections, law-abiding business owners are put at a competitive disadvantage, and consumer protections are threatened. Moreover, tax revenues are lost that could otherwise fund education, law enforcement, and infrastructure projects that benefit Californians who play by the rules.
   
   “According to a 2013 University of California at Los Angeles Labor Center report, the state’s underground economy generates between $60 to $140 billion in revenue annually. An estimated $8.5 billion in corporate, personal, sales and use taxes go uncollected each year. To help respond to this problem, the multi-agency Tax Recovery and Criminal Enforcement (TRaCE) Task Force pilot program was administratively established in 2014 to investigate and prosecute the most egregious felony-level multijurisdictional underground economic crimes in the state. Participating agencies include the Department of Justice, the Department of Tax and Fee Administration, the Franchise Tax Board, and the Employment Development Department.
   
   “Under the pilot program, the TRACE Task Force established teams in Sacramento and Los Angeles. In just a few years, these team have identified $210 million in unreported gross receipts and $46 million in associated tax loss to the state. Through its criminal enforcement actions, the pilot program has recovered millions of dollars in lost tax revenue for the state.
   
   “In 2015, the Little Hoover commission published a report recognizing that in its short tenure, the TRaCE team has shown promising result. The commission recommended that in a state as large as California, the task force should have operations in every major metropolitan region. Consistent with the Little Hoover Commission’s recommendations, SB 1272 would build off the success of the TRaCE Task Force pilot program by permanently establishing the existing teams in Sacramento and Los Angeles and authorizing additional teams in three other major metropolitan regions of the state – San Diego, the Bay Area and Fresno.”
   
2. Related Legislation: AB 2046 (Daly), would require information sharing by specified state agencies investigating workers compensation fraud. AB 2046 is awaiting hearing in the Senate Insurance Committee.
   
3. Prior Legislation:
   
   1. AB 576 (Author:V. Manuel Pérez) Chapter 614, Statutes of 2013, created the “Centralized Intelligence Partnership” pilot program consisting of specified agencies to collaborate in combating those engaged in the underground economy.
      
   2. SB 1185 (Author:Price), of the 2011-12 Legislative Session, would have created the “Centralized Intelligence Partnership” as a clearinghouse for multiple agencies to collaborate to prosecute violators engaged in illegal activity as part of the underground economy. SB 1185 was held on the Assembly Appropriations Committee's Suspense File.
      
   3. SB 1490 (Johnston), Chapter 1117, Statutes of 1994, codified the Joint Enforcement Strike Force on the Underground Economy under the Employment Development Department.
      

REGISTERED SUPPORT / OPPOSITION:

Support

Attorney General, Xavier Becerra (Sponsor)

Brand Security Corp.

California Construction and Industrial Materials Association

California District Attorneys Association

California Labor Federation

California Landscape Contractors Association

California Pool & Spa Association

California State Association of Electrical Workers

California State Council of Laborers

Flasher Barricade Association and Coalition of Small and Disabled Veteran Businesses

International Anti-Counterfeiting Coalition

Little Hoover Commission

Louis Vuitton

Prada

Rolex

Sacramento-Sierra Building & Construction Trades Council

SEIU-California

State Building and Construction Trades Council

Opposition

None

Analysis Prepared by: Sandy Uribe / PUB. S. / (916) 319-3744

 THIRD READING  

Bill No: SB 1272

Author:

Amended: 5/25/18

Vote:

SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 4/4/18

AYES: McGuire, Nguyen, Beall, Hernandez, Lara, Moorlach

NO VOTE RECORDED: Hertzberg

SENATE PUBLIC SAFETY COMMITTEE: 7-0, 4/17/18

AYES: Skinner, Anderson, Bradford, Jackson, Mitchell, Stone, Wiener

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/25/18

AYES: Lara, Bates, Beall, Bradford, Hill, Nielsen, Wiener

SUBJECT:

SOURCE: Attorney General Xavier Becerra

DIGEST:

This bill enacts the Tax Recovery and Criminal Enforcement Tax Force Act, which establishes the TRaCE Task Force in the Department of Justice to combat underground economic activities.

ANALYSIS: Existing law enacts the Revenue Recovery and Collaborative Enforcement Team Act, which created the Revenue Recovery and Collaborative Enforcement (RRaCE) team to complement the state’s underground economy enforcement efforts (AB 576, V.M Perez, Chapter 614, Statutes of 2013). The RRaCE Act:

1. States its goal is to “serve the best interests of the state by combating criminal tax evasion associated with the underground economy.”
2. Includes on the team the Franchise Tax Board (FTB), Board of Equalization (BOE), and the Department of Justice (DOJ), and also allowed the Health and Human Services Agency, the Department of Consumer Affairs (DCA), the Department of Industrial Relations (DIR), the Employment Development Department (EDD), and the Department of Motor Vehicles to participate.
3. Establishes RRaCE as a pilot program which is set to expire on January 1, 2019.

This bill:

