Steven P. Bryde, JD, Tax Partner Marcum & Kliegman LLP 212-981-3071 sbryde@mkllp

1. Voluntary Disclosure Agreements The Leading Edge Alliance (Boston, MA) October 28, 2008 Steven P. Bryde, JD, Tax Partner Marcum & Kliegman LLP 212-981-3071 sbryde@mkllp.com J. Pablo Gárciga, JD, CPA, SALT Manager Marcum & Kliegman LLP 212-981-3089 pablo.garciga@mkllp.com

2. Purpose Many states offer voluntary disclosure procedures to taxpayers who have unpaid tax liabilities.  In consideration for coming forth and voluntarily disclosing their non-compliance, paying the unpaid tax and, generally, the related interest, most states will waive penalties that would otherwise be imposed and will agree to limit their look-back periods to a set number of years.  The purpose of this presentation is to take a look at some of the voluntary disclosure procedures offered by some states, including New York, Florida, Texas and California.

3. General Comments Both Tax Amnesty and Voluntary Disclosure Agreements are programs designed by tax administrators to encourage businesses to file and to pay their back taxes. In return, the taxing authority may reduce or eliminate penalties, and in some situations interest. In order to qualify for the waiver of penalties and possibly interest, the taxpayer must pay the entire amount of all taxes due, plus any interest not abated, by the program's deadline. Also, the business may have to sign a settlement agreement in which the taxpayer agrees to file and to pay all taxes on time in the future. Tax administrators have the authority to enter into these types of agreements by specific legislation or through the general powers given to them by the legislature. Source: Charles Johnson, June 13, 2007 Presentation

4. General Comments A voluntary disclosure program tends to be more open- ended. Voluntary disclosure programs encourage businesses to file and to pay their back taxes without the state having to contact the person first. If you have received a letter from the state asking you to complete a nexus questionnaire, to file a return, or proposing that you owe more taxes, then you probably do not qualify for a voluntary disclosure program. Several states have on- going voluntary disclosure programs. This means there is no firm deadline. Source: Charles Johnson, June 13, 2007 Presentation

5. General Comments A Tax Amnesty program provides comprehensive tax relief. Typically an amnesty program has a very short window of opportunity. The goal is to collect as much back taxes as possible in a very short period of time, usually two or three months. Generally, the state will waive penalties and interest if you file returns and pay your taxes during the amnesty period. Source: Charles Johnson, June 13, 2007 Presentation

6. General Comments A hybrid of the two programs is called a Voluntary Compliance Initiative. Typically, the voluntary compliance initiative will run during a short period of time, and targets taxpayers in very specific situations. However, the tax agency does not know who these taxpayers are. For example, the IRS and several states operated Voluntary Compliance Initiatives to uncover taxpayers who utilized certain types of tax shelters to hide income. Source: Charles Johnson, June 13, 2007 Presentation

7. States’ Efforts to Raise Revenue As state revenues decline, states will cut budgets and reduce spending. A less popular method with which to deal with loss of revenue during times of economic downturns is to raise taxes. States may increase the number of audits performed and refine their efforts in order to concentrate on lucrative areas. A review of actions taken by many states during the economic downturns over the past 20 years reveals another method that states utilize to increase revenues. A number of states push to increase the revenue flow from taxes already on the books.

8. States’ Efforts to Raise Revenue • Voluntary disclosure programs differ from tax amnesty programs in several ways. • Voluntary disclosure programs are generally open-ended and available at any time compared with the relatively short future time frame typical of most state tax amnesty programs. • Criminal investigations and/or charges. Voluntary disclosure programs may not provide any guarantees to taxpayers to protect them from such investigations and/or charges if they voluntarily come forward. • Voluntary disclosure programs are generally available only to those who have never filed or paid any tax to the respective state. • Although most state tax amnesty programs are limited to certain types of taxes, voluntary disclosure programs usually apply to any delinquent tax. A taxpayer who is not eligible for the tax amnesty program may be able to gain similar benefits under a state's voluntary disclosure program.

9. States’ Efforts to Raise Revenue A major advantage to the taxpayer is that the state may agree not to audit tax years prior to the "lookback" period. The lookback period is the number of back tax years for which the voluntary disclosure program requires that tax and interest plus certain administrative fees must be paid. Some states also forgive a portion, if not all, of the civil tax penalties and/or interest during the lookback period.

10. States’ Efforts to Raise Revenue • Two approaches for increasing the revenue flow from existing taxes include: • Tax Amnesty Programs • Voluntary Disclosure Agreements (VDA)

11. States’ Efforts to Raise Revenue State tax amnesty programs are designed to encourage delinquent taxpayers to come forward without serious repercussions from the state. The general premise of such amnesty programs is to increase revenues by getting new taxpayers on the books.

