States Offer Voluntary Disclosure Programs to Help With Delinquent Tax Returns
By Jonathan Medows, CPA
Medows CPA, PLLC (www.medowscpa.com).
Despite the obvious benefits of being your own boss: flexible hours…stimulating daily work…the opportunity to make more money than you can working for someone else, small-business owners and freelancers face challenges unique to self-employment. Along with the likelihood of sporadic paychecks, paying your own insurance bills, and financing your business, the self-employed are responsible for setting money aside for taxes. Every year, year-in and year-out, they must report their earnings and pay the government. But with the current economic situation, many of the self-employed simply cannot pay what they owe.
So, What To Do If You Come Up Short?
In September 2008, several states, including New York, initiated “Voluntary Disclosure Programs” in an effort to ease collection of unpaid taxes. The objective? Encouraging those who haven’t paid their taxes to come forward on their own. The Offer? Significant incentives to anyone agreeing to arrange payment.
What’s more, voluntary disclosure laws include privacy provisions that protect compliance by not using disclosed information against participants. However, there is this exception: Taxpayers intentionally violating the terms of voluntary disclosure agreements may find the government using their disclosed information against them.
This program benefits the government and taxpayers. Since time and money are not wasted tracking down the delinquent, States collect the money owed and taxpayers avoid criminal charges. While the program waives penalties for late returns, payment of tax principal and interest is still required.
In addition to clearing delinquent taxpayers of penalties and criminal charges, the plan saves them plenty of money. In fact, with penalties alone accounting for 25 to 50 percent of tax bills for late filing, this program is too good to pass up. What’s more, penalties for outstanding liabilities could equal or exceed the outstanding interest, so the advantage of paying interest-only–sidestepping those additional charges–is tremendous.
Taking advantage of the program is simple:
- First, prepare outstanding tax returns and file an application, which can be found state Revenue Department websites.
- Then, enter into an agreement to pay what’s owed and to pay future taxes as they come due.
- Installment payments can be arranged if taxes due cannot be paid in full.
The program covers all taxes administered by State Tax Departments – including income, corporate, and sales. Any taxpayer meeting the eligibility criteria can participate, even if nonpayment was the result of fraudulent or criminal conduct.
But not everyone is eligible! For example, New York State disqualifies anyone who has already been contacted by the State about an outstanding return, or who is under criminal investigation by the state agency or political subdivision, or who is being audited by the government.
The Toughest Part?
Dealing with back taxes is something many taxpayers—business owners especially–try to avoid, or at least avoid thinking about. And why not? There’s the cost of a business owner’s time and of hiring competent professional advice, not to mention the cost of the taxes owed and penalties! Small wonder that, even now, taxpayers who’d benefit most from Voluntary Disclosure plans are still shying away.
Lack of awareness? Perhaps. But if you think about it, the advantages of voluntary disclosure are many, very clear, and when understood, extremely difficult to pass up. Saving money…Avoiding prosecution…Forestalling further penalties. Powerful incentives all. The psychological effect of coming out of the proverbial closet and avoiding those calls from the tax man? Priceless!
About Jonathan Medows, CPA - Jonathan Medows received his Bachelor of Science, magna cum laude, in Economics and Accounting and his Master of Business Administration in Finance from the Stern School of Business, New York University. Mr. Medows also earned his Master of Arts in Judaic Studies and Rabbinic Diploma from the Jewish Theological Seminary of America. As a Certified Public Accountant in the States of New York and Maryland, Mr. Medows has worked as a Staff Accountant for Arthur Andersen and as a Senior Consultant in the Restructuring Group of KPMG. For the past five years, he has been engaged in private practice and is the managing member of Medows CPA, PLLC (www.medowscpa.com).