1. Enacts the TRaCE Tax Force Act, which establishes the TRaCE Task Force in DOJ to combat underground economic activities through a multi-agency collaboration to:
   1. Pool resources and leverage enforcement efforts,
   2. Collaborate and share data with state and federal partners, and
   3. Efficiently prosecute violations coverings jurisdiction of multiple agencies to address the severity of the crimes, and impose appropriate penalties on contract violators.
2. Creates the TRaCE executive board to ensure efficient and effective multi-agency collaboration, consisting of representatives from the:
   1. Division of Law Enforcement at DOJ,
   2. Criminal Law Division at DOJ,
   3. Investigations and Special Operations Bureau at the California Department of Tax and Fee Administration (CDTFA),
   4. Criminal Investigations Bureau at FTB, and
   5. Investigation Division at EDD.
   6. Other state and federal agencies in an advisory or membership role as TRaCE by invitation.
3. Directs the executive board to meet as needed, but at least quarterly.
4. Requires five teams: one each in Fresno, Los Angeles, Sacramento, San Diego, and the San Francisco Bay Area.
5. Provides that each team must have a committee established by the task force to ensure efficient and effective multi-agency collaboration in each region, which must also meet as needed, but at least quarterly.
6. Allows duly authorized team members of investigative teams to exchange information for cases that involve tax and fee administration associated with underground economic activities.
7. Permits duly authorized agents employed by a state or federal agency invited to join the executive board to exchange intelligence, data, documents, information, complains, or lead referrals with the TRaCE Task Force for specified purposes.
8. Bars any person involved with the TRaCE Task Force, or any person who has received knowledge from any agency from divulging or making known any confidential information received by the team.
9. States that any information retains its confidential status and is subject to each agency’s confidentiality law, which are specifically referenced in the bill.
10. Provides that the TRaCE Task Force shall develop a data analytics system that enhances the efficiency and effectiveness of the multiagency collaboration to the extent funds are appropriated.
11. Requires DOJ in consultation with the Task Force to submit to the Legislature a report by January 1, 2020, and annually thereafter, that includes:
    1. Number of leads or complaints received during the reporting period.
    2. Number of cases investigated or prosecuted through civil action or criminal prosecution as a result of its work.
    3. The amount and final disposition of moneys collected through the TRaCE Task Force enforcement efforts.
    4. The status of the multiagency collaboration required by the Act.
    5. The status of any efforts to plan for, develop, and implement a data analytics system.
    6. Policy considerations to help advance the task force’s purpose.

Background

Prosecuting illegal activity in the underground economy is notoriously difficult: violators don’t file for businesses licenses or pay taxes, and compensate their employees in cash, leaving little to no paper trail. Oftentimes when authorities find violators, the taxes avoided don’t justify the costs of deploying more auditors and prosecutors. According to the Little Hoover Commission’s (LHC’s) March, 2015, report Level the Playing Field: Put California’s Underground Economy Out of Business, “the tentacles of the underground economy reach deep in California and that it plagues both businesses and workers.” The report estimated uncollected state revenue resulting from the underground economy between $8.5 and $10 billion, and contains chapters on the current leadership void, funding issues, lax penalties, and unclear laws.

In 1994, Governor Pete Wilson signed executive order W-66-93, creating the Joint Economic Strike Force (JESF), which was “responsible for enhancing the development and sharing of information necessary to combat the underground economy, to improve the coordination of enforcement activities, and to develop methods to pool, focus, and target enforcement resources.” JESF is led by the EDD and housed within its Underground Economy Operations, and is comprised of the DCA, agencies within DCA such as the Bureau of Automotive Repair (BAR) and the Contractors State License Board (CSLB), the FTB, the BOE (now the CDTFA), the Department of Insurance (CDI), the Department of Justice (DOJ), the DIR, the Department of Alcoholic Beverage Control (ABC), the United States Department of Labor, and the Internal Revenue Service (IRS). JESF was codified by the Legislature (SB 1490, Johnston, 1994), and publishes an annual report documenting its efforts.

In 2005, Governor Arnold Schwarzenegger’s established the Economic and Employment Enforcement Coalition (EEEC), housed in DIR, and comprised of investigators and auditors from DIR’s Division of Labor Standards Enforcement and Occupational Safety and Health, and includes EDD, DCA, BAR, CSLB, BOE, CDI, DOJ, and ABC. Governor Brown renamed the EEEC the DIR Labor Enforcement Task Force (LETF), effective January 1, 2012. LETF’s mission is “to combat the underground economy in order to ensure safe working conditions and proper payment of wages for workers; to create an environment in which legitimate businesses can thrive; and to support the collection of all California taxes, fees, and penalties due from employers.” Additionally, EDD receives audit leads from the IRS through the Questionable Employment Tax Practices Program.

When Governor Brown signed AB 576, he included a signing message noting the lack of a lead agency, and directed DIR to take the lead. However, BOE and DOJ created the TRaCE Task Force, and list BOE, FTB, DOJ, DMV, EDD, as well as the IRS, Federal Bureau of Investigation, and Homeland Security Investigations, as partners on its Web site. The LHC report notes:

“[AB 576] was supposed to fill a long-recognized need for a task force to focus on criminal tax evasion. Although the focus of the task force is primarily tax evasion, Governor Brown designated the Department of Industrial Relations as the RRaCE lead when he signed AB 576 into law, despite the fact that DIR is a labor-focused agency with no tax jurisdiction. Problematically, DIR does not have access to confidential tax information. Tax agencies have strict controls on how they use the sensitive information they receive from businesses and individuals, and face severe penalties for sharing it inappropriately. State tax agencies could lose their access to IRS data – key to unearthing underground economy-related financial crimes – if they share information with unauthorized parties. As a result, a legislatively-designated advisory member without access to tax information is leading a team of tax agencies to generate leads on tax-related crimes. The task force has existed for more than a year and has not yet generated any leads for state investigators.”

As a result, California has two separate task forces with nearly identical names pursing the same goals, but housed under the leadership of two distinct agencies. Both task forces have an executive board comprised of similar agencies to guide its operations. DIR leads RRaCE, while DOJ houses and operates the current TRaCE Task Force. The TRaCE board meets regularly, while RRaCE’s does not.

The LHC report adds:

“The simultaneous emergence of both RRaCE and TRaCE has been challenging and confusing for some of the agencies involved in both efforts. Departments are legislatively mandated to devote resources to RRaCE, which already has spent one of its six allotted years of the pilot project holding committee meetings and developing an operational framework. Significant information sharing challenges remain. Instead of augmenting the state’s underground economy enforcement efforts, the RRACE/TRaCE bifurcation could potentially spread limited resources even thinner.”

