State Voluntary Taxpayer Disclosure Programs: An Overview

State Voluntary Disclosure Programs: An Overview[1]

By Attorney Morris N. Robinson, CPA, LLM[2]

What is Voluntary Disclosure?

Most state departments of revenue[3] allow certain categories of noncompliant taxpayers to come forward voluntarily and pay taxes accrued during a limited lookback period.[4] Taxpayers accepted into state voluntary disclosure programs typically:

  • Avoid the threat of criminal prosecution;[5]
  • Avoid taxes accrued prior to the lookback period;[6]
  • 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.[7]

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.[8] 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 with which they design and operate their respective voluntary disclosure processes.

State voluntary disclosure programs are one method whereby taxpayers may resolve their tax liabilities – often, for significantly less than the proposed assessment.[9] Other tax resolution methods include:

  • Settlement with the department of revenue at the audit stage,[10] the appeals stage[11] or before the courts based on doubt as to liability. Some states, such as Massachusetts, also have a number of “fast track” settlement programs, such as (1) the Early Mediation Program;[12] and (2) Expedited Settlements.[13]
  • 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.[14] Here, the taxpayer pays a portion of what is due.
  • Tax amnesties where state departments of revenue agree to forgive penalties, provided that the related taxes are paid during a specified amnesty period. Here, again, the taxpayer generally pays only a portion of what is otherwise due.

The Taxpayer’s Goals in Entering a Voluntary Disclosure Program

Taxpayers seek entrance into voluntary disclosure programs for a number of reasons. Some of the more important reasons follow:

  1. To Quantify Unreported Tax Liabilities

Businesses may want to quantify their federal and state tax liabilities either before or after they have been acquired by publicly traded issuers which are generally defined as businesses required to register and report with the SEC and state securities regulators.

  • Potential buyers typically review the tax exposure of targets before acquisition. The review typically includes income, payroll and sales taxes. Wise sellers will therefore clean up outstanding tax issues before the acquisition.
  • Sometimes, a business is acquired before the outstanding tax issues are fully resolved. In such cases, sellers may set aside money for the payment of these potential liabilities and may set up accounting reserves.

In either case, a voluntary disclosure – either pre-acquisition or post-acquisition – may be the most practical way to bring a business into full tax compliance.

  1. Avoidance of Criminal Responsibilities

Sometimes non-compliance is due to carelessness. For example, small businesses sometimes experience explosive growth. This results in a number of related financial and tax issues.

  • The business owner is totally consumed in building his/her business. He/She has little time to deal with tax compliance issues. There may also be too few executives available to run the business. Those executives in place often may lack the time to fully address tax compliance issues.
  • Inadequate cash reserves intensify the problems facing the business and its executive team. Being small businesses, they cannot easily find money from public sources of capital or the banks. They thus have no choice but to rely on retained earnings for their growth. Thus, the business may seek to use income tax money, for example, to fund its growth.

Ultimately, the business owner and his/her team of executives stop climbing the mountain. The view they suddenly see is one that involves massive tax noncompliance. They are concerned with their criminal exposure.

  1. Avoidance of Penalties

Penalty avoidance can be significant. Typically, if a tax return is not timely filed, the failure-to-file penalty rate is 25 percent of the unpaid tax. If a tax is not timely paid, the failure-to-pay penalty rate is also 25 percent of the unpaid tax. These two penalties amount to 50 percent of the unpaid tax. Many states, like Massachusetts, impose interest on these penalties. Thus, penalty avoidance can reduce the total payments by a third. Assume:

             Taxes and Penalties                    Percentage of Total Taxes and Penalties

Unpaid Tax                           $100,000                          66.670%

Failure-to-File Penalty            25,000                          16.665%

Failure-to-File Penalty            25,000                          16.665%

Total                                       $150,000                        100.000%

Sometimes non-compliance is due to inattention and ignorance. Here are some typical scenarios where penalties might be avoided even if the excuse does not amount to “reasonable cause.”[16]

