The Tax-osaurus Rex, or the fearsome offshore voluntary disclosure programs, has made thousands of taxpayers panic since it smashed through the scene a few years ago. While some chose to run and probably ended up torn to parts by vicious raptors (collectors), others are trying to survive by disclosing their foreign accounts and making up for previous tax returns and FBAR transgressions. Unfortunately, federal raptors aren’t the only terrors that’ll drive you behind a kitchen counter; ‘friendly’ state raptors are sniffing taxpayers out.

“You Just Went and Made a New Dinosaur?”

Well, the few states with state income tax were tempted to get a piece of the IRS’s action. After all, taxpayers who didn’t report their interest income from an undisclosed Swiss account probably didn’t report it for state tax purposes either. Therefore, if you’re amending up to eight income tax returns to disclose and report income to the IRS, prepare to amend your state tax returns as well.

Now most states have their own offshore voluntary disclosure programs. While some are knock-offs of the IRS’s program, some are quite unique despite being the me-too type. Regardless, getting these out of the way, even if your state doesn’t mandate it, is definitely the right way to go. This is especially true since the state can seek criminal penalties even if the IRS has already decided against gobbling you whole.

The purpose of this blog is to discuss the reporting obligations that a taxpayer has to the state taxing authority in his home state when he is participating in the IRS’s Offshore Voluntary Disclosure Program.

Setting the Scene

Picture this: You are sitting behind your desk when your phone rings. No, it’s not your spouse calling to find out why you are late for dinner. Although if this was the first thing that came to mind, their might be some deeper meaning in it. Instead, it is a new client. His name is John. John is a U.S. citizen who lives in New Jersey. John contacts you for advice regarding foreign, unreported bank accounts in Switzerland. You recommend to John that he apply to the Offshore Voluntary Disclosure Program.

As part of this process, you file amended federal income tax returns on John’s behalf in addition to delinquent FBARs. John then pays the miscellaneous offshore penalty on the highest aggregate maximum balance in his foreign bank accounts during the eight-year look-back period. Finally, John pays additional taxes for each of the preceding eight years.

At the end of the disclosure process, you sign IRS Form 906, otherwise known as a closing agreement, to settle the liability for the years covered by the disclosure once and for all. Right about now, you are ready to kick up your feet, open the door to the liquor cabinet, and reach for the bottle of bourbon. After all, John’s Federal tax issues are resolved. But are all of John’s tax issues resolved? Not quite.

The question now becomes, “What about state taxes?” Does John have an obligation to notify the New Jersey Division of Taxation about what happened at the Federal level? Indeed he does. In fact, failing to do so could have serious consequences. We’ll get to that in a second.

As tempting as it might be to bury your head in the sand and cry “uncle,” perhaps justifying your decision on the grounds that you do not have any other clients who reside in New Jersey, a word of caution is in order. New Jersey isn’t the only state that imposes such an obligation on its residents. There are many others, including New Jersey’s northern neighbor, New York. Thus, this blog also has a “New York State of Mind.”

Some Basics

Internal Revenue Code § 6103 authorizes the IRS to share information with state agencies for tax administration purposes. This authorization applies whenever the IRS enters into an agreement with a taxpayer. What type of information? Information pertaining to examinations, tax return information, and even employment tax information.

Many tax practitioners mistakenly believe that the IRS will automatically notify the New Jersey Treasury (or the New York Treasury) about Federal changes to their clients’ returns under IRC § 6103. While that thinking might sound completely logical, it nonetheless could prove costly for taxpayers.

Background Information on the NJ Offshore Compliance Initiative (NJOVCI)

Back in 2013, the New Jersey Department of Treasury, Division of Taxation, unveiled the Offshore Compliance Initiative, a voluntary compliance program designed to complement the IRS’s Offshore Voluntary Disclosure Initiative. Its purpose was to identify assets and income from unreported offshore accounts.

Penalties Under NJOVCI

Are the penalties as severe under NJOVCI as they are in OVDI? In other words, should a New Jersey taxpayer expect to pay the same offshore penalty under NJOVCI as he or she paid under the IRS’s Offshore Voluntary Disclosure Program? The answer is a resounding, “no.”

Only two penalties apply: a 5% late payment penalty and a 5% amnesty penalty. Of course, the taxpayer must also pay any NJ tax liability, including interest. Practically speaking, how does the NJOVCI penalty structure work? Assume that the taxpayer applied to OVDP in late 2014 and to NJOVCI on March 1, 2015. Assume further that the taxpayer has already submitted his Offshore Voluntary Disclosure package and paid the miscellaneous offshore penalty.