TRaCE reports that its efforts have been successful, stating that is has identified $210 million in unreported gross receipts, with $46 million in tax losses to the state, and recovered millions of dollars in lost tax revenue to the state. TRaCE also notes that housing the Task Force within DOJ provides more effective investigation and prosecution of offenses.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee, “This bill would expand duties related to addressing the underground economy across several departments. Though some impacted departments have yet to determine their costs from the bill, the aggregate fiscal impact would likely be in the low millions of dollars (General Fund and special funds). Additionally, the bill would result in a cost-pressure to fund the proposed data analytics team, the cost of which is also unknown, but minimally in the hundreds of thousands of dollars (General Fund and special funds). Unknown future revenue gains, likely in the tens millions of dollars annually (General Fund), related to enforcement actions and increased tax collections. A portion of the revenue gains could be offset by revenue losses to the extent partnership activities supplant existing revenue-generating enforcement efforts among the participating entities.”

SUPPORT: (Verified 5/25/18)

Attorney General Xavier Becerra (source)

Brand Security Corporation

California Construction and Industrial Materials Association

California District Attorneys Association

California Labor Federation

California Landscape Contractors Association

California Pool and Spa Association

California State Association of Electrical Workers

California State Council of Laborers

California State Pipe Trades Council

Flasher Barricade Assocation

International Anti Counterfeiting Association

International Union of Elevator Constructors

Laborers International Union of North America

Little Hoover Commission

Louis Vuitton

Prada

Rolex

Sacramento-Sierra Building and Construction Trades Council

SEIU California

State Building and Construction Trades Council

Western States Council of Sheet Metal Workers

OPPOSITION: (Verified 5/25/18)

None received

ARGUMENTS IN SUPPORT: According to the author, “the TRaCE Task Force is a multi-agency effort that focuses on investigating and prosecuting individuals involved in the underground economy. The state’s underground economy can be as large as $140 billion annually. And, as a result, the state loses an estimated $8.5 billion in corporate, personal, and sales and use taxes each year. Needless to say, these are significant uncollected revenues that are desperately needed to fund basic government services – an amount relatively equivalent to the state’s rainy day fund lost each year. SB 1272 is vital given the persistent and significant negative effects of the underground economy including labor law violations, consumer risks, unfair competition and lost tax revenues to the state.”

Prepared by:

5/29/18 17:44:38

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

SB 1272 (Galgiani) - Tax Recovery and Criminal Enforcement (TRaCE) Task Force

Bill Summary:

SB 1272 would enact the Tax Recovery and Criminal Enforcement Tax Force (TRaCE) Act, which would establish the TRaCE task force within the Department of Justice (DOJ) to combat underground economic activities.

*********** ANALYSIS ADDENDUM – SUSPENSE FILE ***********

The following information is revised to reflect amendments

adopted by the committee on May 25, 2018

Fiscal Impact:

This bill would expand duties related to addressing the underground economy across several departments. Though some impacted departments have yet to determine their costs from the bill, the aggregate fiscal impact would likely be in the low millions of dollars (General Fund and special funds). Additionally, the bill would result in a cost-pressure to fund the proposed data analytics team, the cost of which is also unknown, but minimally in the hundreds of thousands of dollars (General Fund and special funds).

Unknown future revenue gains, likely in the tens millions of dollars annually (General Fund), related to enforcement actions and increased tax collections. A portion of the revenue gains could be offset by revenue losses to the extent partnership activities supplant existing revenue-generating enforcement efforts among the participating entities.

Author Amendments:

Develop a data analytics team that would enhance the efficiency and effectiveness of the multiagency collaboration to the extent funding is provided, and clarify reporting requirements.

-- END --

SENATE COMMITTEE ON

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

SB 1272 (Galgiani) - Tax Recovery and Criminal Enforcement (TRaCE) Task Force

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

SB 1272 would enact the Tax Recovery and Criminal Enforcement Tax Force (TRaCE) Act, which would establish the TRaCE task force within the Department of Justice (DOJ) to combat underground economic activities.

Fiscal Impact:

This bill would expand duties related to addressing the underground economy across several departments. Though some impacted departments have yet to determine their costs from the bill, the aggregate fiscal impact would likely be in the low tens of millions of dollars (General and special funds).

Unknown future revenue gains, likely in the tens millions of dollars annually (General Fund), related to enforcement actions and increased tax collections. A portion of the revenue gains could be offset by revenue losses to the extent partnership activities supplant existing revenue-generating enforcement efforts among the participating entities.

Background:

The term “underground economy” refers to individuals and businesses that transact in cash or use other schemes to conceal both (1) their activities, and (2) resulting tax liability from government licensing, regulatory, and taxing agencies. Underground economy activities include tax evasion, tax fraud, cash pay, tax gap, under the table payments, and other “off-the-books” activities. Annual uncollected state revenue resulting from the underground economy is estimated at roughly $10 billion.

In 1994, Governor Pete Wilson signed an executive order (later codified by the Legislature) creating the Joint Economic Strike Force (JESF) to address the underground economy. JESF is led by the Employment Development Department (EDD) and also consists of the Labor Commissioner's Office, the Department of Consumer Affairs (DCA), the Office of Criminal Justice Planning, the Franchise Tax Board (FTB), the Board of Equalization (BOE), and the Department of Justice (DOJ).

In 2005, Governor Schwarzenegger established the Economic and Employment Enforcement Coalition (EEEC), housed in the Department of Industrial Relations (DIR), and comprised of investigators and auditors from DIR’s Division of Labor Standards Enforcement and Occupational Safety and Health, and partnering with EDD, DCA, and the Contractors’ State License Board. The United States Department of Labor also participates in the coalition. Governor Brown renamed EEEC the DIR Labor Enforcement Task Force (LETF) in 2012. DIR launched a new collaborative effort between state agencies to combat illegal business practices and improve California’s business environment. LETF’s primary partners are EDD, the Contractors’ State License Board, BOE, and the Bureau of Automotive Repair, with collaboration by the Department of Insurance (DOI), DOJ, and local district attorneys. According to a recent report, enforcement activities have identified nearly 50,000 violations of labor, licensing, and tax laws since the inception of the EEEC, valued at $63 million in penalty assessments. EEEC activities also resulted in the referral of 3,446 cases to district attorney’s offices, with 1,696 criminal convictions.

