There has been talk recently about the Department of Revenue (DOR) “Enhancements” to its Voluntary Disclosure Program (hereafter referred to as “Program”). That talk suggests that something new is available to businesses wishing to avail themselves of the benefits of voluntary disclosure. In appropriate circumstances voluntary disclosure may well be beneficial, but the fact is that the criteria for entitlement to those benefits have not changed in over 20 years (see, RPM 89-4), and the enhancements which took effect March 4, 2014, provide no new level of relief. What the enhancements do provide is more readily available information in one place online, a check the box online application, and the finality of a formal agreement if DOR accepts a business’ qualification for voluntary disclosure partial relief. But, whether or not a business uses the online disclosure option, it is likely to face inquiries and examination by DOR as to qualification under the Program if the amounts disclosed are above minimum thresholds.
What is voluntary disclosure? First announced in 1989, the Program was designed to bring unregistered taxpayers “into the fold,” particularly out of state businesses that may have belatedly become aware that they are required to report income from, and possibly to collect sales tax on, Washington business activities. The problem for unregistered businesses is that there is no statute of limitations which protects an unregistered businesses as to how many years back DOR may go in assessing tax, so businesses that are discovered by DOR and involuntarily registered normally face an unlimited look-back period of taxes owed, plus penalties and interest. The DOR’s reasoning was that businesses which owed many years taxes would be encouraged to voluntarily step forward if they knew there was a cap on how far back DOR would assess taxes. Therefore, the Program provides that if an unregistered (and never previously registered) business voluntarily applies for a Washington business license, and makes a good faith effort to report taxes owed, it will face a look-back period of 4 years plus the current year, which is the normal statute of limitations for assessments. Moreover, it will owe interest, but not penalties (which means, incidentally, that it will actually fare better than a registered business which will face penalties on back taxes). The Program states that if a taxpayer is discovered (contacted) by DOR, before it makes voluntary disclosure, then it will be subject to 7 years plus the current year in back taxes, plus penalties and interest. The limited look-back period does not apply where an unregistered business has been collecting but not remitting sales tax, or is otherwise deemed to have engaged in fraudulent practices.
What are the 2014 enhancements? They are self described by DOR as being “streamlining and standardization” to ensure “more efficient and consistent customer service.” However, there is nothing in law which requires an unregistered business to use the online procedures for application, and businesses that file an application for a master business license, indicate in the application that they will be required to report taxes to the state, and subsequently file tax returns directly will also qualify for the limited look-back assessment and waiver of penalties. In sum, there are procedural changes in the enhancements, but no substantive changes. Some unregistered businesses may find the online application more convenient, but they should not expect any greater tax relief than has been in effect for over 20 years.
Voluntary Disclosure Program is not amnesty or settlement. First and foremost, the disclosure Program is not general amnesty because it is available only to unregistered businesses. A registered business which has not filed, will normally have the benefit of the normal statute of limitations (except for sales or other taxes collected directly from the consumer), if assessed for back taxes, whether voluntarily reported or assessed by audit. But it will normally be subject to one or more penalties depending on the facts of the case. Second, unregistered business which seek the limited look-back of the disclosure Program are normally asked what their income was in Washington during the look-back period, not what they think their taxable income should be. Therefore, business which think they did not have nexus or delivery for the entire look-back period, or services business which think they are entitled to apportion their income between Washington and other jurisdictions will not normally want to report 100% of sales. The amount disclosed may or may not be inquired into, but certainly it is not closed to later audit. An unregistered business, even one accepted as qualifying for the disclosure Program may not have heard the last from the DOR, and in fact the disclosure agreement between the business and DOR clearly states that the assessment resulting from the Voluntary Disclosure Agreement is limited in scope and is subject to a future field audit covering all areas of possible taxation within the statutory period, and that the Department reserves the right to assess any other tax due or tax credit found at a later date for the time period covered by the assessment