Voluntary disclosure: minimizing preexisting state tax liabilities.

• Author: O'Connell, Frank J., Jr.

Businesses having sufficient contact with a state to require filing a return, but not filing, may benefit from participating in a voluntary disclosure program. These programs limit prior-year filing requirements and eliminate potential penalties for nonfiling years. A business can negotiate a voluntary disclosure agreement to limit prior income, franchise, sales, use and other tax exposure and penalties. To do this, it would typically approach a state anonymously, through a tax representative. Voluntary disclosure" materially differs from tax amnesty, because the lookback period is typically three to four years; it is generally available only after amnesty expires.

Voluntary Disclosure Applications

In applying for voluntary disclosure, applicants usually have to include the following information:

1. A reason they are subject to a tax they have not paid in the past;

2. A description of the nature and extent of their activities in the state;

3. When they commenced doing business in the state;

4. Their tax year-end;

5. Whether the state has already contacted them about the taxes that are part of the voluntary disclosure;

6. The taxes for which they are currently registered, filing returns and remitting;

7. Whether they are registered with the secretary of state to transact business in the state; and

8. A good faith request to participate in the state's voluntary disclosure program.

Although not inclusive, these core points are typically required during the application process.

Lookback Periods

Pursuant to a voluntary disclosure agreement, states typically require applicants to file three to four prior-year returns. For example, Michigan's single business tax lookback period is generally 48 months; under certain circumstances, Michigan will limit the lookback period to 36 months. Pennsylvania will generally require a taxpayer to file a current year return plus four prior-year returns, for a total of five years, for corporate income or franchise tax purposes; however, it only requires three years of sales or use tax return filings.

Abatement of Penalties/Interest

Generally, pursuant to voluntary disclosure, states will abate penalties for not filing returns and not paying taxes. They usually do not abate interest on past-due taxes, because the statutes that assess interest on delinquent taxes typically do not grant the discretion to waive interest. However, one exception is Texas, which can waive interest on late tax payments under certain...