Voluntary disclosure as a means of satisfying unmet state tax obligations.

• Author: Boucher, Karen J.

What happens when a taxpayer discovers that it has had a taxable presence in a foreign state for several years but has neither filed a return there nor paid tax to that state? Is there any procedure available by which the taxpayer can ensure that no criminal investigation will result from this oversight? What about civil tax penalties? What about the unpaid tax for those past years, not to mention the interest on unpaid tax, interest on unpaid penalties and interest on unpaid interest?

An administrative procedure known as voluntary disclosure may be what the taxpayer needs to solve these problems. Voluntary disclosure is a process by which a taxpayer, who is clearly subject to a state's taxing jurisdiction (i.e., has nexus with that state) but has not filed or paid tax, can (if eligible) voluntarily approach the state to register as a taxpayer and make a negotiated payment, in exchange for the state "cutting off" some of the back-tax ability, all civil penalties (sometimes criminal penalties as well) and perhaps some interest. (This article does not address voluntary registration in exchange for an agreement by a state not to audit prior years. That technique is better suited to a separate discussion.)

Voluntary disclosure is different from tax amnesty. In a typical tax amnesty program, a state waives all criminal penalties for a short period of time, after which it embarks on a crackdown of delinquent taxpayers. Though limited in time, amnesty is generally available to any taxpayer.

Voluntary disclosure, by contrast, often comes without any specific promise regarding criminal investigation or prosecution. Moreover, voluntary disclosure is generally open-ended, meaning that it is available at any time. Finally, it is typically available only to taxpayers that have never filed a tax return or paid any tax in a particular jurisdiction for the tax at issue.

Background

A flurry of significant events in state and local taxation beginning in the late 1950s heightened the usefulness of voluntary disclosure as a tool to resolve unmet state tax obligations. In Northwestern States Portland Cement Co. v. Minnesota, 358 US 450 (1959), the U.S. Supreme Court ruled in favor of state taxing power, holding that a foreign state may constitutionally levy a tax on the net income from interstate commerce earned by an out-of-state business. The resulting hue and cry from the business community led to the enactment, also in 1959, of P.L. 86-272, by which...