California, like the federal government taxes residents on worldwide income. Some California taxpayers who maintain offshore financial and bank account and have not reported the interest and dividends on their offshore accounts. In 2011 the Franchise Tax Board (FTB) offered a limited amnesty from prosecution and waiver of penalties for taxpayers who participated in Voluntary Compliance Initiative Two (VCI 2). VCI 2 was open from August 1, 2011- October 31, 2011. There is no new program even though the IRS has had two programs covering offshore accounts, (OVDI 2011 and OVDP 2012). Given that there is in place an information sharing agreement between the IRS and the FTB taxpayers who participate in either OVDI 2011 or OVDP 2012 should be aware that they are exposed to risk of prosecution or civil penalties if they do not file amended returns at the same time as they file amended returns with the IRS under the OVDI 2011 or OVDP 2012 programs. Even then, there is no certainty. Further, California will have four (4) years) for the filing of the amended federal returns if the taxpayer does not file California amended returns. The absence of a VCI program is a bit problematic.
There is no sound policy reason why taxpayers who are coming forward for federal purposes should not be encouraged to come forward for California purposes. The inaction or lack of parallel process may actually result in revenue loss to the state. Instead of having taxpayers come forward, pay tax on unreported income and a stated penalty and providing copies of the documents filed with the IRS, including Form 906 Closing Agreement) as a method of verification, the FTB runs the administrative cost of having to individually audit returns, determine reasonable cause elements, and assess penalties, if applicable. This is inefficient and may actually encourage non-compliance.
The State of California should adopt a VCI 3 and make it run co-terminus with IRS Offshore Voluntary Disclosure Programs. The IRS and Department of Justice have done the leg work, by creating the demand for participation in the offshore compliance programs and there is no reason that California should not benefit from work being done on the federal level. The inefficiencies of inaction are most likely more expensive than any potential loss in penalty revenue by acting on an ad hoc basis.