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Frequently Asked Questions - Voluntary Compliance Initiative 2 (VCI 2)

Updated October 13, 2011 – We added FAQ #4 under the following two sections: General information and Offshore Voluntary Disclosure Initiative (OVDI), and FAQ #12 under Participation.

General information

  1. What is Voluntary Compliance Initiative 2?
  2. What is an abusive tax avoidance transaction?
  3. What is an offshore financial arrangement?
  4. What are transaction and other costs that are disallowed deductions when reporting income from an OFA?

Eligibility

  1. Can I participate in VCI 2?
  2. Can I participate in VCI 2 if I am currently under FTB examination?
  3. I did not file an original return for the year in which I want to participate in VCI 2. Can I file an original return correctly reporting all of my income during VCI 2 and still receive VCI 2 treatment?
  4. I am under criminal investigation by the Internal Revenue Service or another state. Can I still apply for VCI 2?
  5. Can I participate in VCI 2 if I do not have the ability to pay now?
  6. I filed an amended tax return reversing an ATAT or reporting income from an OFA before August 1, 2011. Can I participate in VCI 2 if I resubmit my amended tax return with a Participation Agreement during the filing period?
  7. I filed an amended tax return before August 1, 2011, reversing an ATAT or reporting income from an OFA and self-assessing penalties, which are unpaid. Do I need to file a new amended tax return excluding the penalties with a Participation Agreement during the VCI 2 filing period?
  8. I participated in FTB's 2004 VCI (VCI 1) program. The Internal Revenue Service subsequently issued a notice for additional tax on the ATAT which is more than what I reported under VCI 1. Can I participate in VCI 2 to avoid penalties on the federal adjustments?

Participation

  1. How do I participate in VCI 2?
  2. When must I file my amended return and participation agreement to take advantage of VCI 2?
  3. Why should I participate in VCI 2?
  4. Does participation in VCI 2 exempt me from criminal prosecution?
  5. Can I claim transaction costs associated with the ATAT or OFA if I participate in VCI 2?
  6. If I have entered into a federal settlement or closing agreement, what amount do I need to report on my amended tax return and pay to complete VCI 2?
  7. I did not receive a VCI 2 notification letter from FTB. Can I still participate in VCI 2?
  8. I did not participate in an ATAT or OFA, and would like to participate in VCI 2. Can I just check the "Changes not related to ATAT/OFA" box on the Participation Agreement and submit my amended tax return and receive the benefits of VCI 2?
  9. I am filing a VCI 2 amended tax return which reports income from an OFA or reverses an ATAT and also includes changes not related to an ATAT or OFA. Should I just check the box for "Changes not related to ATAT/OFA" on the Participation Agreement?
  10. I am filing my VCI 2 amended tax return based on a federal settlement or closing agreement and have checked the box "Changes based on federal settlement/closing agreement" on the Participation Agreement. Do I also need to indicate whether my amended tax return reports a reversed ATAT and/or unreported income from an OFA by checking an additional box on the Participation Agreement?
  11. I paid my tax and interest due at the time that I filed my amended tax return eliminating an ATAT or reporting OFA income before VCI 2 that I am submitting with my VCI 2 Participation Agreement. As a result, I do not owe a balance and will not be submitting payment with my VCI 2 Participation Agreement. Do I still need to check a box for payment type on the Participation Agreement?
  12. Does my VCI 2 amended return/participation agreement need to be received by FTB on or before October 31, 2011 to receive VCI 2 treatment? Can it just be postmarked on or before October 31, 2011?