First, identify the taxpayer’s disclosure period under OVDP. It includes tax years 2006 through 2013. Now let’s calculate the taxpayer’s penalties under NJOCVI. With respect to the 5% late payment penalty, it applies for all eight tax years beginning with 2006 and ending with 2013.

How about the 5% amnesty penalty? That’s a little tricky. It applies for tax years 2006 and 2007 only.

Is State Offshore Voluntary Disclosure Much ‘Ado About Nothing?

Why should New Jersey residents who participate in OVDP give a hoot about New Jersey’s offshore compliance program? There are two reasons. First, a New Jersey taxpayer who participates in the Federal Disclosure Program is not at liberty to choose whether to participate in the NJ Offshore Voluntary Compliance Initiative. In other words, he doesn’t get a dispensation from preparing another voluntary disclosure even though he has already endured months of endless torture navigating the choppy seas of the “mother” of all voluntary disclosure programs, namely OVDP and is teetering on the brink of insanity if he has to look at another tax form. As explicitly stated on the New Jersey Department of Taxation website, a NJOVCI submission is required if the taxpayer is participating in OVDP.

And second, if New Jersey discovers that one of its residents has undisclosed offshore assets and income before a disclosure has been made, then it will be too late for the taxpayer to make a voluntary disclosure under NJOVCI. In that case, the taxpayer risks the full panoply of penalties, including a possible referral to the New Jersey attorney general’s office for criminal prosecution. Sound familiar? The New Jersey Department of Taxation has taken a page right out of the IRS playbook by putting “teeth” into its disclosure program.

What Information Must be Submitted Under NJOVCI?

Not only must the taxpayer submit a letter requesting acceptance into the program, but he or she must also submit a copy of the IRS acceptance letter into the IRS Voluntary Disclosure Program along with copies of IRS documents reflecting the federal tax examination changes.

The letter should contain the following items:

• Applicant’s complete name and address
• The tax type and the tax years affected
• A New Jersey original or amended return and a copy of the federal original or amended return, for each year
• An explanation of the circumstances to support the application
• Whether an application was submitted to the IRS Offshore Voluntary Disclosure Program
• A certification that the applicant will cooperate with the Division of Taxation to establish the correct tax liability incurred from this voluntary disclosure

The taxpayer may be disqualified from participating if:

• He has previously been contacted by the Division or any of its Agents;
• He is currently under criminal investigation;
• He refuses to pay outstanding tax liabilities and/or file the prior year returns within a reasonable period.

Which States have an Offshore Voluntary Disclosure Program of their own?

The following is a list of states with offshore voluntary disclosure programs of their own. However, this information may change in the future, so always rely on a professional legal opinion to ensure that you’re covered and safe from your local raptors before they decide that you’re their next meal.

