V is for Voluntary Disclosure.
I know what you’re thinking: this doesn’t apply to me because I don’t have offshore accounts. But don’t leave just yet. It’s not only taxpayers with offshore accounts that might qualify for voluntary disclosure programs. While most taxpayers are familiar with the 2012 Offshore Voluntary Program (and its predecessors, the Offshore Voluntary Disclosure Initiative and the 2009 Offshore Voluntary Disclosure Program), voluntary disclosure programs exist for simple income tax liabilities, too.
Many municipalities and states offer you a break on criminal charges – and sometimes penalties and interest – if you come forward and disclose your unreported tax liabilities. For example, in the state of New York, eligible taxpayers who owe back taxes and haven’t filed can avoid monetary penalties and possible criminal charges by disclosing, paying those taxes, and entering an agreement to pay all future taxes. Same deal in California. And Missouri. Colorado. North Carolina. You get the picture.
In fact, most states now offer some form of voluntary disclosure to encourage taxpayers to come forward. There are lots of benefits for taxpayers including:
- Limitations On Back Taxes. It’s generally the case that the failure to file income tax returns or the filing of fraudulent returns means that there’s no statute of limitations. Most amnesty programs have a look-back period (three to five years is about average) for the program. If you get compliant, the back taxes will be wiped.
- Elimination or Reduction of Penalties. Penalties can make what was a small debt much bigger very quickly. Most programs offer either complete elimination of penalties or some kind of substantial reduction.
- Reduction of Interest. In many cases, abatement of interest may be restricted by statute. However, as part of the voluntary disclosure programs, interest may be significantly reduced.
- Peace of Mind. Truly, when you have tax liabilities, most taxpayers just want the chance to start over. That’s the appeal of these kinds of voluntary disclosure programs. You can make the disclosure, pay what you owe (or get on a plan), and put a period on your old liabilities.
So what’s in it for the tax authorities?
- Less Work. You’ve done the work for the taxing authorities by coming forward. Less work for them.
- Less Cost. It doesn’t just take time (and work) to collect back taxes, it takes resources. Amnesty programs generally bring in a lot of revenue for minimum cost.
- Increased Compliance Moving Forward. As part of most voluntary disclosure programs, taxpayers agree to pay all taxes going forward. This ensures ongoing compliance, perhaps the most valuable benefit to taxing authorities.
Many cities and townships offer similar programs.
Even if your state or local taxing authorities don’t offer benefits for coming forward, you may want to consider a voluntary disclosure if you’re out of compliance. You always want to come to them before they come to you. I tell my clients this all of the time.
It’s worth noting that there may be some wiggle room in these programs – and important distinctions in the manner of disclosure (a noisy disclosure versus a quiet one, for example). I highly recommend working with a tax professional when you’re thinking about making such a disclosure.