12. Voluntary Compliance Initiative (VCI) A hybrid of the two programs is called a Voluntary Compliance Initiative. Typically, the voluntary compliance initiative will run during a short period of time, and targets taxpayers in very specific situations. However, the tax agency does not know who these taxpayers are. For example, the IRS and several states operated a Voluntary Compliance Initiatives to uncover taxpayers who utilized certain types of tax shelters to hide income.

13. Tax Amnesty Programs

14. States’ Efforts to Raise Revenue Voluntary disclosure programs allow taxpayers who are clearly subject to a state's taxing authority and jurisdiction, but who have not complied by filing and/or paying tax liabilities, to voluntarily offer to register as a taxpayer. The taxpayer can enter into negotiations with the state tax agency as to prior tax liabilities, interest and penalties.

15. Compare VDA, Tax Amnesty, These 2 are methods by which states increase their revenues Offers in Compromise, Obtaining Advance Rulings

16. Other VDAs IRS (and several states) re: Tax shelter initiatives Streamlined Sales Tax Project Multistate Tax Commission

17. New York State The 2008 NYS Budget enacted new VDA procedures New law creates legal basis for program and right to participate Eliminates need for anonymity Does not provide for automatic limited lookback Taxpayers are required to apply online.

18. VDA – New York State The program is administered by NYS Department of Taxation and Finance (“Department”) The program covers all taxes administered by the Department – including income, corporate, and sales. Any taxpayer who meets the eligibility criteria can participate, even if their nonpayment was the result of fraudulent or criminal conduct.

19. VDA – New York State In consideration for taxpayers coming forth of their own volition, entering an agreement, paying the taxes they owe and agreeing to be in compliance in the future, NYS will not impose penalties and will not bring criminal charges against them.

20. VDA – New York State The new procedure is no longer anonymous; however, the law includes privacy provisions which protect taxpayers who come forth, but ultimately do not complete the VDA. One exception to the secrecy rule: if a taxpayer intentionally violates the terms of the voluntary disclosure agreement, the Department may use the disclosed information against the taxpayer.

21. VDA – New York State To be eligible, an applicant must meet all of the following criteria: They must not be currently under audit by the Tax Department. They must not have received a bill for the past due taxes that they are disclosing. They must not be under criminal investigation by a New York State agency or political subdivision of the state. They must not be seeking to disclose participation in a tax avoidance transaction (commonly known as a tax shelter) that is a federal or New York State reportable or listed transaction.

22. VDA – New York State • How to Apply: • If criteria met, complete the online application. • Applicant must disclose: • the taxes owed,   • the reason that the taxpayer failed to report and pay those taxes, • why the taxpayer thinks he is eligible for a limited look-back

23. VDA – New York State After applying: The Department will review the application and request additional information if needed. If approved, a VDA will be mailed to the taxpayer. Taxpayer signs the VDA and returns it to the Department. Taxpayer must file returns for agreed lookback period and pay the tax and interest. If taxpayer can not pay the entire amount at once, installment payment agreements are available.

24. VDA – New York State If the taxpayer does any of the following, the taxpayer will be in violation of the agreement: Intentionally provides false material information in any of its disclosure documents. Intentionally omits material information from any of its disclosure documents. Intentionally fails to pay the back taxes and interest that was agreed to be paid as part of the agreement. Intentionally violates the tax law in the future, including failing to pay any taxes.

25. VDA – New York State If the taxpayer violates the terms of the agreement, the Department will no longer be bound by the promises. The Department may use the information that the taxpayer disclosed against the taxpayer. The Department may pursue any civil or criminal penalty that might apply to the misconduct disclosed by the taxpayer as part of the program process.

26. VDA – New York State The above VDA is different than the Voluntary Compliance Initiative for taxpayers that have engaged in abusive tax avoidance transactions. For Tax Shelter liabilities, see Form DTF-672, Election to Participate in the Tax Shelter Voluntary Compliance Initiative; and, Publication 672, New York State Tax Shelter Voluntary Compliance Initiative

27. VDA - New York City Administered by NYC Department of Finance (“DOF”) If the tax at issue is one administered by the State (e.g., NYC resident income tax and sales tax), the VDA must be procured through the State. NYC procedure applies to business taxes imposed by NYC. If the taxpayer has liabilities at both levels – NYS and NYC, a unified procedure exists whereby the taxpayer can procure one VDA addressing both NYS/C. Facts and circumstances driven; hence, no single set of terms for VDAs (e.g., no fixed limit on the number of delinquent years). NYC emphasizes reasonable causes and not willful neglect for participation in its VDA program and for the abatement of penalties.