Penalties

  1. What penalties do I avoid if I participate in VCI 2?
  2. I protested the noneconomic substance transaction (NEST) understatement penalty and made a tax deposit before August 1, 2011. Can I request a return of my tax deposit?
  3. Will I be subject to the late filing penalty and interest for the tax years in which I filed a delinquent tax return?
  4. If I previously paid a penalty, can I file an amended tax return during VCI 2 and have the penalty waived so I can receive a refund?
  5. What if I paid a penalty prior to August 1, 2011, and filed a claim for refund, will I get a refund if I participate in VCI 2?
  6. I participated in FTB's 2004 VCI (VCI 1) and elected option 2, in which I retained my appeal rights but remain subject to the accuracy-related penalty. Can I apply for VCI 2 and attach an amended return to my VCI 2 participation agreement that reports the same transaction and income that I reported during VCI 1 to avoid imposition of the accuracy-related penalty in the future?

Interest

  1. Does interest suspension apply if I participate in VCI 2?

Payment

  1. How do I apply for a VCI 2 installment payment agreement?

Offshore Voluntary Disclosure Initiative (OVDI)

  1. I am participating in the IRS's Offshore Voluntary Disclosure Initiative (OVDI) and wish to participate in VCI 2 to report the same offshore income. Following the IRS review of my application, additional federal changes which increase or decrease my federal adjusted gross income may be made after the October 31, 2011, VCI 2 deadline. If I report my income during VCI 2, and the IRS makes adjustments after October 31, 2011, can I amend my VCI 2 amended return, pursuant to the federal determination, to avoid penalties and criminal prosecution or claim a refund?
  2. I participated in the IRS's Offshore Voluntary Disclosure Initiative (OVDI) and as part of my participation, I signed IRS Form 872, extending the time in which the IRS can audit and assess additional tax (Statute of Limitations) for the 2003 -2008 tax years to December 31, 2012. Does this extension of the statute of limitations also apply to FTB?
  3. I am a shareholder in a Passive Foreign Investment Corporation (PFIC) as defined under IRC Section 1297. I participated in the IRS's OVDI and utilized a mark to market approach to recognize gain or loss based on the difference between the fair market value of the stock and its basis at year end. Can I use the mark to market approach to recognize my gain or loss on my VCI 2 amended return?
  4. I am participating in OVDI, but I will not have my final determination from the IRS until after October 31, 2011. Can I request an extension so that I can file my VCI 2 return after I get my final figures from the IRS?

General information

  1. What is Voluntary Compliance Initiative 2?

    Voluntary Compliance Initiative 2 (VCI 2) is an opportunity for taxpayers who underreported their California income tax liabilities, through the use of abusive tax avoidance transactions or offshore financial arrangements, to amend their tax returns for 2010 and prior tax years and obtain a waiver of most penalties.

  2. What is an abusive tax avoidance transaction?

    Abusive tax avoidance transaction (ATAT) means a:

    • Tax shelter as defined under Internal Revenue Code (IRC) Section 6662(d)(2)(C),
    • Reportable transaction as defined under IRC Section 6707A(c)(1) that is not adequately disclosed in accordance with IRC Section 6664(d)(2)(A),
    • Listed transaction as defined under IRC Section 6707A(c)(2),
    • Gross misstatement within the meaning of IRC Section 6404(g)(2)(D), or
    • Transaction to which the noneconomic substance transaction (NEST) penalty applies under Revenue and Taxation Code (R&TC) section 19774.

  3. What is an offshore financial arrangement?

    An offshore financial arrangement (OFA) is any transaction designed to avoid or evade California income or franchise tax through the use of: (a) offshore payment cards, including credit, debit, or charge cards issued by banks in foreign jurisdictions, or (b) foreign banks, financial institutions, corporations, partnerships, trusts, or other entities.

  4. What are transaction and other costs that are disallowed deductions when reporting income from an OFA?

    Transaction and other costs include, but are not limited to, brokerage fees, commissions, bank fees or charges, discount rates and chargeback fees. Basically, the disallowed transaction or other costs would include any cost or expense arising as a direct result of the offshore account or financial arrangement. If you have questions regarding whether your specific cost is a "transaction or other cost" that is disallowed as a deduction under VCI 2, you can email vci2@ftb.ca.gov.

