Disclosure of Offshore Financial Interests – State Tax Obligations

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Disclosure of Offshore Financial Interests – State Tax Obligations

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A deep and diverse practice focused on maximizing tax efficiencies and minimizing tax risks for clients nationally and internationally.
Clients turn to our seasoned team of attorneys—strategically located across the United States—to resolve nearly any state or local tax challenge. State and local taxes account for a high percentage of most businesses’ tax burden. There are literally thousands of these taxes that companies may or may not be subject to, depending on the nature of a given transaction and the requirements of various taxing authorities. The application of historical tests to determine whether a business is subject to state or local tax jurisdictions and the extent of its tax liability has become more difficult with the explosive growth of e-commerce, and the rules are sometimes counterintuitive and seemingly contradictory. We have structured our state and local tax practice to help clients across the United States successfully cope with the specific requirements of individual jurisdictions.
Taxpayers intending to comply with the federal program for voluntary disclosure of offshore financial accounts should make certain that they also comply with any state tax requirements as a result of the federal compliance. In a memorandum dated March 23, 2009, the Internal Revenue Service announced "a penalty framework to be applied to voluntary disclosure requests containing offshore interests." Among other things, those taking advantage of the program must pay back taxes and interest for 6 years as well as certain accuracy and delinquency penalties and an additional penalty of 20% of the amount in foreign bank accounts in the year with the highest aggregate account or asset value. Persons complying with the IRS program will avoid any potential federal criminal prosecution. The deadline for compliance with the federal program is October 15, 2009.

Many states require a taxpayer to report any change in the taxpayer's federal taxable income. Some states such as Massachusetts and California have issued releases reminding taxpayers that the "federal change" rules will apply to the changes resulting from compliance with the federal disclosure program. Although not explicitly stated in these releases, compliance with the federal change rules on a voluntary basis will presumably reduce the risk of state criminal prosecution. At least one other state – Connecticut – has announced its own program for taxpayers to voluntarily disclose offshore assets.

It is important for taxpayers to determine and comply with the requirements of states where they were subject to tax jurisdiction for the years covered by the federal program in order to reduce the risk of criminal prosecution and minimize civil penalties at the state level.

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