In 2013, the Legislature enacted the Revenue Recovery and Collaborative Enforcement Team Act, which created the Revenue Recovery and Collaborative Enforcement (RRaCE) team to complement the state’s underground economy enforcement efforts (AB 576, V.M Perez). The team includes FTB, BOE, and DOJ, and also allowed the Health and Human Services Agency, DCA, DIR, EDD, and the Department of Motor Vehicles to participate. While the state already has the LETF within DIR, and the JESF led by EDD, the Legislature established RRaCE with its own specific goal, which is to “serve the best interests of the state by combating criminal tax evasion associated with the underground economy.” AB 576 established RRaCE as a pilot program which is set to expire on January 1, 2019. To date, no bill has been introduced to extend the sunset.

When the Governor signed AB 576, he included a signing message noting the lack of a lead agency. He directed DIR to take the lead. However, BOE and DOJ created TRaCE task force by a Memorandum of Understanding, and listed BOE, FTB, DOJ, DMV, EDD, as well as the Internal Revenue Service, Federal Bureau of Investigation, and Homeland Security Investigations, as partners on its website. Thus, the State has two separate task forces with very similar names pursuing the same goals, but housed under the leadership of separate agencies. Both task forces have an executive board comprised of similar agencies to guide its operations. DIR leads RRaCE, while DOJ houses and operates the current TRaCE task force. The TRaCE board meets regularly, while RRaCE’s does not, and the Legislature is yet to receive the report required by AB 576 which was due December 1, 2017.

Proposed Law:

This bill, whose provisions sunset on January 1, 2028, would enact the Tax Recovery and Criminal Enforcement Tax Force Act, which establishes the TRaCE task force within DOJ combat underground economic activities through a multi-agency collaboration to (1) pool resources and leverage enforcement efforts, (2) collaborate and share data with state and federal partners, and (3) efficiently prosecute violations coverings jurisdiction of multiple agencies to address the severity of the crimes, and impose appropriate penalties on contract violators.

The bill would create an executive board to ensure efficient and effective multi-agency collaboration, consisting of representatives from: (1) the Division of Law Enforcement at DOJ, (2) the Criminal Law Division at DOJ, (3) the Investigations and Special Operations Bureau at the California Department of Tax and Fee Administration (CDTFA, a new department that has replaced BOE as the department administrating several taxes and fees), (4) the Criminal Investigations Bureau at FTB, and (5) the Investigation Division at EDD. The board may invite other state and federal agencies to join in an advisory or membership role as it deems appropriate. The executive board is required to meet as needed, but at least quarterly.

The bill creates requires five teams: one each in Fresno, Los Angeles, Sacramento, San Diego, and the San Francisco Bay Area. Each team must have a committee established by the task force to ensure efficient and effective multi-agency collaboration in each region. The bill likewise directs the committees to meet as needed, but at least quarterly. DOJ is responsible for the management and supervision of the task force, and retains supervisory control of its personnel.

The bill requires duly authorized team members and representatives of other participating agencies to exchange information for the purpose of investigating criminal tax evasion associated with underground economic activities. Team members, ex-members, any agent employed by the team, or any person who has received knowledge from any agency, are barred from divulging or making known any confidential information received by the team. Any such information retains its confidential status and is subject to each agency’s confidentiality laws.

SB 1272 requires the task force to submit to the Legislature a report that includes: (1) the number of leads or complaints received during the reporting period, (2) the number of cases investigated or prosecuted through civil action or criminal prosecution as a result of its work, and (3) policy considerations to help advance the task force’s purpose.

Related Legislation:

SB 1185 (Price) of 2012 would have created a pilot project for centralizing the investigative efforts of several governmental agencies in order to combat the underground economy. SB 1185 was held under submission on the Suspense File of the Assembly Committee on Appropriations.

Staff Comments:

This bill would codify TRaCE in statute; however, as noted above, it would increase its footprint by adding one team for Fresno, San Diego, and the San Francisco Bay Area to the current teams in Sacramento and Los Angeles, plus a committee to ensure efficient and effective collaboration of each team. This would increase costs for participating agencies relative to current practice. The author is requesting funding to implement these efforts in this year’s Budget Act.

TRaCE reports that its efforts have been successful, stating that is has identified $210 million in unreported gross receipts, and recovered millions of dollars in lost tax revenue to the state. TRaCE also notes that housing the task force within DOJ provides more effective investigation and prosecution of offenses.

As noted above, certain impacted state departments have yet to determine the bill’s impact to their administration costs. DOJ indicates that it would incur General Fund costs of $6.7 million in 2018-19 (reflecting 46 new positions), and about $12 million (reflecting 56 new positions) annually thereafter to implement the provisions of the bill. As noted above, DOJ would be responsible for the management and supervision of the task forces, and retain supervisory control of its personnel. The California Department of Tax and Fee Administration’s (CDTFA) costs would be about $2 million per year. The fiscal impact of the bill to EDD would be similar.

The revenue impact from the bill is unknown, as the frequency and value of future task force criminal investigations cannot be predicted. However, using standard benefit to cost ratios, the revenue recovery would potentially exceed expenditures by a comfortable margin. TRaCE thus far has largely centered on fraud investigations. These cases typically require on average 12 to 24 months before they are referred for prosecution, which delays revenues accordingly. To date, all cases prosecuted have resulted in plea agreements and accelerated restitution payments.

