California taxpayers who underreported their state income tax liabilities through the use of offshore entities have until October 31, 2011 to avoid criminal and civil (monetary) penalties and interest by participating in the California Voluntary Compliance Initiative 2.  Due to the information sharing agreement between the IRS and the states, precipitation may be especially vital for taxpayers who took part in the Federal Offshore Voluntary Disclosure Initiative in 2011 or the previous federal amnesty in 2009. 

Program Overview

The California Voluntary Compliance Initiative 2 is an amnesty program for taxpayers who have used “abusive tax avoidance transactions” or offshore financial arrangements.  An “abusive tax avoidance transaction” is defined as either a tax shelter, a reportable transaction that is not adequately disclosed, a listed transaction as defined under the tax code, a gross misstatement, or a transaction in which the California noneconomic substance transaction (NEST) penalty applies.  Further, there are additional amnesty penalties that may be assessed to non-participants.   

To participate in the program, the taxpayer must complete a Participation Agreement (which requires an admission of the intent to evade California taxes), attach appropriate tax forms, as needed, and pay all taxes and interest to the California Franchise Tax Board by October 31, 2011. Payment plan options are available to those who qualify. 

Key Benefits of the Program

There are two major reasons taxpayers should seriously consider participating in the California Voluntary Compliance Initiative 2.  First, participants will greatly reduce their criminal exposure if they report their involvement in an offshore financial arrangement or an “abusive tax avoidance transaction.”  Secondly, participants may avoid many applicable penalties.  Those who choose not to participate in the California Voluntary Initiative 2 are subject to severe penalties ranging from 20% to 100% of the subject amount, depending on the nature of the underpayment, for a period of twelve years, yes, twelve years.  

Detriments to the Program

As tax attorneys, we are particularly concerned that taxpayers are required to make statements that could be deemed admissions of criminal intent in order to participate in the program.  We are also concerned that taxpayers may waive any rights to appeal determinations and/or contest specific penalties or tax implications should they arise from the filing of amended tax returns or otherwise by participating in the program.

Implications of the Federal and State Information Sharing Agreement

California and the Federal Government have an information sharing agreement whereby the parties report to each other all information they may have about the participants in their programs.  This means that Californians who participated in the Federal Offshore Voluntary Disclosure Initiative in 2011 or the 2009 program will be reported by the IRS to the California Franchise Tax Board.  Conversely, the California Franchise Tax Board will report all participants in the California Voluntary Disclosure Initiative 2 to the IRS.  Not only will they pass along identifying information but participants can expect that any “admissions” on forms that the taxpayer completed will be handed over as well.  Thus, in most cases, a taxpayer who participated in one government’s program is unwise not to participate in the other program.
If you are considering participating in the California Voluntary Disclosure 2 initiative, you should consult an experienced tax attorney first.  Remember, you only have an attorney-client privilege when you talk to an attorney.  Other tax professionals do not afford you this important benefit. 

Not all amnesty programs are right for every taxpayer and the facts of your particular situation should be analyzed by a tax attorney before you lift the veil on your situation for the government.  The skilled tax attorneys at the Law Offices of Stephen Moskowitz, LLP have helped countless clients decide whether to participate in this and other amnesty programs.  Call me at 1-888-829-3325 for your free attorney-client privileged consultation to see if the California Voluntary Disclosure Initiative 2 is right for you.  And don’t forget that the program expires October 31, 2011.