The Power of Voluntary Taxpayer Disclosure

Today the Boston Globe reported that PTC, Inc. (“PTC”) voluntarily disclosed that its Chinese subsidiaries allegedly provided about $1.5 million in bribes to foreign officials over a period of five years (from 2006 through 2011) in violation of the United States Foreign Corrupt Practices Act. PTC is a publicly held company that has been involved in the Massachusetts high-tech scene for over 30 years. In addition to voluntary disclosure, PTC fired the employees involved, replaced its leadership team in China, and enhanced its compliance practices.

Through voluntary disclosure, PTC obtained the following benefits:

(1) A non-prosecution agreement with the United States Department of Justice.

(2) A fine ($28 million) that PTC could pay without financial difficulty.

(3) Minimizing the effects of negative publicity on its business and its stock price.

As evidence of PTC’s successful conclusion after the announcement yesterday, PTC’s stock price actually rose by about 1 percent yesterday after the settlement was announced. For the full story in the Boston Globe, click here. A business can achieve similar results when it self-reports noncompliance with United States and state tax laws under relevant federal and state voluntary disclosure programs.

What is Voluntary Disclosure in the Federal and State Tax Area?

  1. Benefits of Federal and State Voluntary Disclosure Programs

Federal and state voluntary disclosure programs allow certain categories of noncompliant taxpayers to come forward voluntarily and pay taxes accrued during a limited lookback period. Taxpayers accepted into these disclosure programs typically:

  • Avoid the threat of criminal prosecution;[1]
  • Avoid taxes accrued prior to the lookback period;[2]
  • Avoid failure-to-file and failure-to-pay penalties normally imposed on unpaid taxes accrued during the lookback period; and
  • Avoid interest on taxes accrued during the lookback period.[3]
  1. Multistate Voluntary Disclosure

Multi-state voluntary disclosure allows a tax non-filer with potential liability in multiple U.S. states (including the District of Columbia) to negotiate a settlement agreement regarding back liability on favorable terms through a single point of contact and a single, uniform procedure.[4] Typically, taxpayers are able to negotiate these voluntary disclosure agreements anonymously. Both individuals and businesses may be eligible to participate in state voluntary disclosure programs. The various states differ in the degree of formality to the voluntary disclosure process.

  1. Other Tax Resolution Methods

Other federal and state tax resolution methods include:

  • Settlement Based on Doubt as to Liability with the IRS or a state department of revenue at the audit stage,[5] the appeals stage[6] or before the courts.
  • Some states, such as Massachusetts, also have a number of “fast track” settlement programs, such as (1) the Early Mediation Program;[7] (2) Expedited Settlements;[8] and (3) a new Massachusetts pilot settlement program, announced on February 8, 2016, regarding Settlement of Uncertain Tax Positions.[9]
  • Installment Payment Agreements give taxpayers additional time to pay an old tax bill. Typically, the taxpayer pays all penalties and interest, including penalties and interest that accrue during the installment payment period.
  • Offers in Compromise based on doubt as to collectability.[10] Here, the taxpayer pays a portion of what is due.
  • State Only Tax Amnesties where state departments of revenue agree to forgive penalties, provided that the related taxes are paid during a specified amnesty period. The current Massachusetts amnesty runs between April 1, 2016 and May 31, 2016.[11]

Attorney Morris N. Robinson, CPA, LLM is Managing Director of M. Robinson Tax Law, a boutique tax law firm located at the Landmark Building on Federal Street in Boston’s financial district. He is also serving his second term as president of the New England chapter of the American Association of Attorney – CPAs. M. Robinson Tax Law is a recognized leader in tax audit defense for both businesses and individuals at audit, on appeal and before the United Sates Tax court and the Massachusetts Appellate Tax Board. For a recent article on State Voluntary Disclosure published by Attorney Robinson in State Tax Notes on January 18, 2016 click here.

 

The material in this publication does not constitute legal advice. It is intended for general information purposes only. If legal issues arise, the reader should consult legal counsel. If you have questions or need assistance with regard to tax debts or tax controversies with the IRS, the attorneys at M. Robinson & Company may be able to assist you. Please feel free to contact us at 617-428-6900.

 

[1] The willful violation of state tax laws is usually a serious criminal offense. Therefore, both the anonymity of the taxpayer and attorney/client privilege should be preserved until tax counsel reaches a deal with the state taxing authorities.

[2] Under state voluntary disclosure programs, taxpayers agree to pay taxes accrued during a specified lookback period. Taxes accrued prior to the lookback period are generally forgiven.

[3] Massachusetts does not forgive interest under its voluntary disclosure program.

[4] See Multistate Voluntary Disclosure Program. Multistate Tax Commission Website. http://www.mtc.gov/Nexus-Program/Multistate-Voluntary-Disclosure-Program. Last visited November 22, 2015. This multistate voluntary disclosure program only applies to member states. The list of member states is listed at http://www.mtc.gov/Nexus-Program/Member-States. Last visited November 22, 2015.

[5] Although auditors typically do not have settlement authority, as a practical matter they can settle cases by “trading” issues. The auditor agrees with the taxpayer’s position on Issue “A;” and the taxpayer agrees with the auditor’s position on Issue “B.” Assuming that there are only two tax issues and that both issues are for similar dollar amounts, such an issue trade amounts to an approximately settlement based on 50 cents on the dollar. Similarly, auditors may assess the 20% significant understatement of tax penalty on one issue, but not on another issue.

[6] Although Massachusetts typically does not permit the abatement of penalties, the Massachusetts Department of Revenue will abate penalties as part of an overall settlement based on doubt as to liability.

[7] Massachusetts AP 635: Early Mediation Program.

[8] Massachusetts AP 628.5.2: Expedited Settlements.

[9] Massachusetts AP 637: Voluntary Disclosure Program for the Settlement of Uncertain Tax Positions

[10] Taxpayers have the right to contest a tax bill before it is assessed. Generally, taxing authorities take a dim view of taxpayers who bypass normal tax dispute resolution procedures. As a result, offers in compromise based on doubt as to liability rarely succeed.

[11] See MDOR Announcement http://www.mass.gov/dor/breaking-news/amnesty/tax-amnesty-info.html (Last visited February 17, 2016.)

 

 

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