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In SB 86, signed by Governor Brown on March 24, 2011, the California legislature adopted a second voluntary compliance initiative. This initiative will run from August 1 to October 31, 2011 and will afford individual and corporate taxpayers the opportunity to resolve pending or potential franchise or income tax disputes for all tax years before 2011, in most cases without any penalties. The prior voluntary compliance program in 2004 raised $1.3 Billion and the legislature is obviously hoping for an even better result this time.
In the near future, the Franchise Tax Board (“FTB”) will provide information about what taxpayers must do to participate. The program applies to “abusive tax avoidance transactions” and “offshore financial arrangements” such as foreign bank accounts and foreign entities that hold unreported income. Abusive tax avoidance transactions include tax shelters, gross misstatements, reportable transactions and listed transactions. In the prior compliance initiative the FTB accepted into the program taxpayers with issues that did not on the surface seem to meet the definition and it is likely that they will also interpret this new program in an expansive manner.
Taxpayers electing to participate will have to file amended returns for all pre-2011 affected tax years and pay the additional tax due plus the statutory interest. The FTB is permitted to enter into an installment payment agreement but it is very limited as the final payment must be paid no later than June 15, 2012. All penalties will be waived except the penalty for large corporate underpayments and the 50% of interest penalty that is imposed only on those deficiencies that could have been resolved in the prior amnesty program. The penalties that are waived include the onerous 40% “non-economic substance transaction” or “NEST” penalty, the 100% of interest penalty and the 20% or 40% accuracy penalty. In addition, no criminal action will be brought against the taxpayer with respect to issues for which the taxpayer voluntarily complies.
You can elect to participate even if you are already under audit or your case is at the protest or Settlement Bureau levels. No deduction will be permitted for transaction costs incurred by the taxpayer in the transactions giving rise to the tax deficiency and the taxpayer must waive any further appeal rights.
We will provide further information when the FTB makes it available. In the interim, please contact us if you believe that this program may be beneficial.
This report is a publication of Loeb & Loeb LLP and is intended to provide information on recent legal developments. This report does not create or continue an attorney client relationship nor should it be construed as legal advice or an opinion on specific situations. For further information, feel free to contact us or other members of the firm. We welcome your comments and suggestions regarding this publication.
Circular 230 Disclosure: To assure compliance with Treasury Department rules governing tax practice, we inform you that any advice (including in any attachment) (1) was not written and is not intended to be used, and cannot be used, for the purpose of avoiding any federal tax penalty that may be imposed on the taxpayer, and (2) may not be used in connection with promoting, marketing or recommending to another person any transaction or matter addressed herein.