Offshore Voluntary Compliance Initiative: New Jersey Changes its Position, Demands Payment Now

Offshore Voluntary Compliance Initiative:
New Jersey Changes its Position, Demands Payment Now

By Asher Rubinstein, Esq. 

We were recently advised of a change in the position of the New Jersey Department of the Treasury, Division of Taxation, regarding its Voluntary Compliance Initiative for foreign bank accounts.   The new position requires an immediate payment of estimated tax due.

In January, we were advised by the New Jersey Division of Taxation that it understood that taxpayers needed time to obtain financial statements from foreign sources, as well as time to amend their Federal and New Jersey income tax returns.  These are pre-requisites to making a payment for taxes due on foreign income.  In addition, the Division’s conditional acceptance letter stated that “In lieu of an estimate of the tax due, a detailed explanation is required that explains the basis for difficulty in determining the estimate of tax and the steps being taken to acquire the necessary information for both the IRS and for NJ.”  We provided such an explanation, advising that we were obtaining statements from foreign sources and will prepare amended Federal returns in order to prepare amended state returns.

However, we recently received a letter from the Division that a “good faith estimate for each tax year must be remitted” within fifteen days.  This letter provided no guidance as to what might constitute a “good faith estimate”.  In our subsequent discussions with the Division in an attempt to understand its new position, it was clear that the Department is aware that foreign banking information may be incomplete, and that amended federal returns may not yet be prepared.  We further informed the Department that there is no such deadline, on the federal level, to make an estimated payment.  Further, many clients who have passed the IRS Criminal Investigations Division have yet to be assigned to a civil agent for determination of tax due.  While we made these points clear to the Division, it still insists upon a “good faith estimate” now, notwithstanding its earlier position.

If you have already amended your past tax returns to include foreign income, then you should be able to calculate New Jersey income tax due, and send in a payment for these amounts.

If, however, you are still awaiting statements from foreign sources, and/or have not yet prepared amended returns for past years, you should still consider making a “good faith estimate” now.  We suggest the following formula, for each tax year, 2003 through 2008:

(estimated foreign income earned) x (New Jersey tax rate, e.g., 6.37%) = good faith estimate of tax due.

However, in many cases, foreign income may still be unknown.  We have been advised by the Division that the taxpayer should send in “something” now.  We have been further advised that if a taxpayer sends, e.g., $1,000 now, but later the taxes due are significantly greater, the taxpayer would not be assessed additional penalties for making too low a payment now.  Of course, such advice from the Division is informal and non-binding.  The representative reasoned that if a taxpayer over-pays now, the Division would send a refund later.  The representative advised that no extension is possible for making an estimated payment.

We believe that because of the State’s fiscal crisis, the New Jersey Division of Taxation is attempting to obtain revenue as fast as possible.  We understand from a contact at the Division that the directive to send immediate payment comes from the Director of the Division of Taxation.  The State’s goal, however, clearly does not take into account that taxpayers are constrained by the long process of obtaining information from foreign banks (which only recently and begrudgingly accepted greater bank transparency) and amending past tax returns.  Nevertheless, we do not expect clients to commence legal challenges against the Division based on its lack of understanding and sudden change in its position.  In addition, because taxes will be due at the end of the Voluntary Compliance process, challenging payment now may be have limited benefit.

Please contact us  to discuss how to proceed.

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