Eligibility

  1. Can I participate in VCI 2?

    You can participate in VCI 2 if you filed a tax return on which you underreported your income or tax liability through the use of an ATAT or OFA. You may participate in VCI 2 even if you are eligible to participate in the Internal Revenue Service's Offshore Voluntary Disclosure Initiative.

  2. Can I participate in VCI 2 if I am currently under FTB examination?

    Yes. If you or one of your related entities is already under FTB examination, you can still participate in the initiative. In addition, if you have a matter that is currently under administrative protest or appeal you may also participate. If you choose to participate in the initiative, immediately notify the FTB agent handling your matter.

  3. I did not file an original return for the year in which I want to participate in VCI 2. Can I file an original return correctly reporting all of my income during VCI 2 and still receive VCI 2 treatment?

    If you participated in an ATAT or OFA and wish to correctly report your income during VCI 2 even though you did not file an original return underreporting your income, you may email vci2@ftb.ca.gov to contact us to discuss options that may be available to you. You may be eligible to participate in a closing agreement. In order to determine the best way to resolve your particular matter, you may want to consult your tax professional.

  4. I am under criminal investigation by the Internal Revenue Service or another state. Can I still apply for VCI 2?

    Yes. You will not be precluded from participating in VCI 2 if you are the subject of a federal or other state criminal tax investigation, but are not under criminal tax investigation in California.

  5. Can I participate in VCI 2 if I do not have the ability to pay now?

    Yes. If you have a financial hardship and cannot pay in full by October 31, 2011, you may request an installment payment agreement to extend your final payment due date for VCI 2 tax and interest to June 15, 2012.

  6. I filed an amended tax return reversing an ATAT or reporting income from an OFA before August 1, 2011. Can I participate in VCI 2 if I resubmit my amended tax return with a Participation Agreement during the filing period?

    Yes. If you previously filed an amended tax return for the year and you would like to participate in VCI 2, you must attach a copy of the amended tax return to your Participation Agreement. Please note that you cannot resubmit an amended tax return for the same amount and transaction for which you participated in FTB's 2004 Voluntary Compliance Initiative.

  7. I filed an amended tax return before August 1, 2011, reversing an ATAT or reporting income from an OFA and self-assessing penalties, which are unpaid. Do I need to file a new amended tax return excluding the penalties with a Participation Agreement during the VCI 2 filing period?

    Yes. If you self-assessed penalties on your previously filed amended tax return for the year you are participating in VCI 2, you must file a new amended tax return, excluding the penalties, with your Participation Agreement.

  8. I participated in FTB's 2004 VCI (VCI 1) program. The Internal Revenue Service subsequently issued a notice for additional tax on the ATAT which is more than what I reported under VCI 1. Can I participate in VCI 2 to avoid penalties on the federal adjustments?

    Yes. You can report additional income attributable to the same ATAT for which you participated in VCI 1 and obtain a waiver of most penalties on the additional income.

Participation

  1. How do I participate in VCI 2?

    To participate in VCI 2, obtain a Participation Agreement form and instructions at ftb.ca.gov, or call 888.825.9868 to request a copy of the form. Complete the form and attach it to your amended tax return as outlined in the Participation Agreement form instructions.

    Your amended tax return must report all income from all sources, without regard to the ATAT and including all income from the OFA. You must amend your tax return and pay all taxes and interest by October 31, 2011.

  2. When must I file my amended tax return and Participation Agreement to take advantage of VCI 2?

    You must file your amended tax return and Participation Agreement during the filing period of August 1, 2011 to October 31, 2011.

  3. Why should I participate in VCI 2?

    Participating in VCI 2 will allow you to reverse ATATs or include the unreported income from OFAs without the added cost of penalties and possible litigation. In addition, you will be protected from criminal liability with respect to ATAT or OFA issues for the tax years for which you voluntarily comply, unless a criminal complaint has already been filed or you are already under criminal investigation.

    Taxpayers who choose not to take advantage of this opportunity will face the full range of penalties and interest, and may be subject to criminal prosecution. Potential penalties and interest arising from such activities can be substantial.

