California Voluntary Compliance Initiative 2

The Franchise Tax Board of California has announced the Voluntary Compliance Initiative 2 (VCI 2) as an opportunity for taxpayers with underreported California tax liabilities relating to either (i) abusive tax avoidance transactions (ATATs) or (ii) offshore financial arrangements (OFAs), to amend their tax returns for 2010 and prior years and obtain a waiver of most penalties. If you are concerned that you may have underreported your California tax liabilities, please continue reading for more information regarding the VCI 2.

As mentioned above, VCI 2 only relates to taxpayers with underreported California tax liabilities relating to either ATATs or OFAs.

An ATAT includes: (i) any tax shelter as defined under Internal Revenue Code (IRC) Section 6662(d)(2)(C); (ii) any reportable transaction as defined under IRC Section 6707A(c)(1) that is not adequately disclosed in accordance with IRC Section 6664(d)(2)(A); (iii) any listed transaction as defined under IRC Section 6707A(c)(2), (iv) any transaction resulting in a gross misstatement within the meaning of IRC Section 6404(g)(2)(D), or (v) any transaction to which the noneconomic substance transaction (NEST) penalty applies under Revenue and Taxation Code (RTC) section 19774.

An OFA includes: “any transaction designed to avoid or evade California income or franchise tax through the use of: (a) offshore payment cards, including credit, debit, or charge cards issued by banks in foreign jurisdictions, or (b) foreign banks, financial institutions, corporations, partnerships, trusts, or other entities.”

If you believe you may have underreported California tax liabilities relating to either an ATAT or an OFA, you should consider participation in VCI 2. To participate in VCI 2, you will be required to (i) complete a Participation Agreement with the Franchise Tax Board on or before October 31, 2011; (ii) attach the Participation Agreement to your amended tax return to report all income from all sources, without regard to the ATAT and including all income from the OFA; and (iii) pay all tax and interest by October 31, 2011.

The Franchise Tax Board provides that participants in VCI 2 can avoid the following penalties through participation as described above: (i) Noneconomic Substance Transaction Understatement Penalty; (ii) Accuracy Related Penalty; (iii) Interest Based Penalty; and (iv) Fraud Penalty.

Additional information regarding VCI 2 can be found on the Franchise Tax Board website at: http://www.ftb.ca.gov/voluntary_compliance_initiative_2/

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Roger Royse
rroyse@rroyselaw.com

Roger Royse, the founder of the Royse Law Firm, works with companies ranging from newly formed tech startups to publicly traded multinationals in a variety of industries. Roger regularly advises on complex tax structuring, high stakes business negotiations and large international financial transactions. Practicing business and tax law since 1984, Roger’s background includes work with prominent San Francisco Bay area law firms, as well as Milbank, Tweed, Hadley and McCloy in New York City.
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