New Jersey Announces Second Offshore Voluntary Compliance Initiative

Earlier this year, the New Jersey Division of Taxation (“Division”) announced a second Offshore Voluntary Compliance Initiative.¹ Individuals and entities that participate in the program will pay tax, interest, a 5% late payment penalty, and a 5% “amnesty penalty,”² but they will avoid all other civil penalties, including the 50% fraud penalty with respect to undisclosed offshore accounts. This initiative is intended as a complement to the Internal Revenue Service’s (IRS) second special offshore account initiative, announced February 8, 2011.³ It is intended to benefit taxpayers who had undisclosed offshore financial accounts who wish to declare them and to come into compliance with their reporting obligations.

Taxpayers must apply to participate in the initiative. The application must be made by submitting a letter to the Division by September 30, 2011. The letter must contain:

• The applicant’s complete name and address, 
• The applicant’s tax identification number and federal number, if different,  The tax type and tax years affected, 
• A New Jersey original or amended return and a copy of the federal original or amended return, for each year 
• For each year, remittance of the additional tax due, interest, 5% late payment penalty, and 5% amnesty penalty, if applicable (tax years 2003 to 2007), 
• An explanation of the circumstances to support the application, 
• Whether an application was submitted to the Internal Revenue Service offshore voluntary disclosure program, and 
• A certification that the applicant will cooperate with the Division to establish the correct tax liability incurred from the voluntary disclosure.

The Division’s announcement states that it will promptly review all applications and notify the applicant (or representative) of acceptance into the initiative.

To finalize the voluntary compliance agreement, the applicant is required to submit the following:

• a copy of the IRS acceptance letter into the second IRS offshore voluntary disclosure program, and 
• copies of the IRS documents reflecting the federal tax examination changes.

It is unclear how or if the New Jersey program applies to anyone who made an IRS disclosure in the first (2009) voluntary disclosure initiative or for anyone treated as having made such a disclosure but who may have only received an IRS audit report without filing amended returns.

After review of the federal information, the amount of the New Jersey tax liability, including tax, interest, and the two 5% penalties, will be finalized, and the taxpayer will be advised of the amount of the actual New Jersey liability, and any additional amount payable or any overpayment of tax. A call to a representative of the Division confirmed that if the estimated tax is overpaid, the balance will be refunded.

The second IRS offshore voluntary disclosure initiative requires reporting income from offshore accounts for the years 2003 through 2010. New Jersey will be expecting returns for these same years. New Jersey requires that amended New Jersey income tax returns be filed to report federal changes or to conform to a federal amended return. If this is not done, there is no statute of limitations for the Division to assess additional New Jersey tax based on the federal changes or amended returns.

New Jersey taxpayers who disclosed foreign bank accounts to the IRS are very likely to be uncovered by the Division. The Offshore Voluntary Compliance Initiative offers New Jersey taxpayers a means to make disclosure to New Jersey with the reduced penalties of 10% of the additional tax owed. These terms are far more generous than those that had been offered by the IRS, which requires a 20% penalty on unpaid tax plus a 25 percent penalty on the highest offshore account values from 2003 through 2010 for not filing Foreign Bank Account Reports (FBAR).