    For example, if you participate in VCI 2 and reverse an ATAT that results in a $100,000 tax liability for 2003, you will pay:

    • Tax of $100,000,
    • Interest of $50,378, and
    • A total of $150,378.

    However, if you do not participate, you can expect to pay at least:

    • Tax of $100,000,
    • An understatement penalty of up to $40,000,
    • Interest of $72,126,
    • An interest-based penalty of $72,126, and
    • A total of $284,252

  4. Does participation in VCI 2 exempt me from criminal prosecution?

    Yes, for the tax years in which you participate. We will not initiate criminal action for amounts reported during VCI 2 if you are eligible to participate. If a criminal complaint has already been filed or you are currently under criminal investigation, you are not eligible to participate in VCI 2.

  5. Can I claim transaction costs associated with the ATAT or OFA if I participate in VCI 2?

    No. If you elect to participate in VCI 2, you cannot deduct any transaction costs associated with the ATAT or other costs associated with unreported income from the use of an OFA.

  6. If I have entered into a federal settlement or closing agreement, what amount do I need to report on my amended tax return and pay to complete VCI 2?

    If you have entered into a federal settlement or closing agreement and wish to participate in VCI 2, we will generally follow a final federal determination based on a federal settlement or federal closing agreement. You should amend your California tax return based on the final federal determination and attach a copy of the federal documentation to the amended tax return, adjusting for federal and state differences.

    FTB reserves the right to examine the federal closing agreement or settlement to ensure that it resulted in a final federal determination that is consistent with California law and specifically resolved an ATAT or an OFA. If FTB determines that the federal determination did not consider the merits of and resolve any adjustments required by your participation in an ATAT or OFA, then you must report all income from all sources not previously reported due to the ATAT and/or the OFA. If FTB determines that the federal closing or settlement agreement resolved matters other than an ATAT or an OFA, additional tax, penalties, and interest may be assessed.

  7. I did not receive a VCI 2 notification letter from FTB. Can I still participate in VCI 2?

    Yes. If you meet the eligibility requirements for the VCI 2 program, you can participate even if you did not receive a notification letter from FTB.

  8. I did not participate in an ATAT or OFA, and would like to participate in VCI 2. Can I just check the “Changes not related to ATAT/OFA” box on the Participation Agreement and submit my amended tax return and receive the benefits of VCI 2?

    No. A taxpayer who did not participate in an ATAT or fail to report income from an OFA is not eligible to participate in VCI 2. The box for "Changes not related to ATAT/OFA" should only be checked in addition to the "Reversed ATAT" and/or "Unreported income from OFA" boxes. FTB will assist taxpayers who do not meet the requirements for VCI 2 to file their returns and reduce future penalties and interest. Call FTB toll-free at 800.852.5711 for more information.

  9. I am filing a VCI 2 amended tax return which reports income from an OFA or reverses an ATAT and also includes changes not related to an ATAT or OFA. Should I just check the box for "Changes not related to ATAT/OFA" on the Participation Agreement?

    No. A taxpayer filing an amended tax return which reports ATAT and/or OFA changes and changes not related to an ATAT or OFA must check all of the applicable boxes on the Participation Agreement. This means that depending on the circumstances, you may need to check all four of the provided boxes.

  10. I am filing my VCI 2 amended tax return based on a federal settlement or closing agreement and have checked the box "Changes based on federal settlement/closing agreement" on the Participation Agreement. Do I also need to indicate whether my amended tax return reports a reversed ATAT and/or unreported income from an OFA by checking an additional box on the Participation Agreement?

    Yes. Taxpayers filing based on a federal settlement or closing agreement must check the "Changes based on federal settlement/closing agreement" box on the Participation Agreement, as well as one or more of the other boxes indicating whether the changes are due to a reversed ATAT or unreported income from an OFA. Additionally, taxpayers should attach a copy of the federal documentation to the amended tax return, and make any applicable adjustments for federal and state differences.

