California Offshore Voluntary Disclosure – New Voluntary Compliance Initiative for California

In March 2011, California passed legislation to allow a program similar to the federal 2011 Offshore Voluntary Disclosure Initiative (OVDI). Senate Bill 86 was passed by the California legislature, signed by Governor Brown, and entered into California law.  While SB 86 amends several sections of the Revenue and Taxation Code, one important change is the authorization of a new voluntary compliance initiative. The legislation authorizes the Franchise Tax Board to develop and administer a voluntary compliance initiative to be conducted between August 1, 2011, and October 31, 2011. SB 86 represents the first voluntary disclosure program in California since the first quarter of 2004.

This initiative is similar to the 2011 Offshore Voluntary Disclosure Initiative from the federal government that encourages disclosure of offshore financial arrangements. See the previous blog post regarding OVDI.  In addition to overseas money, California’s voluntary compliance initiative will include provisions for the disclosure of abusive tax shelters-an important distinction discussed below.

Procedures for Compliance and Disclosure

Under the compliance initiative, a taxpayer will be eligible to minimize penalties and avoid criminal prosecution for unreported or underreported income gained by abusive tax shelters or from foreign financial arrangements in previous tax years if he or she complies with the disclosure program. To comply with the program, a taxpayer must:

  1. file an amended tax return for each year that abusive tax shelter income or overseas money was not previously included, and
  2. fully pay all taxes and interest due according to the amended returns.

The amended returns must not contain deductions from any transaction costs associated with the previously-unreported income.  Also, the taxpayer will not be credited or refunded any money from any penalties the taxpayer paid in prior years.  Fortunately for many taxpayers, installment plans are authorized to be available so long as final payment is paid by June 15, 2012.

Certain taxpayers are not eligible for the voluntary compliance initiative, including those who, with regards to the abusive tax avoidance transaction or income from the offshore financial arrangement, is the subject of criminal investigation or have had a criminal complaint filed against them on or before July 31, 2011.

Federal OVDI and CA program – An Important Difference

It is imperative to understand the difference between the federal disclosure initiative and California’s voluntary compliance initiative. Taxpayers will be protected from criminal penalties associated with abusive tax schemes under California’s initiative but abusive tax schemes are not protected under the federal program. Should the Internal Revenue Service receive information disclosed to the Franchise Tax Board regarding a taxpayer’s participation in an abusive tax scheme, he or she may not be provided the same protection from the federal government. All circumstances should thus be examined carefully with Steve Moskowitz, LLP before participating in any disclosure or compliance program to determine if it is right for you.

You can read SB 86 in its entirety by selecting this link.

We work to defend your rights, your loved one’s rights, and your assets. For over thirty years we have defended individuals and businesses accused of tax and financial crimes and advised others how to legally benefit from doing business outside the United States with legal tax savings and avoiding the problems that can arise, even inadvertently when you enter the extremely complex and often time times tricky foreign area. Our law firm has the knowledge and the skills to aggressively defend your rights and provide you with sound, reliable, and practical advice. We have substantial tax experience with the voluntary disclosure program, international tax issues, and related matters in advice, execution, and legal defense.  Avoid having the government build a case against you.

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