-- END --

SENATE COMMITTEE ON PUBLIC SAFETY

Senator Nancy Skinner, Chair

2017 - 2018 Regular

Bill No: SB 1272 Hearing Date: April 17, 2018

Subject: Tax Recovery and Criminal Enforcement (TRaCE) Task Force

HISTORY

Source: Attorney General’s Office, Department of Justice

Prior Legislation: AB 576 (Perez), Chapter 614, Statutes of 2014

SB 1185 (Price), held in Assembly Appropriations Committee

SB 1490 (Johnston), Chapter 1117, Statutes of 1994

Support: California Construction and Industrial Materials Association; California District Attorneys Association; California Landscape Contractors Association; California Pool & Spa Association; California State Association of Electrical Workers; California State Pipe Trades Council; Department of Justice; Flasher Barricade Association; International Anti-Counterfeiting Coalition; International Union of Elevator Constructors; Little Hoover Commission; Laborers’ International Union of North America; Louis Vuitton; Prada, Rolex, SIEU; Sacramento-Sierra Building & Construction Trades Council. State Building and Construction Trades Council; Western States Council of Sheet Metal Workers

Opposition: None known

Analysis reflects author’s amendments to be offered in committee

PURPOSE

The purpose of this bill is to expand the Tax Recovery and Criminal Enforcement (TRaCE) Task Force from Sacramento and Los Angeles to San Diego, Fresno, and the San Francisco Bay area to combat underground economic activities.

Existing law provides that all property is taxable unless otherwise provided by the California Constitution or the laws of the United States. (Cal. Const., Art. XIII, § 1.)

Existing law establishes the California Board of Equalization which administers sales and use of taxes, excise taxes, special taxes, and the state’s fee programs. (Cal. Const., Art. XIII, § 17.)

Existing law allows taxes on or measured by income to be imposed on persons, corporations, or other entities as prescribed by law. (Cal. Const., Art. XIII, § 26.)

Existing law contains various provisions criminalizing tax evasion. (Rev. & Tax. Code, § 7152-7153.5)

This bill establishes the TRaCE Task Force in the Department of Justice (DOJ) to combat underground economic activities through multi-agency collaboration to do, to the extent practicable, the following:

• Pool resources and leverage enforcement efforts.
• Collaborate and share data with state and federal partners.
• Prosecute violations covering jurisdictions of multiple agencies to address the severity of the crimes and impose appropriate penalties on convicted violators.
• Recover state revenue lost to the underground economy.

This bill states that the DOJ shall be responsible for the management and supervising of the TRaCE Task Force and retain supervisory control of the personnel assigned to the TRaCE Task Force.

This bill states that the TRaCE Task Force shall include an executive board to ensure efficient and effective multi-agency collaboration in furtherance of this act. The executive board shall consist of the following representatives from:

• The Division of Law Enforcement at the DOJ.
• The Criminal Law Division at the DOJ.
• The Investigations and Special Operations Bureau at the CA Department of Tax and Fee Administration.
• The Criminal Investigation Bureau at the Franchise Tax Board.
• The Investigation Division at the Employment Development Department.

This bill states that the TRaCE Task Force, as the executive board deems appropriate, may invite other state and federal agencies to join the executive board in membership or advisory capacity.

This bill states that the TRaCE Task Force shall include TRaCE teams located in Sacramento, Los Angeles, San Diego, the San Francisco Bay area, and Fresno.

This bill requires that duly authorized team members shall exchange intelligence, data, documents, information, complaints, or lead referrals for the purpose of investigating criminal tax evasion associated with underground economic activities.

This bill requires that any member or ex-member of the team, any agent employed by any agency listed, or any person who has at any time obtained such knowledge from any of the foregoing agencies or persons shall not divulge, or make known in any manner not provided by law, any of the confidential information received by, or reported to, the team. Information exchanged pursuant to this section shall retain its confidential status and shall otherwise remain subject to the confidentiality provisions contained in law.

The bill requires the TRaCE Task Force to submit a report to the Legislature a report on January 1, 2014, that includes, but is not limited to, the following information:

• The number of leads of complaints received by the TRaCE Task Force during the reporting period.
• The number of cases investigated or prosecuted through civil action or criminal prosecution as a result of the work of the TRaCE Task Force.
• Policy considerations, if any, to help advance the purpose of the TRaCE Task Force.

This bill requires the section on report submission be repealed on January 1, 2028.

COMMENTS

1. Need for This Bill

The author states:

The underground economy has significant negative effects on Californians. Many workers go without basic rights and protections, law-abiding businesses are put at a competitive disadvantage, consumer protections are threatened, and tax revenues are lost that could otherwise fund programs such as education, law enforcement, infrastructure projects, or reduce taxes for the majority of Californians who play by the rules.

According to a 2013 report by the UCLA Labor Center, the state’s underground economy is estimated at $60 to $140 billion annually. An estimated $8.5 billion in corporate, personal, and sales and use taxes go uncollected each year.

In response to this problem, the Tax Recovery and Criminal Enforcement (TRaCE) Task Force pilot program was created to investigate and prosecute the most egregious felony-level underground multijurisdictional economic crimes in the state. Participating agencies include the Department of Justice, the Department of Tax and Fee Administration, the Franchised Tax Board, and the Employment Development Department.

The TRaCE Task Force currently consists of two teams—one in Sacramento and one in Los Angeles. In the short time the task force has been in place, it has identified $210 million in unreported gross receipts and $46 million in associated tax loss to the state. Through its enforcement efforts, the TRaCE Task Force has been collecting millions of dollars for tax loss, court ordered restitution, and cost of investigations.

In 2015, the Little Hoover Commission published a report on the underground economy that recognized the success of the TRaCE Task Force and recommended expanding the program to every major metropolitan region. To assist TRaCE in expanding to every major metropolitan region in the state, and to ensure the long-term efficiency and effectiveness of the program, legislation is necessary.

SB 1272 would permanently establish the TRaCE Task Force program and expand the program into other major metropolitan regions in the state by codifying the existing TRaCE teams in Sacramento and Los Angeles and establishing additional TRaCE teams in San Diego, the Bay Area, and Fresno.