• Arizona – The Arizona Department of Revenue offers its program for those who haven’t fulfilled their individual tax, corporate tax, use tax, transaction privilege tax or withholding tax obligations in the state but would like to come into compliance with current filing requirements. The qualifications are quite superficial, which is why you should consult with your tax lawyer to find out if you’d be well served going under the program. (More Information)
• Connecticut – The Connecticut Department of Revenue Services (DRS) offers businesses and individuals who are not in compliance with the state’s tax laws to come forward voluntarily or ensure that their accounts are in compliance. A taxpayer may be disqualified from this if they were contacted by the department, caught misrepresenting facts, or if they failed to comply with the terms of the agreement. While it does mirror the federal programs, you’ll need to find out whether the look back is six or eight years for standard. (More Information)
• Florida – The voluntary disclosure administered by the Florida Department of Revenue applies, but isn’t limited, to sales and use tax, county tax (a.k.a. discretionary sales surtax), corporate income tax, communications services tax, documentary stamp tax, gross receipts tax, fuel taxes, insurance premium tax, and reemployment compensation tax. The department will consider the three years preceding taxpayers’ requests. So if you’re a business entity with foreign holdings, file right away. (More Information)
• Georgia – The Georgia Department of Revenue’s Voluntary Disclosure Agreement (VDA) program is available for individuals and businesses alike. Participants will receive a waiver of all penalties as well as a time limit for disclosing and paying previous liabilities. The look back period is usually for a minimum of three years for all tax types. However, the department can extend the period to five years for taxpayers who filed their federal income returns but not their Georgia individual income tax. (More Information)
• Indiana – Indiana’s Department of Revenue has established a voluntary disclosure program, but it’s relatively simpler than the rest on this list. The program is only available for taxpayers who don’t have brick-and-mortar nexus with Indiana. The rest may submit requests, but the department will offer an alternative proposal. Anonymity is a must while applying formally; therefore you’ll need to work with a third-party representative. (More Information)
• Iowa – A non-specific program, Iowa’s voluntary disclosure program covers individual income tax, corporation income tax, motor fuel tax, franchise tax, use tax and local option sales tax, fiduciary income tax, withholding income tax, and cigarette and tobacco tax. (More Information)
• Kansas – Kansas’ Department of Revenue offers another non-specific voluntary disclosure program which alleviates penalties for late filing and payment while mandating the payment of interest. (More Information)
• Kentucky – The Kentucky Department of Revenue designed its program to tackle taxes administered by the department as well as domestic or foreign taxpayers who are subject to taxation in the state. It isn’t for taxpayers who underreport taxes due while filing returns. Now the program’s description is quite superficial, which is why you’ll need to consult with an expert before applying. (More Information)
• Louisiana – The Louisiana Department of Revenue also offers a non-specific program where taxpayers can anonymously and voluntarily pay their taxes at either no penalty or a reduced one. The program covers all the taxes the department covers, including individual income tax, excise tax, sales and use tax, and severance taxes. (More Information)
• Maryland – The Comptroller allows individuals as well as businesses to report and pay their previously due tax liabilities in the state. However, the non-specific program mirrors the federal program without really providing much detail. (More Information)
• Minnesota – The Department of Revenue in Minnesota offers its program to qualifying individuals with back taxes. In addition to reducing/waiving some penalties when possible, the program may allow you to limit how far back the department can audit through your records. (More Information)
• Mississippi – The Mississippi State Tax Commission’s program aims to promote compliance and benefit taxpayers with previous filing obligations and liabilities. Again, this is a non-specific program which you’ll need help for. (More Information)
• Montana – Specifically addressing foreign accounts, the Montana Department of Revenue’s voluntary disclosure program mandates reporting foreign assets on both state and federal returns. However, the program doesn’t specify a look back time, so you’ll need to touch base with specialists. (More Information)
• New Hampshire – Administered by the New Hampshire Department of Revenue Administration, the program helps resolve prior tax liabilities. It covers all tax types tackled by the Department as well as any type of domestic or foreign taxpayer. However, the state doesn’t have income tax on unearned income such as foreign investment earnings. (More Information)
• New Jersey – The Department of Treasure, Division of Taxation in New Jersey announced a voluntary compliance program that would follow the IRS initiative and identify assets and reported income from offshore accounts. The program is for both individuals and businesses that “realize they have a tax filing obligation or that their business activity creates nexus for New Jersey state tax purposes”. The look back period is four years in total, three prior years and the current year. Moreover, taxpayers may avoid paying civil penalties, but they will need to pay the 5% late payment penalty and 5% amnesty penalty. If you choose, however, to forgo this opportunity, certain discovery will force the imposition of all penalties and may lead to criminal prosecution. (More Information)
• New York – New York’s Tax Department’s Voluntary Disclosure and Compliance program invites taxpayers who owe back taxes and haven’t filed related returns to avoid penalties and possible criminal charges. The look back period in this case is a minimum of six years or the number of years the offshore account was held if it was less. On the other hand, if you’re in an IRS OVDI program, the look back period will be equal to the tax years you’re required to file with the IRS. (More Information)
• North Carolina – North Carolina Department of Revenue has established a tricky program that applies to taxpayers who failed to file returns and pay taxes to the department. Its main goal, though, is to resolve corporate income, franchise tax, and sales and use liabilities when nexus is an issue. (More Information)
• Ohio – The Ohio Department of Taxation rolled out its own voluntary disclosure program to encourage individual taxpayers to tackle and resolve income tax liabilities they believe they may have. As a result, they can avoid the consequences of a nexus investigation, audit or assessment. Since the program is for “those who believe they have a liability”, it’s not specific and can be misleading without professional guidance.(More Information)
• Pennsylvania – Pennsylvania’s voluntary disclosure program offers individuals and businesses that recently became aware of their tax obligations a chance to come forward. Again, penalties will be waived and only tax and interest should be paid. However, you’ll need to prove that you’re one of those who weren’t aware of their obligations till recently. (More Information)

As for the rest of the states with income taxes, they have their own programs which are only for business compliance or for non-filers.

“That’s How It Always Starts. Then Later There’s Running and Um, Screaming.”

After finding out that your T-rex horrors aren’t limited to the IRS, your mind must be screaming “RUUNNN!” However, in the words of Dr. Alan Grant from Jurassic Park, “T-Rex doesn’t want to be fed. He wants to hunt.” Therefore, don’t give the IRS and the state the chance to pile evidence against you and penalize you heavily. We’re here to help you find a balanced approach that allows you to comply with both the IRS and the state without affecting your nest egg. That way, you can truly sit back and enjoy the ride.