On September 28, 2009, the Connecticut Department of Revenue Services (“Department”) announced its Offshore Voluntary Disclosure Program, which will run through January 15, 2010. The Department’s Special Notice 2009(5) (“Notice”) provides 14 questions and answers to explain the new program. It is similar to the Department’s long-standing Voluntary Disclosure Program except that the Offshore Voluntary Disclosure Program permits participation by taxpayers who are already under audit by the Department. In the traditional program, taxpayers are ineligible to participate if there was “a previous contact of any kind by the Department.” (Both of these programs are unrelated to Connecticut’s recent tax amnesty, which expired June 25, 2009; see GT Alert, Connecticut Offers Taxpayers a Short-Term Tax Amnesty Program.)

The new program is targeted at taxpayers with undisclosed foreign bank accounts and entities. The Notice points out that taxpayers who do not submit a voluntary disclosure or otherwise become compliant with Connecticut tax laws run the risk of detection by the Department, which has information sharing agreements with the Internal Revenue Service. It also notes that the U.S. Department of Justice and the Internal Revenue Service have entered into an agreement with the Swiss government to release the names of 4,450 U.S. residents suspected of using foreign bank accounts held by UBS AG to avoid or evade taxes. In late August of 2009, Connecticut’s governor requested the state attorney general to investigate whether Connecticut had been deprived of tax revenue as a result of these accounts, and the attorney general announced that he is conducting that investigation.

Further, Connecticut requires that amended Connecticut income tax returns be filed to report federal changes or to conform to federal amended returns, and there is no statute of limitations for the Department to assess Connecticut tax where the taxpayer fails to do so.

According to the Notice, participation in the program will “generally eliminate the risk of criminal prosecution” and the Department “will not impose any civil penalties.” Tax and interest must be paid in full. The Notice states that reasonable payment plans may be accepted.

The Notice is vague on the look-back period involved (this is the number of years that must be brought into compliance). It states that the Department “will generally look favorably on a limited look-back period provided the taxpayer has paid tax on the principal (which includes initial deposits and all subsequent contributions) of any undisclosed bank account.” In a call to the telephone number on the Notice, a Department representative stated that the look-back period will be considered on a case-by-case basis.

Participation in the program requires:

  • A cover letter expressing the intent to participate,
  • A description of the source of funds or other assets in each account,
  • The date the initial deposit was made or the date the taxpayer took control or ownership of the account,
  • Documentation indicating whether the principal (which includes initial deposits and all subsequent contributions) has been taxed or untaxed and the years involved,
  • The amount of potential tax liability, and
  • Whether the taxpayer participated in the IRS Offshore Voluntary Disclosure Program.

The application may be sent by an authorized representative without identifying the taxpayer until after the Department has confirmed that the request to participate has been granted.

The Notice provides the address to which information is to be sent and a telephone number to obtain additional information.

The deadline for participation in the IRS Voluntary Disclosure Program was recently extended from September 23 to October 15, 2009. In light of the agreement for disclosure of names by Swiss authorities to U.S. tax authorities, and the information sharing agreements between the IRS and state tax authorities, it is very likely that the Department will uncover taxpayers who have not paid all Connecticut taxes, and assert additional tax, plus interest and penalties. The Offshore Voluntary Disclosure Program offers a means for taxpayers to make this disclosure by January 15, 2010, and eliminate civil penalties and the possibility of criminal prosecution. These terms are far more generous than those imposed by the IRS, which requires a 20 percent penalty on unpaid tax plus a penalty of 20 percent of the highest account value from 2003 through 2008 for not filing a Foreign Bank Account Report (FBAR).

See the following GT Alerts concerning the federal offshore voluntary disclosure program: