We have blogged extensively about the IRS's plans to offer amnesty to the holders of off-shore bank accounts who have not previously disclosed the accounts to the IRS. The IRS has made several recent attempts to bring offshore bank account holders within the fold, with incentives for disclosing offshore bank accounts to avoid higher tax penalties. The IRS has counted nearly 18,000 more offshore bank accounts as a result of its efforts. Because of this success, the IRS is contemplating another voluntary disclosure program, although with less advantageous terms than the first voluntary disclosure programs.
But what about the state tax authorities? As more offshore bank accounts have appeared on the IRS's radar, it has shared this information with state tax authorities. Many states have gotten in line behind the IRS, as well. States such as New York, New Jersey and Connecticut replicated the IRS's voluntary disclosure program in 2009.
The California Franchise Tax Board (FTB) also posted a notice that it would be receiving information on California residents that disclosed offshore bank accounts to the IRS. While the FTB noted that it does not have a penalty "similar to the federal 20 percent asset value penalty," it warned that California residents are taxed on "worldwide income" and that usually, income is taxed by the state, even if it is not considered taxable for federal purposes.
While some states require recalcitrant tax payers who are disclosing foreign income through the IRS's voluntary disclosure program to also file for admission for the state's voluntary disclosure program, other states merely require the taxpayer to file amended state tax returns and send a check for the amount of state tax owed. A tax professional can advise on state tax requirements for disclosure of offshore bank accounts in California and elsewhere.
Source: Forbes.com "IRS Foreign Account Disclosure: What About The States?" Robert Wood, 3/4/2011