California taxpayers have two voluntary disclosure programs to consider as we approach August, 2011. The first is the federal Second Supplemental Offshore Voluntary Disclosure (OVDI) which ends August 31, 2011 (subject to extension discussed below). The second is California's recently enacted Voluntary Compliance Initiative Two (California Amnesty) which runs from August 1, 2011 - October 31, 2011. The two programs have a common theme in that they both provide amnesty from a wide variety of civil and criminal penalties for qualifying taxpayers. A qualifying taxpayer is generally understood in both contexts as a person (which includes individuals and legal entities) who is not at the time of filing the voluntary disclosure under examination or investigation by taxing authorities. If other non-tax issues are involved, like non-tax criminal activity, then person is not qualified. However, the programs also differ in material ways beyond timing. The OVDI program offers relief from criminal prosecution and a myriad of potential civil penalties only to taxpayers who have unreported foreign financial accounts. This means that the taxpayer failed to timely filed a Foreign Bank Account Report (FBAR) for each year in which aggregate foreign financial account balances were $10,000 or more. The California Amnesty applies to taxpayers who either (a) were participants in what are called abusive tax avoidance transactions (ATAT) OR (b) had unreported income from offshore finanical arrangements. The similarity in the two programs is the requirement to disclose previously undisclosed offshore accounts and report unreported income. But, whereas the OVDI starts with the fact that an FBAR was due the California Amnesty programs starts with unreported income. This is an important distinction for the OVDI incorporates two statutory schemes, the Bank Secrecy Act under which establishes the obligation to file FBAR's and the Internal Revenue Code which requires the reporting of income from foreign held accounts. The OVDI incorporates relief from both statutory systems into a single approach administered by the IRS under which requires taxpayers to pay an FBAR penalty in the form of a "miscellaneous civil penalty" of 25% of the single year highest account balance (FOR NOT FILING THE FBARS) and payment of tax on unreported income, plus a 20% accuracy related penalty and interest. The California Amnesty requires filing of amended returns to report previously unreported income and payment of the tax, plus interest on the tax. There is no similar provision in California law to the FBAR filing requirement.
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