2. Underground Economy Task Forces

There are currently existing efforts to combat the underground economy. The Joint Enforcement Strike Force (JESF), the Employment Enforcement Task Force (EETF), and the Labor

Enforcement Task Force (LETF) are also responsible for investigating California’s underground economy.^[1]

Governor Pete Wilson’s Executive Order W-66-93 created JESF on October 26, 1993. Subsequently, in 1995, the Governor signed SB 1490 which placed the provisions of the Executive Order into the California Unemployment Insurance Code. The Employment Development Department (EDD) is the lead agency for the JESF, and the Director of EDD is the chairperson. JESF is responsible for developing and sharing of information necessary to combat the underground economy, improve the coordination of enforcement activities, and develop methods to pool, focus, and target enforcement resources. JESF’s membership is comprised of EDD, multiple agencies within Department of Consumer Affairs, multiple divisions within the Department of Industrial Relations (DIR), Department of Insurance, Franchise Tax Board, Board of Equalization (BOE), CA Department of Alcoholic Beverage Control, Internal Revenue Service, and the DOJ.^[2]

EETF, the first program implemented by JESF, works with partner agencies to conduct joint on-site business inspections to identify employers who operate in the underground economy. EETF’s goal is to identify and bring into compliance individuals and businesses participating in the underground economy that are in violation of payroll tax, labor, and licensing laws. The participating agencies include the EDD, DIR, Contractors State License Board, Bureau of Security and Investigative Services, Alcoholic Beverage Control (ABC), BOE, Bureau of Automotive Repair (BAR). ^[3]

Under the direction of the Department of Industrial Relations, the LETF is a coalition of the California State government enforcement agencies to share information and resources to ensure employees are paid properly and have safe work conditions and honest, law-abiding businesses. The participating agencies are the DIR, Division of Labor Standards Enforcement, the Division of Occupational Safety and Health, EDD, BOE, California Department of Insurance, the State Attorney General, ABC, the Department of Consumer Affairs, Contractor’s State Licensing Board, and BAR.^[4]

While TRaCE targets felonies and JESF, EETF, and LETF target civil cases and/or misdemeanors, most of the participants of these tasks forces overlap.

3. Jurisdiction

AB 576 (Perez) established the TRaCE pilot program where there are existing TRaCE teams headquartered in Sacramento and Los Angeles however, the teams are not limited to those counties. Along with the existing teams in Sacramento and Los Angeles, the bill establishes teams in San Diego, Fresno, and the San Francisco Bay area to combat underground economic activities.

4. Argument in Support

According to the Little Hoover Commission:

In order to transform business culture into one of voluntary compliance, the impact of TRaCE must be felt by run-of-the-mill criminals: Those who are not running elaborate multi-state operations or trafficking humans on the side.

A change of culture necessitates significant outreach to educate those who are misinformed and for the truly criminal, recognizing there is a real possibility the task force could be coming for them. During its short tenure, the TRaCE team has shown promising results…But these two multi-agency financial crimes teams with two prosecutors are not enough in a state as large as California. At a minimum, California should have a multi-agency financial crimes-focused task force based in every major metropolitan region.

5. Author’s Amendments

The Senate Committee on Governance and Finance suggested, the author has agreed to the following amendments to be taken in our committee. These amendments are meant to clarify under which provisions team members or ex-members may be subject to confidentiality. The suggested amendment is to Section 2 of Government Code § 15928, and reads as follows:

15928. Duly authorized team members listed in subdivision (c) of Section 15926 shall exchange intelligence, data, documents, information, complaints, or lead referrals for the purpose of investigating criminal tax evasion associated with underground economic activities. Any member or ex-member of the team, any agent employed by any agency listed in subdivisions (c) and (d) of Section 15926, or any person who has at any time obtained such knowledge from any of the foregoing agencies or persons shall not divulge, or make known in any manner not provided by law, any of the confidential information received by, or reported to, the team. Information exchanged pursuant to this section shall retain its confidential status and shall otherwise remain subject to the confidentiality provisions contained in law. contained in the following provisions

(a) Department of Justice: Section 11183.

(b) Employment Development Department: Sections 1094 and 1095 of the Unemployment Insurance Code.

(c) Franchise Tax Board: Sections 19542, 19542.1, and 19542.3 of the Revenue and Taxation Code.

(d) California Department of Tax and Fee Administration: Section 15619 of this code, Section 42464.8 of the Public Resources Code, and Sections 7056, 7056.5, 8255, 9255, 9255.1, 30455, 38705, 38706, 43651, 45981, 45982, 45983, 45984, 46751, 50159, 50160, 50161, 55381, 60608, and 60609 of the Revenue and Taxation Code.

(e) For any agency added to the pursuant to subdivision (d) of Section 15926, any information confidentiality provisions in law applicable to that agency.

The suggested amendments also add Senator Moorlach, Senator Dodd, and Assemblymember Cervantes as co-authors.

-- END –

1. “Underground Economy Operations,” accessed March 26, 2018, http://www.edd.ca.gov/payroll_taxes/underground_economy_operations.htm. ↑

2. “Joint Enforcement Strike Force (JESF),” accessed April 4, 2018, http://www.edd.ca.gov/payroll_taxes/Joint_Enforcement_Strike_Force.htm. ↑

3. “Underground Economy Operations.” ↑

4. “Labor Enforcement Task Force,” accessed April 4, 2018, http://www.dir.ca.gov/letf/letf.html. ↑

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Tax Recovery and Criminal Enforcement (TRaCE) Task Force

Enacts the Tax Recovery and Criminal Enforcement Tax Force Act, which establishes the TRaCE task force in the Department of Justice to combat underground economic activities.

