Voluntary Compliance Initiative Begins in California – Deadline October 31, 2011
Time Sensitive — Action May Be Required
California’s taxing regime has become amplified with many new penalties over the last several years that can quickly and significantly balloon the balance due on a potential income tax liability. California recently began accepting filings as of August 2011 in its Voluntary Compliance Initiative 2 (VCI 2).
VCI 2 covers Abusive Tax Avoidance Transactions (ATATs) and underreporting of income from Offshore Financial Arrangements (OFAs). Taxpayers who have underreported their California income tax liabilities through the use of ATATs or OFAs may use VCI 2 to amend their returns filed for tax years beginning prior to January 1, 2011 and obtain waivers of most penalties. Under the program, taxpayers must file those amended returns between August 1, 2011 and October 31, 2011, include all underreported income in those returns, and pay all associated tax and interest to the state by October 31, 2011.
How do Taxpayers Participate?
To participate, taxpayers must do all of the following:
- File an amended return reversing the ATAT or including income from the OFA
- Complete and sign FTB 621, Voluntary Compliance Participation Agreement Form (Business Entities) or FTB 622, Voluntary Compliance Participation Agreement Form (Individual Taxpayers)
- Write “VCI 2” in red at the top of the amended return
- Pay in full all taxes and interest by October 31, 2011
Participation allows a taxpayer to be eligible to avoid accuracy-related, noneconomic substance transaction, interest-based, and fraud penalties and criminal prosecution. However, the Large Corporate Understatement and 2005 Act amnesty penalties as well as penalties paid prior to August 1, 2011 cannot be waived under the program. Even taxpayers who are currently under audit or in protest or appeals may participate. However, those who are currently under criminal tax investigation in California as of July 31, 2011 are not eligible. It is important to note that the statute of limitations for any unreported ATAT/OFA is now 12 years from the date the return was filed, an increase from the prior 8-year period to assess deficiencies for such unreported transactions.
Taxpayers who participate in the Internal Revenue Service’s Offshore Voluntary Disclosure Initiative (OVDI), predominantly involving unfiled foreign bank account reports (FBARs), are also eligible and are encouraged to consider the VCI 2 program and the timing of participation in each program.
What are ATATs and OFAs?
An ATAT is defined as any plan or arrangement devised for the principal purpose of avoiding taxes and includes all:
- Tax shelters
- Listed transactions (including California only listed transactions)
- Other reportable transactions not adequately disclosed
- Gross misstatements
- Noneconomic substance transactions
It should be noted that the Franchise Tax Board added two new listed transactions earlier this year:
- transactions between corporations and partnerships undertaken to improperly inflate the denominator of the California sales factor and;
- circular cash flow transactions. These represent the first new California specific listed transactions since the original VCI program in 2004.
An OFA is any transaction designed to avoid or evade California income or franchise tax through the use of offshore payment cards or foreign banks, financial institutions, corporations, partnerships, trusts or other entities.
WTAS professionals can assist both individuals and companies during the VCI 2 filing period with reviewing your specific facts, preparing and filing applications, quantifying exposure, preparing tax returns and working with Franchise Tax Board personnel.
If you feel you may be affected by this notice, please contact your WTAS advisor as soon as possible.