What is a “voluntary disclosure agreement” and how does it differ from a tax amnesty program?
Typically, there are two mechanisms whereby taxpayers can come forward and report past due state and local taxes and receive some relief from amounts (penalties, interest, and perhaps the tax itself) that would ordinarily be due. Both programs offer taxpayers significant savings.
The first option that a taxing jurisdiction may offer is a voluntary disclosure agreement (VDA). Most VDA programs are established by the Department of Revenue in a particular jurisdiction and generally allow for the abatement of penalties, a limited lookback period (i.e., the number of past due tax returns a taxpayer may need to file) and, depending on the facts and tax jurisdictions involved, the avoidance of criminal penalties. Interest, however, is nearly always due. Once established, these programs typically do not expire unless cancelled by the Department of Revenue.
Many states also offer tax amnesty programs to taxpayers who may have undisclosed tax liabilities to a jurisdiction. Unlike VDA programs, amnesty programs are almost always enacted by the legislature, typically run for a finite period, allow for a waiver of some or all interest due, and typically cover specific tax liabilities. Because amnesty programs are legislatively enacted, taxpayers are often more aware of this option because of the media coverage the programs receive.
What is the process for participating in such a program?
Whether participating in a VDA or amnesty program, the process is very similar. Generally, a taxpayer (or their representative) approaches a jurisdiction on a no-name basis, describes their facts, and asks for permission to be included in the program. Once an agreement is reached, the taxpayer’s identity is disclosed and the taxpayer has a specific time-frame in which to file the agreed-upon returns and remit the amounts due.
What is a typical lookback period when it comes to back taxes?
A lookback period is the number of years a jurisdiction will “look back” and require the taxpayer to file a tax return. For example, if a taxpayer should have filed a tax return starting in 2000 through the current year and the state limits the lookback period to three years, the taxpayer (provided they voluntarily come forward before being contacted by the taxing authorities), would generally only need to file tax returns for the current year and the most recent three years (i.e., 2009, 2008, 2007, and 2006). All other taxes would be waived. The lookback period differs by state, but most states offer a three- or four-year lookback.
How do taxpayers determine what works best for them?
Each situation should be reviewed to determine which program provides the best outcome for a specific taxpayer. For example, some amnesty programs allow for the waiver of all penalties and interest, but do not limit the lookback period, while most VDA programs limit the lookback period, but require that all interest be paid. Your tax advisor can help you weigh the advantages and disadvantages of each approach.
How vigilant are state revenue departments when it comes to back taxes?
Very. Due to the historic budget gaps we are seeing across the U.S. today, states are increasingly looking for ways to generate additional revenue. Many states, including Connecticut, have “discovery units” that are looking for taxpayers who should be filing tax returns. In addition, states are increasingly sharing information and combing public data to identify potential taxpayers.