  11. I paid my tax and interest due at the time that I filed my amended tax return eliminating an ATAT or reporting OFA income before VCI 2 that I am submitting with my VCI 2 Participation Agreement. As a result, I do not owe a balance and will not be submitting payment with my VCI 2 Participation Agreement. Do I still need to check a box for payment type on the Participation Agreement?

    No. If you are not submitting any payment with your VCI 2 Participation Agreement and amended tax return because you do not have a balance due, you do not need to check a payment box on the Participation Agreement.

  12. Does my VCI 2 amended return/participation agreement need to be received by FTB on or before October 31, 2011 to receive VCI 2 treatment? Can it just be postmarked on or before October 31, 2011?

    Your VCI 2 amended return/participation agreement will be accepted by FTB as filed within the VCI 2 filing period if it is postmarked on or before October 31, 2011.

Penalties

  1. What penalties do I avoid if I participate in VCI 2?

    The penalties you avoid by participating in the initiative include:

    Penalty Amount
    Noneconomic Substance Transaction Understatement 20% or 40% of the understatement
    Accuracy Related 20% or 40% of the underpayment
    Interest Based 50% or 100% of the interest due on the unpaid tax
    Fraud 75% of the underpayment

  2. I protested the noneconomic substance transaction (NEST) understatement penalty and made a tax deposit before August 1, 2011. Can I request a return of my tax deposit?

    Yes. If you made a tax deposit for a NEST penalty that you are contesting, use FTB 3581 to request a return of your tax deposit.

  3. Will I be subject to the late filing penalty and interest for the tax years in which I filed a delinquent tax return?

    If you previously filed your original tax return after the extended due date and you file an amended tax return for the same tax year during VCI 2, FTB will waive the late filing penalty with respect to the additional tax liability attributable to the ATAT or OFA that is reported on your VCI 2 amended tax return. You are subject to interest on the additional tax liability from the original due date of the return through the date of payment.

  4. If I previously paid a penalty, can I file an amended tax return during VCI 2 and have the penalty waived so I can receive a refund?

    No. FTB cannot waive penalties paid prior to August 1, 2011. However, if you are currently involved in an open audit examination, Chief Counsel Review, protest, or appeal in which you are disputing the penalties, you are not considered to have paid the penalty because these amounts are treated as tax deposits.

  5. What if I paid a penalty prior to August 1, 2011, and filed a claim for refund, will I get a refund if I participate in VCI 2?

    No. Under VCI 2, FTB cannot refund or credit any penalty amounts paid prior to August 1, 2011.

  6. I participated in FTB's 2004 VCI (VCI 1) and elected option 2, in which I retained my appeal rights but remain subject to the accuracy-related penalty. Can I apply for VCI 2 and attach an amended return to my VCI 2 participation agreement that reports the same transaction and income that I reported during VCI 1 to avoid imposition of the accuracy-related penalty in the future?

    No. The law that enacted VCI 1 states that FTB must assess an accuracy-related penalty against a taxpayer who elected option 2 when there is a final federal determination for the same issue and the Internal Revenue Service assessed an accuracy-related penalty, and it prohibits FTB from abating the accuracy-related penalty. The VCI 2 legislation did not repeal the VCI 1 law; therefore, a VCI 1, option 2 taxpayer cannot avoid the mandatory accuracy-related penalty by participating in VCI 2.

Interest

  1. Does interest suspension apply if I participate in VCI 2?

    No. Interest suspension does not apply on assessments of additional tax relating to ATATs or OFAs.

Payment

  1. How do I apply for a VCI 2 installment payment agreement?

    To apply for an installment agreement, individuals and business entities must complete the applicable form and make the first installment payment (at least 10 percent of your VCI 2 liability) with your Participation Agreement and amended tax return.

    • Individuals: FTB 3561, Installment Agreement
    • Business Entities: FTB 9310 DBC, Business Entity California Statement of Financial Condition and Other Information

    You cannot use the online installment agreement request for VCI 2 liabilities.