28. VDA - New York City NYC General Procedures – usually initiated by representative of the applicant on an anonymous basis. The initial contact may be by phone or in writing. A taxpayer may make a voluntary disclosure for one or more tax periods if the delinquency is not due to intentional disregard of the tax obligations or fraud. The taxpayer must document the reason for the delinquency and that reason is subject to review as part of the audit process. Any voluntary disclosure agreement made between DOF and a taxpayer will become null and void if there is a final determination that incorporates a finding that the taxpayer disregarded its tax obligation intentionally, or committed fraud, for the period or periods covered in the agreement.

29. VDA - New York City The request must be in writing and include the following: A statement of facts, in anonymous form, describing the taxpayer’s activities in New York City, when these activities commenced, and the number of employees and their titles involved in such activities. The statement should indicate in which tax year taxpayer believes its tax obligation first arose. A statement explaining why the taxpayer has failed to file tax returns and pay taxes in the past. Penalties may only be waived for reasonable cause. A computation of the taxpayer’s approximate tax liability on a year by year basis. An affirmation by the taxpayer that they have not been previously contacted by DOF with respect to any potential tax liability for the tax that they are now disclosing, that they are not currently under audit for any City tax and that the taxpayer understands that all disclosed facts are subject to audit verification and that, if it is determined that a material fact has been omitted or misrepresented, any agreement reached will become null and void. Other information or data deemed appropriate.

30. VDA - New York City Once the fact gathering is complete and DOF determines that the conditions for a voluntary disclosure agreement are satisfied, the DOF representative and the taxpayer can discuss the terms for the written voluntary disclosure agreement. The agreement must include the following elements or terms: Summary of the facts and representations Disposition of penalties Years covered A statement that all returns and covered periods are subject to audit. Any material omission or misrepresentation is grounds for rescission of the agreement. The agreed delinquent taxes must be paid within a specified time period, usually 30-45 days after the VDA is signed A commitment to file all tax returns and make estimated payments due after the date of this agreement on a timely basis.

31. VDA– NYS/C Unified Procedure The NYS Department of Taxation and Finance (“Department”) and DOF have established a Unified Voluntary Disclosure Procedure (UVDP). Both the Department and the DOF’s policies and procedures in this area are generally comparable. A taxpayer with a delinquency for a City Tax with an analogous State delinquency can simultaneously disclose to both jurisdictions following the UVDP. DOF and the Department have designated Unified Disclosure Coordinators to coordinate a response to a request for UVDP. A request that is accepted by DOF and the Department for unified consideration will be acted upon jointly. Taxpayers that complete the UVDP are to be offered comparable terms and conditions as established jointly by the DOF and the Department. A single Voluntary Disclosure Agreement can be utilized to conclude the UVDP.

32. VDA– NYS/C Unified Procedure Where a taxpayer opts to pursue a separate disclosure process for each jurisdiction, DOF staff are not bound by the terms and conditions offered to the taxpayer by the Department in resolving any City tax liability but are to follow the above procedure for NYC. Planning Idea: For entity level taxes, approach DOF with an anonymous request for VDA and DOF will forward the same to the Department, also on an anonymous basis. This appears to allow taxpayer to avoid the NYS requirement of applying on a “name” disclosure basis.

33. VDA– NYS/C Unified Procedure The following are examples of taxpayers who would not be eligible for UDVP (1) A taxpayer who has already been contacted by the Department or DOF in connection with an inquiry into the tax type for which disclosure is sought. (2) A taxpayer who has been sent a notice of tax audit by the Department or DOF and such audit includes the tax type for which disclosure is sought. (3) A taxpayer who is subject to a Federal audit of the type that is commonly reported to the taxpayer’s home state. (4) A taxpayer who was properly registered or licensed with the Department or DOF (in the tax type for which disclosure is sought) and who surrendered or canceled that license or registration without proper cause or subsequently ceased filing properly. (5) A taxpayer who has been notified of a pending criminal investigation by the Department or DOF.

34. VDA– NYS/C Unified Procedure Requests may be made by the taxpayer or a representative to either the Department or DOF on an anonymous basis. The department contacted will notify the other department. The prospective taxpayer or its representative must present the disclosure in writing. Initial requests may be on anonymous bases. If the initial proposal as put forth by the prospective taxpayer is agreed upon by the Department and DOF, a Voluntary Disclosure Agreement can be drawn up immediately and presented to the Department Bureau Director and the DOF Disclosure Coordinator for approval. If the Department and the DOF Coordinators agree that additional information is required which was not included in the written request, the Department Coordinator will contact the taxpayer or representative to obtain the information.