Background

Underground economy. Prosecuting illegal activity in the underground economy is notoriously difficult: violators don’t file for businesses licenses or pay taxes, and compensate their employees in cash, leaving little to no paper trail. Often times when authorities find violators, the taxes avoided don’t justify the costs of deploying more auditors and prosecutors. According to the Little Hoover Commission’s (LHC’s) March, 2015, report Level the Playing Field: Put California’s Underground Economy Out of Business, “the tentacles of the underground economy reach deep in California and that it plagues both businesses and workers.” The report estimated uncollected state revenue resulting from the underground economy between $8.5 and $10 billion, and contains chapters on the current leadership void, funding issues, lax penalties, and unclear laws.

In 1994, Governor Pete Wilson signed executive order W-66-93, creating the Joint Economic Strike Force (JESF), which was “responsible for enhancing the development and sharing of information necessary to combat the underground economy, to improve the coordination of enforcement activities, and to develop methods to pool, focus, and target enforcement resources.” JESF is led by the Employment Development Department (EDD) and housed within its Underground Economy Operations, and is comprised of the Department of Consumer Affairs (DCA), agencies within DCA such as the Bureau of Automotive Repair (BAR) and the Contractors State License Board (CSLB), the Franchise Tax Board (FTB), the Board of Equalization (now the California Department of Tax and Fee Administration or CDTFA), the Department of Insurance (CDI), the Department of Justice (DOJ), the Department of Industrial Relations (DIR), the Department of Alcoholic Beverage Control (ABC), the United States Department of Labor, and the Internal Revenue Service (IRS). JESF was codified by the Legislature (SB 1490, Johnston, 1994), and publishes an annual report documenting its efforts.

In 2005, Governor Arnold Schwarzenegger’s established the Economic and Employment Enforcement Coalition (EEEC), housed in DIR, and comprised of investigators and auditors from DIR’s Division of Labor Standards Enforcement and Occupational Safety and Health, and includes EDD, DCA, BAR, CSLB, BOE, CDI, DOJ, and ABC. Governor Brown renamed the EEEC the DIR Labor Enforcement Task Force (LETF), effective January 1, 2012. LETF’s mission is “to combat the underground economy in order to ensure safe working

conditions and proper payment of wages for workers; to create an environment in which legitimate businesses can thrive; and to support the collection of all California taxes, fees, and penalties due from employers.” Additionally, EDD receives audit leads from the IRS through the Questionable Employment Tax Practices (QETP) Program.

RRaCE and TRaCE. In 2013, the Legislature enacted the Revenue Recovery and Collaborative Enforcement Team Act, which created the Revenue Recovery and Collaborative Enforcement (RRaCE) team to complement the state’s underground economy enforcement efforts (AB 576, V.M Perez). The team includes FTB, BOE, and DOJ, and also allowed the Health and Human Services Agency, DCA, DIR, EDD, and the Department of Motor Vehicles to participate. While the state already has the LETF within DIR, and the JESF led by EDD, the Legislature established RRaCE with its own specific goal, which is to “serve the best interests of the state by combating criminal tax evasion associated with the underground economy.” AB 576 established RRaCE as a pilot program which is set to expire on January 1, 2019.

When Governor Brown signed AB 576, he included a signing message noting the lack of a lead agency, and directed DIR to take the lead. However, BOE and DOJ created TRaCE (Tax Recovery and Criminal Enforcement) task force, and list BOE, FTB, DOJ, DMV, EDD, as well as the Internal Revenue Service, Federal Bureau of Investigation, and Homeland Security Investigations, as partners on its website. The LHC report notes:

“[AB 576] was supposed to fill a long-recognized need for a task force to focus on criminal tax evasion. Although the focus of the task force is primarily tax evasion, Governor Brown designated the Department of Industrial Relations as the RRaCE lead when he signed AB 576 into law, despite the fact that DIR is a labor-focused agency with no tax jurisdiction. Problematically, DIR does not have access to confidential tax information. Tax agencies have strict controls on how they use the sensitive information they receive from businesses and individuals, and face severe penalties for sharing it inappropriately. State tax agencies could lose their access to IRS data – key to unearthing underground economy-related financial crimes – if they share information with unauthorized parties. As a result, a legislatively-designated advisory member without access to tax information is leading a team of tax agencies to generate leads on tax-related crimes. The task force has existed for more than a year and has not yet generated any leads for state investigators.”

As a result, California has two separate task forces with nearly identical names pursing the same goals, but housed under the leadership of two distinct agencies. Both task forces have an executive board comprised of similar agencies to guide its operations. DIR leads RRaCE, while DOJ houses and operates the current TRaCE task force. The TRaCE board meets regularly, while RRaCE’s does not, and the Legislature is yet to receive the report required by AB 576 which was due December 1, 2017.

The LHC report adds:

“The simultaneous emergence of both RRaCE and TRaCE has been challenging and confusing for some of the agencies involved in both efforts. Departments are legislatively mandated to devote resources to RRaCE, which already has spent one of its six allotted years of the pilot project holding committee meetings and developing an operational framework. Significant information sharing challenges remain. Instead of augmenting the state’s underground economy enforcement efforts, the RRACE/TRaCE bifurcation could potentially spread limited resources even thinner”

TRaCE reports that its efforts have been successful, stating that is has identified $210 million in unreported gross receipts, with $46 million in tax losses to the state, and recovered millions of dollars in lost tax revenue to the state. TRaCE also notes that housing the task force within DOJ provides more effective investigation and prosecution of offenses. The author wants to codify TRaCE in statute established in DOJ.

Proposed Law

Senate Bill 1272 enacts the Tax Recovery and Criminal Enforcement Tax Force Act, which establishes the TRaCE task force in the Department of Justice to combat underground economic activities through a multi-agency collaboration to:

• Pool resources and leverage enforcement efforts,
• Collaborate and share data with state and federal partners, and
• Efficiently prosecute violations coverings jurisdiction of multiple agencies to address the severity of the crimes, and impose appropriate penalties on contract violators.

