New Jersey Offshore Voluntary Disclosure Program
Following the lead of the IRS Offshore Voluntary Disclosure Program, New Jersey recently established an Offshore Voluntary Disclosure Program of its own. Rather than advising clients to summarily apply to the New Jersey Voluntary Disclosure Program, we investigated whether New Jersey had a legal basis to tax foreign income, as opposed solely to income within the State.
On the federal level, the Internal Revenue Code (IRC) contains a blanket, wide-reaching statute which states that “all income from whatever source derived” is considered gross income and is subject to taxation (IRC §61). On this basis, the IRC taxes all income, global, offshore sources included. Thus, offshore income is subject to federal tax.
There is no similar all-encompassing statute in the statutes of New Jersey. Title 54A of the New Jersey Statutes, New Jersey Gross Income Tax Act, Section 54A:2 1 states: “Imposition of tax. There is hereby imposed a tax for each taxable year . . . on the New Jersey gross income as herein defined of every individual.” [Emphasis supplied] Chapter 5, Section 54A:5-1, defines “New Jersey gross income” as:
- (c) Net gains or income from disposition of property. Net gains or net income, less net losses, derived from the sale, exchange or other disposition of property, including real or personal, whether tangible or intangible as determined in accordance with the method of accounting allowed for federal income tax purposes. (1) For the purpose of determining gain or loss, the basis of property shall be the adjusted basis used for federal income tax purposes.
- (e) Interest, except interest [such as municipal bond interest excluded]
- (f) Dividends, “Dividends” means any distribution in cash or property made by a corporation ….
The above definition does not specifically include income earned outside of New Jersey.
Chapter 6 of the New Jersey Statutes contains specific exclusions from “New Jersey gross income”. However, none of the specific exclusions in Chapter 6 cover foreign income.
Thus, the law is unclear because New Jersey Statutes do not expressly include foreign income, nor do they specifically exclude foreign income, from taxation.
Clients wishing to be sure that they are not running afoul of the (vague) law may decide to enter the New Jersey Voluntary Disclosure Program, and declare and pay tax, interest and a 5% voluntary disclosure penalty(2) on offshore income. Other clients may elect to challenge New Jersey’s taxation of foreign income.
Inasmuch as the IRS routinely shares information with various state tax departments, if you have made voluntary disclosure to the IRS regarding an offshore account, and do not disclose that account to the New Jersey Division of Taxation, it is likely that New Jersey will learn about the account from the IRS, in which case you might face significant fines and penalties.
Based on the above, and in light of the lack of clarity with respect to whether foreign income is properly taxable by New Jersey, we suggest that New Jersey clients with offshore accounts should participate in the New Jersey Voluntary Disclosure Program and disclose their foreign accounts to New Jersey. The New Jersey Division of Taxation has set December 31, 2009 as the deadline to submit a letter stating:
- The taxpayer’s name and address;
- Tax identification number(s) (state and federal);
- Type of tax, years affected and an estimate of tax due;
- Explanation of the circumstances;
- Whether the taxpayer applied to the IRS Voluntary Disclosure Program;
- A certification that the taxpayer will cooperate with the Division of Taxation to establish the correct tax liability and pay all taxes, interest and the 5% voluntary disclosure penalty;
- Appointment of Representative Form M-5088-R.
If you would like us to represent you in connection with the New Jersey Voluntary Disclosure Program under the same terms and conditions as our representation before the IRS, we request that you contact us, sign and return the M-5088-R form to us as soon as possible.
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1. The linkage between New Jersey and the federal tax system is further established in NJ Stat. §54A:8-3, Accounting periods and methods, which sets the taxable year and accounting methods for New Jersey income tax purposes the same as under the IRC.
2. Otherwise, the penalty for tax fraud may be as high as 50%, as well as the likelihood of criminal prosecution.