35. VDA– NYS/C Unified Procedure The letter should set forth details relating to the following: A statement of facts describing the taxpayer’s activities in NYC and NYS, when these activities commenced, and the number of employees and their titles involved in such activities. The statement should indicate in which tax year taxpayer believes its tax obligation first arose. A statement explaining why the taxpayer has failed to file tax returns and pay taxes in the past. Penalties may be waived for reasonable cause. A computation of the taxpayer’s approximate tax liability on a year by year basis. An affirmation by the taxpayer that they have not been previously contacted by the Department or DOF with respect to any potential tax liability for the tax that they are now disclosing, that they are not currently under audit for any State or City tax and that the taxpayer understands that all disclosed facts are subject to audit verification and that, if it is determined that a material fact has been omitted or misrepresented, any agreement reached will become null and void. Other information or data deemed appropriate.

36. VDA– NYS/C Unified Procedure The Written Agreement • Once the fact gathering is complete and the Department and DOF determine that the conditions for a voluntary disclosure agreement are satisfied, the Department and DOF Coordinators and the taxpayer can negotiate the terms for the written voluntary disclosure agreement. • The agreement must include the following elements or terms: • A summary of the facts and representations. • Disposition of penalties. • Years covered. • A statement that all returns and covered periods are subject to audit. Any material omission or representation is grounds for rescission of the Agreement. • The agreed delinquent taxes must be paid within a specified time period. • A commitment to file all tax returns and make estimated payments due after the date of this agreement on a timely basis. All voluntary disclosure agreements must be reviewed and approved by the Department and DOF Coordinators. The agreement must be signed for the Department by the Director of the Audit Division and for DOF by a duly authorized DOF employee.

37. Florida VDA is available unless: • taxpayer has been contacted by the Department before voluntary disclosure; and• disclosures are related to delinquencies or deficiencies that are obvious and would routinely generate a billing if otherwise self-disclosed.

38. Florida Penalties generally waived when tax and interest liabilities have been paid. If tax has been collected and not remitted, 5% penalty will be imposed.

39. Florida Written requests must dislose:• previous contacts by state regarding tax liability;• industry and filer type;• tax type and reporting period;• amounts, if any, of tax collected and not remitted;• FEIN or SSN if payment is included; and• any other relevant facts. Lookback period is 3 years immediately preceding postmark date of voluntary disclosure request.

40. California Available to corporations if taxpayer: • never filed a return with the Franchise Tax Board (“FTB”);• has not been the subject of an inquiry by the FTB with respect to liability for any taxes;• has voluntarily come forward, prior to any contact from the FTB; and• has completed an application for a voluntary disclosure agreement and a full and accurate statement of its state activities for the 6 immediately preceding taxable or income years. Not available if corporation: • is organized and existing under the laws of the state;• is qualified or registered with the Office of the Secretary of State; or• maintains and staffs a permanent facility in the state (storing of materials, goods, or products in a public warehouse pursuant to a contract does not constitute maintaining a permanent facility in the state).

41. California Available to individual S corporation shareholders if:• shareholder is a nonresident on signing date of voluntary disclosure agreement; and• S corporation has applied for voluntary disclosure agreement and all material facts pertinent to shareholder's liability would be disclosed in that agreement.

42. California Specified penalties waived during immediate preceding six years. Taxes, additions to tax, fees, and penalties waived for periods ending prior to immediate preceding six years.Filing Compliance Agreement (FCA) program is available to corporations included in the class of taxpayers in voluntary disclosure program (VDP) statute but who failed to satisfy a VDP eligibility requirement, including nonfilers who were contacted by the FTB.Relief from penalties that may be abated for reasonable cause available under FCA program. Estimated tax underpayment and amnesty penalties may not be waived.

43. California Form 4925 must be filed with FTB. Taxpayer has 30 days (120 days with approval by FTB) to file returns and pay all taxes and interest after agreement is signed. Disclosure may be made anonymously.Written request to enter into Filing Compliance Agreement (FCA) must contain:• explanation of the unfulfilled filing requirement and unpaid California tax liability;• detailed facts qualifying taxpayer for a waiver of penalties; and• years for which taxpayer seeks relief.

44. California Lookback period is 6 years for VDA. No limited lookback period for Filing Compliance Agreement (FCA) program

45. Texas Available if taxpayer has not been contacted, verbally or in writing, regarding an audit or investigation. 60 days to file tax return and pay tax after execution of agreement. Penalties will be waived. Interest will be waived on taxes voluntarily disclosed and paid that were not collected. Nexus questionnaire must be completed and returned within 30 days after receiving disclosure agreement and application.

46. Texas The written request for agreement must disclose: • type of entity; • description of activities including specific in-state activities; • start date of business and in-state activities; • tax type involved; • any taxes already paying in state; • if there has been previous contact by Comptroller; • tax collected but not remitted; • estimated tax due; and • any additional supporting information. Representative initiates process on behalf of anonymous client. Lookback Period is 4 years.