California expands voluntary disclosure program

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October 2017

Overview

California enacted S.B. 813 on September 25, 2017, expanding eligibility for voluntary disclosure agreements to include non-resident members of partnerships and out-of-state trusts with California beneficiaries for corporate income, individual income and trust income tax purposes.  The bill also provides for voluntary disclosure program relief from the failure to file penalty for partnerships, S corporations and limited liability companies classified as partnerships.

The bill applies to agreements entered into on or after January 1, 2018.

The takeaway

California’s economic nexus standard and recent changes to rules related to the sourcing of intangibles increase the likelihood that certain out-of-state entities that did not previously have a California filing obligation are now required to file.

Because the voluntary disclosure statute did not previously include out-of-state partnerships with nonresident partners, or out-of-state administered trusts with California beneficiaries, such entities were not eligible for a VDA and only had the option to enter into a Filing Compliance Agreement (FCA) – an agreement under the FTB’s authority to administer tax and to abate penalties for which reasonable cause is a defense.  The FCA is not limited to a specific look-back period.

With the expanded voluntary disclosure program, previously excluded entities will be able to enter into the VDA program, which limits the look-back period to six tax years.  Now, similar to the FCA program, the VDA program will provide relief from the significant per-partner penalties.  Additionally, the VDA process is generally a simpler process than the FCA program.  With that, combined with the limited six-year lookback period, the VDA program may be a better option for entities that previously considered but did not participate in the FCA program because of the unlimited lookback.

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Peter Michalowski

Peter Michalowski

State and Local Tax Leader, PwC US

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