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Protect Clients with the Voluntary Disclosure Program
By William Comiskey, JD

Shortly after New York’s statutory Voluntary Disclosure and Compliance Program became available to taxpayers in the summer of 2008, Albany tax attorney Howard Koff, in a June 2008 radio interview labeled it an “early Christmas present for taxpayers.” Koff’s quick assessment was right on the money and, after two years, the program is still a huge and continuing success that has become the “gift that keeps on giving” for New York taxpayers.

The program is the flip side of the department’s widely reported increased tax enforcement initiatives, and both it and increased enforcement were intended to accomplish the same result—to move more taxpayers into voluntary compliance with the tax laws. The voluntary disclosure program is one that all CPAs with a tax practice should know about and turn to whenever they need to help a client avoid penalties for delinquent tax liabilities, especially in light of the state’s enactment of a tax whistleblower program this past summer which provides huge monetary rewards to whistleblowers who turn in taxpayers with significant tax liabilities.

Increased enforcement boosts compliance by deterring non-compliance, while voluntary disclosure provides incentives for taxpayers to self-correct deficiencies. Without question, as strategies to close the tax gap and improve tax compliance, both have been proven successful.

Numbers Tell the Story

According to numbers provided by the New York State Department of Taxation and Finance, in the two years that the Voluntary Disclosure and Compliance Program has been in existence, it has brought in more than $155 million in tax revenues for the state, and is projected to produce $75 million in proceeds this fiscal year alone. This is “found” money for our cash-strapped state. None of the program’s participants were under audit or investigation when they applied to the program and none had been billed for the liabilities they disclosed. Nonetheless, perhaps concerned by the department’s increasingly aggressive and smarter enforcement efforts, more than 5,600 individuals and businesses have voluntarily applied to participate in the program, with the vast majority of those being accepted by the tax department. More than 3,300 have already reached agreements with the department.

The program provides New York taxpayers with the opportunity to become tax compliant and get out from under the burden of old tax liabilities while avoiding penalties and possible criminal prosecution. It provides strong protections and enhanced benefits to those who self-disclose delinquent tax liabilities that are unknown to the department. In addition, it is easy to understand and easy to access, and it is available to almost all taxpayers. Taxpayers or their representatives apply online, answer four simple questions to determine eligibility and then tell the department what they owe and who they are. The program is designed to help taxpayers clean the slate on old tax debts and become good tax citizens in the future.

Confidentiality

To encourage participation, the program guarantees taxpayers can make their disclosures to the department confident that the information they give—including their identities—will never be used against them or shared with any other agency if they withdraw their application or if they join the program and comply with their obligations under the program (N.Y. Tax Law section 1700(9) and TSB-M-08(6)I, New York State Department of Taxation and Finance Office of Tax Policy Analysis Taxpayer Guidance Division.).

The entire credibility of the program rests on the department’s rigorous protection of taxpayers’ confidences. Neither the taxpayers’ identities nor the substance of their disclosures are shared outside the unit administering the program. The department has made clear that information provided by the taxpayer will not be used for audit selection or any other purpose if the taxpayer is ultimately determined to be ineligible or decides not to participate.

Practitioners should be aware, however, that returns filed by taxpayers once they sign a disclosure agreement are shared with the IRS and state and local agencies that have exchange agreements with the department—just as the department shares with these agencies other returns and reports filed by taxpayers per TSB-M-09(6)I, New York State Department of Taxation and Finance Office of Tax Policy Analysis Taxpayer Guidance Division. Other than the filed returns, however, no information is given to these agencies.

There is one important exception to this rule: if a taxpayer intentionally violates the terms of the voluntary disclosure agreement, all bets are off and the department may use the disclosed information for audit or other purposes and may share that information with other agencies, including state prosecutors per TSB-M-08(6)I, New York State Department of Taxation and Finance Office of Tax Policy Analysis Taxpayer Guidance Division.

Limited Look-back Incentives

As yet another incentive for taxpayers to participate in the program, for those who owe back taxes for more than three years, the program provides for the opportunity to request a limited look-back clause during the online application process. With a look-back clause, taxpayers can settle their entire tax liability by only paying the amounts owed for the years in the look-back period. Depending upon the reason for the non-payment and the type of tax owed, the look-back may be limited to three or six years.

The longer look-back is generally reserved for instances where the liabilities involve trust taxes or are the result of willful non-compliance. The availability and the length of the limited look-back are determined on a case-by-case basis by the department. In determining what look-back period is appropriate, the department may, as with all disclosures under the program, seek additional information from the taxpayer.

Protections from Criminal Prosecution

In addition to giving taxpayers relief from civil tax penalties, the program also offers protection from state criminal prosecution that far exceeds any assurances the department was able to provide taxpayers before the law was enacted. Simply stated, Tax Law section 1700(5)(A) creates an absolute bar prohibiting state prosecutors and district attorneys from initiating tax prosecutions based on the disclosed conduct against eligible taxpayers who are participating in the program and complying with their obligations. Before the new statute created this statutory grant of immunity, taxpayers making disclosures to the department only received the department’s promise that it would not refer the taxpayer to a prosecutor to initiate a criminal prosecution. That promise did not bind the prosecutor who remained free to initiate a prosecution independently, without the department’s referral. The new law eliminates that possibility.

The criminal protections for taxpayers electing a look-back clause are slightly different but still greater than those that existed before the statute was enacted. The statute only creates an absolute prohibition for prosecutions based on tax obligations that are disclosed and fully paid. By taking advantage of the look-back clause, the taxpayer settled his or her case by paying for only the years in the look-back period. Thus, only the years within the look-back period received statutory protection.

This does not mean taxpayers receive no protection against criminal prosecutions for the prior years. Instead, for those prior years, the department’s agreement with the taxpayer provides that the department will not investigate the taxpayer for those prior years, share the taxpayer’s disclosure with any other agency or refer the taxpayer to a prosecutor.

Payment Plans

Finally, as yet another incentive to encourage participation, taxpayers accepted into the program who cannot pay their full tax debt immediately may be allowed to pay their debt over time under generous terms designed to ensure they stay in business. The primary goal of the program is to bring taxpayers into future compliance and that goal would be undermined if entering the program resulted in closing businesses or bankrupting taxpayers.

Because the program is only available to taxpayers who act before they are selected for audit, review or criminal investigation, practitioners would be smart to urge their eligible clients to move quickly. The department has greatly increased its audit and criminal enforcement activities and is now engaging in sophisticated data analysis to identify appropriate audit candidates. Moreover, amendment of the New York False Claims Act to permit treble damage lawsuits based on whistleblower claims against certain high-end taxpayers, the risks for clients who play audit roulette have never been greater.

Given this environment, practitioners who have clients with significant monetary exposure or who face the possibility of criminal charges should consider bringing in counsel to ensure that communications with the client are privileged and protected. They should also, and without question, urge those clients to participate in New York’s forgiving and generous voluntary disclosure program as soon as possible.