Weekly Round-Up: California's Voluntary Compliance Initiative II

Facing a multi-million dollar budget deficit for its 2010-2011 fiscal year, California created the state’s Voluntary Compliance Initiative II program, which legislators estimated would bring the state $270 million in revenue, a new article by Valerie Dickerson & Matthew Johnson, of Deloitte Tax LLP, explains.

The voluntary compliance initiative began Aug. 1 and will run until Oct. 31, 2011.

The program marks “the most recent stage of California's continued effort to encourage taxpayers to come forward and report certain transactions or positions that shelter income,” Dickerson and Johnson say, and could allow the FTB to resolve a “significant portion of its current tax shelter inventory, numbering over 300 cases as of February 2011.”

“Under the terms of the program, qualified participating taxpayers that file the required amended returns, and pay all tax and interest owing, will receive relief from most California tax penalties for pre-2011 abusive tax avoidance transactions (ATATs) and underreported income from offshore financial arrangements (OFAs),” the article states.

The initiative may be most attractive, Dickerson and Johnson explain, to taxpayers faced with a potential, significant noneconomic substance transaction penalty “that, once asserted by the FTB in a notice of proposed assessment, can only be abated partially or in full by the FTB Chief Counsel at his sole discretion, as well as other tax shelter penalties or accuracy-related penalties that might apply even in the absence of a tax shelter determination."

However, they caution that, taxpayers considering “participation in the program must determine whether greater benefit could be obtained by pursuing settlement or litigation, since coming forward means conceding and paying all of the tax and interest due, as well as the amnesty penalty or large corporate understatement penalty (if applicable).”

Further, they explain, participating taxpayers should be prepared “to disclose significant details about their business activities and sources of advice related to the ATAT or OFA.”

For the full article by Dickerson and Johnson on the requirements for participating in the program and some of the initiative's pros and cons, check out this week’s issue of the Weekly State Tax Report.

In other developments, Amazon makes California an offer in return for dropping new sales tax law, the Los Angeles Times reports.

Sutherland takes a closer look at the recent challenge to the Texas margins tax.

Mary Benton, Art Rosen and Cass Vickers, all with Alston + Bird, provide an in-depth analysis of the state taxation of digitally-delivered goods and services.

Sales tax on bundled cell phones is the hot topic on the Massachusetts Department of Revenue blog.

Sutherland issues its September 2011 edition of Salt Shaker – Golden State Edition.

By Priya D. Nair

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