December 3, 2008
Previously published on November 4, 2008
The New York State Department of Taxation and Finance recently established the Voluntary Disclosure and Compliance (VDC) program to help solve the predicament faced by taxpayers who, unbeknownst to the government, owe overdue tax liabilities. The department has established a program where, in exchange for voluntarily disclosure and payment of the tax, the state agrees not to pursue criminal charges or assess civil penalties against the taxpayer.
Eligibility and Compliance Agreement
In order to take advantage of this program, the taxpayer must be an “eligible taxpayer,” as defined by the VDC. This includes any person or entity that is required to pay tax, including an individual, corporation, partnership, LLC, estate, trust, or any other company. Additionally, the taxpayer cannot be under audit by the department for any tax, the department must be unaware of the tax liability at the time of disclosure, and the taxpayer must not currently be a party to a criminal investigation by a state agency. Taxpayers who seek to qualify under the VDC are not eligible if they were participants in a tax shelter.
Initially, the taxpayer must submit an application with detailed information about the taxes owed. Furthermore, the taxpayer must enter into a voluntary disclosure agreement with the department to comply with the tax law in the future, and to pay the taxes owed. In exchange for voluntarily coming forward, the department will limit its “look-back period” and will not assess tax beyond a specified number of years before the current tax year. This agreement limits the taxpayer’s potential liability to the amount of time agreed to in the “limited look-back” agreement. For example, a three-year “limited look-back” agreement prohibits the department from investigating or imposing any liability on the taxpayer for taxes that are more than three years overdue. Interestingly, the time period will vary, and will depend on the facts and circumstances of each individual case.
Taxpayers must provide accurate information during the VDC process. The agreement can be rescinded if the taxpayer provides false information, or omits material information in any submission to the department as part of the VDC. Likewise, the department will seek to void the agreement if the taxpayer undertakes any tax avoidance or evasion activities. Rescission would likely result in the department’s pursuit of potential civil or criminal charges associated with the taxes owed. If the agreement is rescinded as a result of the taxpayer’s actions, the department can share the information with other agencies, and the department can use any information disclosed through the process against the taxpayer.
As a part of the agreement, the department will agree to waive penalties for failure to pay the disclosed tax liabilities, failure to file the return with respect to those liabilities, and failure to pay estimated tax, or any other civil penalties.
Confidentiality
The purpose of the VDC is to encourage voluntary disclosure without the fear of prosecution. Therefore, any disclosure made under the VDC program is confidential and will not be shared outside of the department, unless the taxpayer’s actions result in a rescission of the agreement. Otherwise, the disclosure is completely confidential, and will not be shared with any other agency, including the Internal Revenue Service. Furthermore, if the taxpayer applies for VDC, but is rejected, or the taxpayer decides not to participate, the disclosures remain confidential and will not be used against the taxpayer.
Pepper Perspective
The New York state program seems like a typical voluntary disclosure program. One area where it diverges from the typical program offered by other states is the potential variability of the look-back period depending on the taxpayer’s facts and circumstances. It seems like this carries a risk that similar taxpayers could be treated differently with respect to look-back, depending on the discretion of the employee of the department handling the agreement. Nonetheless, in the era of FIN 48, it may provide an avenue for taxpayers to gain financial statement certainty (and limiting the impact on the balance sheet) by limiting look-back.
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