Voluntary Disclosure, a Procedure to Minimize Delinquent State Tax Obligations

As state tax attorneys, we commonly encounter situations where a company has a state tax obligation with a foreign state without even being aware that such an obligation exists – for instance, through the presence of an agent or representative performing installation or repair services on the company’s behalf,  attendance at a trade show or the storage of inventory in the foreign state.  Since the company hasn’t been filing the necessary returns, because they were unaware of its obligation, there is likely no statute of limitations, meaning the state could assess the unpaid taxes from inception of the problematic presence.  But what can be done when you discover these state tax obligations after the deadline for filing and paying such taxes has passed?

Most states have a voluntary disclosure program whereby the “look back” period is limited to a relatively short time period (typically 3 or 4 years).  By participating in a voluntary disclosure program, not only are the filing and payment requirements limited, but the company can typically avoid penalties and, perhaps, a portion of the applicable interest.  Also, the company, through its attorney, has the ability to present its facts in a favorable light to the state taxing authority, which would not occur if it were audited.

Therefore, the company may be able to eliminate its exposure for delinquent state taxes by only paying a portion of the tax and interest which would otherwise be owed if it were audited, and avoid all penalties. Generally, the voluntary disclosure process can be initiated on an anonymous basis so that the company may gauge the taxing state’s cooperation and determine its delinquent liability prior to deciding whether to proceed.  This can be initiated by the company’s attorney either directly with the state taxing authority or through the Multistate Tax Commission.