California Tax Amnesty for Offshore Income:
California will be offering a new tax amnesty between August 1, 2011, and October 31, 2011. This amnesty is authorized by Senate Bill 86, which was signed into law by Governor Jerry Brown on March 24, 2011. "This bill authorizes a new voluntary compliance initiative (VCI) permitting taxpayers to file amended returns and pay the tax and interest associated with abusive tax avoidance transactions (ATATs) or unreported offshore income. Participants will avoid criminal prosecution and certain penalties," according to information released in the Franchise Tax Board's May 2011 Tax News
Penalty Relief Provided under the California Amnesty:
California will waive most penalties in exchange for full payment of tax and interest. The state "cannot waive the Large Corporate Understatement Penalty and the Amnesty Penalty," but other penalties will be waived, according to a June 2011 news release. Penalty relief under the amnesty requires full payment of taxes and interest by the October 31, 2011, deadline.
California Amnesty Coordinates with IRS Offshore Disclosures:
The California amnesty is designed to coordinate with the federal offshore voluntary disclosure initiative for taxpayers who need to report previously undisclosed income from foreign-based accounts. Additionally, the California amnesty also covers abusive offshore tax schemes.
Taxes Eligible for the California Amnesty:
Personal income tax and corporate income taxes from tax years 2010 and earlier relating to foreign-source income are eligible. SB 86 provides that the amnesty is designed "to apply to tax liabilities attributable to the use of abusive tax avoidance transactions and unreported income from the use of offshore financial arrangements, as specified, for taxable years beginning before January 1, 2011." Taxpayers currently under criminal investigation are not eligible to participate in the amnesty.
What's an Offshore Financial Arrangement?:
"An offshore financial arrangement is generally any transaction designed to avoid or evade California income or franchise tax through the use of offshore entities or payment cards, such as debit or credit cards issued by foreign financial institutions." (News release issued August 1, 2011)
What's an Abusive Tax Avoidance Transaction?:
"An abusive tax avoidance transaction includes either a ‘tax shelter’ defined under Internal Revenue Code Section 6662(d)(2)(c), an undisclosed reportable transaction, a listed transaction, a gross misstatement, or a non economic substance transaction as defined in Revenue and Taxation Code Section 19774." (News release issued August 1, 2011)
What if You Miss the Amnesty?:
The Franchise Tax Board will impose penalties for if a taxpayer does not participate in the amnesty. "After October 31, 2011, a variety of penalties will be added to any amended return or assessment made by us relating to offshore financial arrangements or abusive tax avoidance transactions." (June 2011 Tax News)
Forms and Additional Resources:
The Franchise Tax Board has posted an overview of the California Voluntary Compliance Initiative 2. Individual taxpayers will use FTB Form 622, and business entities will use FTB Form 621 to apply for amnesty. Additional forms related to the California tax amnesty can be downloaded from Forms - Voluntary Compliance Initiative 2.