SB 1272 creates an executive board to ensure efficient and effective multi-agency collaboration, consisting of representatives from:

• Division of Law Enforcement at DOJ,
• Criminal Law Division at DOJ,
• Investigations and Special Operations Bureau at CDTFA,
• Criminal Investigations Bureau at FTB,
• Investigation Division at EDD

The board may invite other state and federal agencies to join in an advisory or membership role as it deems appropriate. The bill directs the executive board to meet as needed, but at least quarterly.

The bill requires five teams: one each in Fresno, Los Angeles, Sacramento, San Diego, and the San Francisco Bay Area. Each team must have a committee established by the task force to ensure efficient and effective multi-agency collaboration in each region. The bill likewise directs the committees to meet as needed, but at least quarterly. DOJ is responsible for the management and supervision of the task force, and retains supervisory control of its personnel.

The bill requires duly authorized team members and representatives of other participating agencies to exchange information for the purpose of investigating criminal tax evasion associated with underground economic activities. Team members, ex-members, any agent employed by the team, or any person who has received knowledge from any agency, are barred from divulging or making known any confidential information received by the team. Any such information retains its confidential status and is subject to each agency’s confidentiality laws.

SB 1272 requires the task force to submit to the Legislature a report that includes:

• Number of leads or complaints received during the reporting period,
• Number of cases investigated or prosecuted through civil action or criminal prosecution as a result of its work,
• Policy considerations to help advance the task force’s purpose.

The measure also makes legislative findings and declarations supporting its purposes. SB 1272’s provisions sunset on January 1, 2028.

State Revenue Impact

According to FTB, “FTB’s participation in the Revenue Recovery and Collaborative Enforcement Team joint task force pilot program has resulted in ordered restitution of $2.9 million. Because it is difficult to predict the frequency and the value of future task force criminal investigation actions, the revenue impact is unknown.”

Comments

1. Purpose of the bill. According to the author, “the TRaCE Task Force is a multi-agency effort that focuses on investigating and prosecuting individuals involved in the underground economy. The state’s underground economy can be as large as $140 billion annually. And, as a result, the state loses an estimated $8.5 billion in corporate, personal, and sales and use taxes each year. Needless to say, these are significant uncollected revenues that are desperately needed to fund basic government services – an amount relatively equivalent to the state’s rainy day fund lost each year. SB 1272 is vital given the persistent and significant negative effects of the underground economy including labor law violations, consumer risks, unfair competition and lost tax revenues to the state.”

2. Structure. State agencies operate under legal mandates using funding allocated in Budget Act. As such, DOJ could continue to house and operate the TRaCE task force to combat criminal tax evasion in the underground economy without SB 1272. In fact, the Legislature created RRaCE in statute, but BOE and DOJ created TRaCE without a bill because the agencies believed that DIR lacked the necessary law enforcement authority to effectively implement AB 576’s goals. SB 1272 gives TRaCE statutory direction, clearly places it within DOJ, creates an executive board with a specific composition, and requires separate teams and committees to operate within five distinct regions; however, the only essential element is the measure’s direction for state agencies to share specified information with each other, notwithstanding current confidentiality laws. TRaCE argues that an executive board comprised of members nominated by each agency that currently works on the team improves its effectiveness, as each agency is more willing to commit resources to the effort when they can provide input and guidance at the executive board level. The Committee may wish to consider which specific elements of SB 1272 are necessary, and whether a better option would be to directly allocate funding to DOJ to combat criminal tax evasion in the underground economy, set specific and measurable goals, direct appropriate agencies to collaborate to the extent needed, and require DOJ to report specific information for the Legislature to assess its performance.

3. Alphabet soup. When measured by number of agencies, the state’s underground economy enforcement efforts should not be lacking: state and local law enforcement, multiple other state agencies, LETF, JESF, RRaCE, and TRaCE combat counterfeiting, wage theft, worker misclassification, and tax evasion. SB 1272 would establish TRaCE as the state’s primary criminal underground economy enforcement effort. With SB 1272 codifying TRaCE, and RRaCE set to expire at the end of the year, the Committee may wish to consider whether the state needs a specific task force to combat the underground economy, and if so, whether TRaCE is the best option.

4. Budget. SB 1272 contemplates an enhanced role for TRaCE, by adding one team for Fresno, San Diego, and the San Francisco Bay Area to the current teams in Sacramento and Los Angeles, plus a committee to ensure efficient and effective collaboration of each team. The author is requesting funding to implement these efforts in this year’s Budget Act.

5. Information sharing. As mentioned above, the essential element for the effectiveness of any multiagency criminal tax evasion effort is the ability for state agencies to share information with each other. Businesses who commit one type of crime, such as wage theft, are more likely to violate others, such as failing to meet tax obligations. SB 1272 reenacts for TRaCE the same information exchange provisions currently in place for RRaCE, with two key differences. First, the requirement to exchange information is mandatory under SB 1272, but permissive for RRaCE; TRaCE asserts that mandatory information sharing would improve the speed and effectiveness of sharing, but a requirement could be construed to obligate the Legislature to provide sufficient funding. Second, unlike AB 576, SB 1272 doesn’t identify the specific statutes that bind its member agencies; doing so could provide additional legal clarity.

6. Who’s in charge? SB 1272 states that DOJ is responsible for the management and supervision of the task force, and retains supervisory control of its personnel. Generally, employees of one state agency cannot be supervised by officials housed in other agencies. The measure could benefit from additional clarity regarding the roles and responsibilities for each participating state agency.

7. Double referred. The Senate Rules Committee ordered a double referral for SB 1272, first to the Committee on Governance and Finance, and then to the Committee on Public Safety.

Support and Opposition

(4/2/18)

Support: Attorney General Xavier Becerra, California Landscape Contractors Association, California State Association of Electrical Workers, California State Council of Laborers, California State Pipe Trades Council, International Union of Elevator Constructors, Little Hoover Commission, Sacramento-Sierra Building and Construction Trades Council, Service Employees International Union (SEIU California), Western States Council of Sheet Metal Workers.

Opposition: Unknown.

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