The New York State Department of Taxation and Finance Grants Relief for Non-Filers
By: Gregory Verdibello
Unfiled returns can create financial and emotional stress, and can cause criminal issues for many people. It seems that more and more people are failing to file their returns on time, or even file at all. This could be due to lack of records, personal issues, financial issues, or simply just ignoring one’s obligation under the law. The problem with not filing tax returns is that tax agencies such as the Internal Revenue Service (“IRS”) and the New York State Department of Taxation and Finance (“DTF”) will assess penalties for failure to pay tax and failure to file your tax returns. It is also a crime to not file your tax returns under federal and state law. Not filing can cause a bank to deny someone a mortgage and it can put a strain on marriages and business relationships.
There is good news for people who have not filed their tax returns with DTF. In 2008, New York State created a Voluntary Disclosure and Compliance (“VDC”) Program under N.Y. Tax Law § 1700. Taxpayers who are accepted into the VDC Program and comply with the VDC Program agreement will be granted a civil penalty abatement for the eligible tax years, DTF will agree not to pursue criminal actions for the eligible tax years, and the taxpayer might not need pay tax, interest, or penalties on some of their unfiled returns. Below are some common questions that taxpayers might have regarding the DTF VDC Program.
What is the DTF VDC Program?
The VDC Program was created in order to encourage Eligible Taxpayers who owe back taxes, for whatever reason, to voluntarily disclose their Eligible Tax liabilities that are not currently known by DTF. TSB-M-08(6)I. Taxpayers who participate in the program will be required to sign a compliance agreement with DTF in which they promise to correct their past behavior, comply with the tax laws in the future, and pay their past due liabilities. Id. In exchange, eligible taxpayers who comply with the agreement’s requirements will be granted protection from criminal prosecution and the avoidance of civil penalties. Id.
Who is an Eligible Taxpayer?
For purposes of the VDC Program, an Eligible Taxpayer includes, but is not limited to, an individual, partnership, estate, trust, corporation, limited liability company, or any other person subject to a tax administered by DTF who meets the following requirements: (1) The taxpayer is currently not under audit by DTF; (2) the taxpayer is voluntarily disclosing a New York tax liability that the department has not determined, calculated, researched or identified at the time of the disclosure (i.e., the taxpayer has not received a bill from DTF); (3) the taxpayer is not currently a party to any criminal investigation being conducted by an agency of NYS or any political subdivision thereof; and (4) the taxpayer is not seeking to disclose participation in a tax avoidance transaction that is a federal or New York state reportable or listed transaction (i.e., a tax shelter).. N.Y. Tax Law § 1700(2); DTF Pub. 200: The Voluntary Disclosure Program.
What is an Eligible Tax?
For purposes of the VDC Program, an Eligible Tax is any tax type that can be imposed (or imposed under prior law) under NYS Tax Law or any other law administered by DTF. N.Y. Tax Law § 1700(1). The major types of Eligible Taxes include income (NYS and NYC), sales, and withholding taxes.
What is the Application Process?
An Eligible Taxpayer who is disclosing an Eligible Tax must submit an application with DTF. The application requires the taxpayer to provide identifying information, complete a disclosure statement describing the nature of the tax liability and the tax periods covered by the application, and provide any other information that DTF may require. TSB-M-08(6)I. Upon receipt the application, DTF will determine whether or not the taxpayer is eligible and DTF may require additional information from the taxpayer. DTF claims that no application will be denied solely because the taxpayer has admitted that the tax liability is the result of fraudulent or willful conduct. Id. If the taxpayer application is denied, DTF cannot use the disclosure against the taxpayer in any proceeding or share the information with any other agency. Id.
Do I Need to File All of My Unfiled Returns?
If an eligible taxpayer owes taxes for more than three years, the taxpayer can request a limited look-back period in his/her disclosure statement. DTF will consider adding a “limited look-back clause” to VDC Program agreements under certain circumstances:
- Collected sales and withholding tax (trust taxes) not remitted to the state;
- Look-back period will be the shorter of six years or the period that begins with the earliest date on which the tax was collected or withheld and ending with the most recently completed tax period.
- Tax fraud of evasion (other than collected trust taxes);
- Six-year look-back period.
- Mistake, confusion, ignorance of the law, inability to comply, or some other similar explanation (other than cases involving trust taxes);
- Three-year look-back period.
If accepted, DTF will limit its review to the look-back period and will not look back prior to that period to audit or assess the taxpayer for anything related to the tax matter being disclosed. Id. Also, the taxpayer will not be required to file returns for the years prior to the look-back period. Id. Furthermore, the taxpayer will not have to pay tax, interest, or penalties on those returns.
What Are the Terms of the VDC Program Agreement?
If the taxpayer is accepted into the VDC Program, then the taxpayer will receive a VDC Program agreement from DTF. N.Y. Tax Law § 1700(5)(a). The VDC Program agreement may or may not include a “limited look-back clause.” Generally, DTF requires that the taxpayer submit his/her delinquent return(s) within forty-five days from the date of the agreement. The taxpayer must pay any tax and interest for the period(s) included in the VDC Program agreement. Id. However, if DTF determines that the taxpayer cannot make immediate fully payment, then DTF may enter into an installment payment agreement with the taxpayer. Id.
The VDC Program agreement can be rescinded if: (1) The taxpayer intentionally provides false material information or omits material information in his or her VDC Program application; (2) the taxpayer attempts to intentionally defeat or evade a tax subject to the agreement; or (3) if the taxpayer intentionally fails to comply with any terms of the compliance agreement. N.Y. Tax Law § 1700(5)(b). If the VDC Program agreement is rescinded, then DTF will be free to use the taxpayer’s disclosures against the taxpayer and can pursue any civil or criminal penalty that might apply to the misconducted disclosed on the taxpayer’s VDC Program application. N.Y. Tax Law § 1700(3). Also, the VDC Program agreement does not preclude the state from auditing returns that were submitted through the VDC Program. Id.
In summary, the DTF VDC Program is an excellent program that should be utilized more by taxpayers and tax professionals. It is extremely important that taxpayers comply with the VDC Program agreement, or else DTF is free to use their VDC disclosure statements against them. The VDC Program can alleviate financial and emotional stress for people who are ready and willing to come forward about their unfiled returns and want to become tax complaint with NYS.
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