    If your installment agreement request is denied, you must make full payment of your VCI 2 liabilities by October 31, 2011.

Offshore Voluntary Disclosure Initiative (OVDI)

  1. I am participating in the IRS's Offshore Voluntary Disclosure Initiative (OVDI) and wish to participate in VCI 2 to report the same offshore income. Following the IRS review of my application, additional federal changes which increase or decrease my federal adjusted gross income may be made after the October 31, 2011, VCI 2 deadline. If I report my income during VCI 2, and the IRS makes adjustments after October 31, 2011, can I amend my VCI 2 amended return, pursuant to the federal determination, to avoid penalties and criminal prosecution or claim a refund?

    No. If after October 31, 2011, the IRS determines your income and tax are more than what you reported on your VCI 2 amended return, the FTB may impose penalties and/or initiate criminal action with respect to the difference between the amount shown on the VCI 2 amended return and the correct amount of tax based on the federal adjustment.

    Also, note that if the IRS later determines you over reported your income and tax, any overpaid amounts that are related to the use of an OFA and paid with your VCI 2 amended return cannot be refunded.

  2. I participated in the IRS's OVDI and as part of my participation, I signed IRS Form 872, extending the time in which the IRS can audit and assess additional tax (Statute of Limitations) for the 2003 -2008 tax years to December 31, 2012. Does this extension of the statute of limitations also apply to FTB?

    Yes, if you have signed a federal waiver, such as IRS Form 872, FTB may issue a notice of proposed assessment on any issue for the taxable years covered by that waiver at any time until six months after the federal waiver expires. (R&TC Section 19065.) Therefore, under Section 19065, FTB may audit taxpayers who signed a federal waiver as part of their participation in OVDI and assess additional tax for the 2003 - 2008 tax years until six months after the December 31, 2012, expiration of the federal waiver. If the OFA meets the definition of an ATAT , the statute is extended to 12 years.

    In addition, if the IRS makes subsequent adjustments before the federal waiver has expired, you filed a false or fraudulent original return, or you never filed an original return, a longer statute of limitations would apply. (R&TC Sections 19059, 19060, 19087, and 19755.) Taxpayers who do not participate in VCI 2 will be subject to all applicable penalties and criminal action.

  3. I am a shareholder in a Passive Foreign Investment Corporation (PFIC) as defined under IRC Section 1297. I participated in the IRS’s OVDI and utilized a mark to market approach to recognize gain or loss based on the difference between the fair market value of the stock and its basis at year end. Can I use the mark to market approach to recognize my gain or loss on my VCI 2 amended return?

    No, you may not use the mark to market approach simply due to the fact that you hold stock in a PFIC. California does not conform to the PFIC rules contained within IRC Sections 1291-1298; therefore, the corporation in which you hold stock will be treated as a regular corporation for California purposes.

    As such, you must meet the requirements of IRC Section 475 in order to elect the mark to market approach. If you do not meet the requirements to elect the mark to market approach, you must recognize the capital gain or loss on any stock that you hold in a PFIC at the time of the stock's disposition, which may mean that you have to adjust the income that you reported in OVDI for purposes of your California VCI 2 return.

  4. I am participating in OVDI, but I will not have my final determination from the IRS until after October 31, 2011. Can I request an extension so that I can file my VCI 2 return after I get my final figures from the IRS?

    No, FTB cannot provide an extension to participate in VCI 2. To participate in VCI 2, you may have to make your best estimate of your tax liabilities and report that on your VCI 2 amended return. If after October 31, 2011, the IRS determines that your income and tax are more than what you reported on your VCI 2 amended return, FTB may impose penalties and/or initiate criminal action with respect to the difference between the amount shown on the VCI 2 amended return and the correct amount of tax based on the federal adjustment.

    Also, note that if the IRS later determines you over reported your income and tax, any overpaid amounts that are related to the use of an OFA and paid with your VCI 2 amended return cannot be refunded.