  • Creeping Nexus. A business may be invited to bid on a particular project in a new state. The bid is successful and the business gets the work. Over several years, the word spreads and soon the business is doing substantial business in that state. But, no one may have told the accounting office, which may not break out sales to the new state. Similarly, the outside accountants may not have been told and may not have prepared appropriate income taxes. Finally, someone will notice that the business is non-compliant.
  • Public Law 86-272 Issues. Corporate headquarters believes its salespeople were complying fully with Public Law 86-272, which exempts from income tax businesses that accept all sales orders for fulfillment out-of-state. The business learns that some of its account representatives have been making occasional small sales in-state, thereby voiding the protection afforded by Public Law 860-272.
  • Confronting Ambiguities in the Tax Law. There are often serious ambiguities in the tax law. Some of these ambiguities include:
    • Transfer pricing issues.
    • Economic nexus.
    • Apportionment Issues.
  1. Avoiding Interest

Massachusetts will not waive interest where a taxpayer makes a voluntary disclosure. But many other states do. The waiving of interest is important because some states impose high rates of interest. The two states that forgive interest under a voluntary disclosure agreement are Texas and Illinois.

  1. Clarification on Tax Obligations of Taxpayers on an On-Going Basis

Massachusetts will not clarify the tax obligations of taxpayers under its voluntary disclosure program.[17] But other states, such as Connecticut, permit taxpayers to negotiate their on-going tax obligations as part of a voluntary disclosure negotiation.

The Government’s Dilemma

Neither IRS nor the state departments of revenue have the tools they need to administer the tax laws effectively. Over the past 30 years governments have significantly reduced their use of tax auditors and now rely almost exclusively on computers and whistleblowers to ferret out tax noncompliance.[18] But computers have significant weaknesses:

  • Computers use algorithms to evaluate filed tax returns. But computerized algorithms are ineffective in policing unfiled income tax returns.
  • Computers compare databases to ferret out taxpayers who fail to file returns. But computers are ineffective when the existence of the taxpayer as a computer record does not occur on relevant databases accessible to government computers.

This reality is the context for the periodic state amnesties and the proliferating federal and state voluntary disclosure programs. Taxing authorities face a tension:

  • Lacking adequate enforcement mechanisms, the taxing authorities want taxpayers to come forward voluntarily, disclose accurately the amount of their unpaid taxes, and come into full tax compliance.
  • The taxing authorities also want to prevent taxpayers from “gaming the system.” Thus, the taxing authorities rely on a hierarchy of civil and criminal penalties that include incarceration and loss of reputation.

Thus, the central question for government is:

  • When to allow taxpayers to come forward voluntarily, without penalty, and quietly come into compliance?
  • When to impose a system of penalties to punish noncompliant taxpayers and to allow those punishments to serve as a warning to others?

Thus, taxpayers should not assume that governments will automatically approve their applications for voluntary disclosure. There is always a risk that the taxing authorities might choose to respond to a voluntary disclosure with criminal prosecution. It follows that the mechanics of the voluntary disclosure process must begin with the choice of the taxpayer’s representative, discussed immediately below.

The Mechanics of Voluntary Disclosure

  1. Who Should Represent the Taxpayer?

Taxpayers should never represent themselves. Taxpayers who represent themselves lose the benefit of anonymity, discussed in section 4, below. Wise taxpayers will use tax attorneys who possess significant skill and experience in the area of voluntary disclosure law. There are two reasons for this:

  • Under state voluntary disclosure programs, taxpayers are admitting tax noncompliance which can trigger criminal sanctions, if such tax noncompliance is willful. See the bottom of paragraph 4, below. Thus, wise taxpayers will use tax attorneys who possess significant skill and experience in this area of the tax law.
  • By using an attorney, the taxpayer is protected by both the attorney/client privilege and the anonymity of the process until a voluntary disclosure agreement has been reached.[19]

Tax counsel should possess significant experience in the substantive law that underlies the voluntary disclosure. This is especially true in states like Massachusetts where the substantive law is quirky and abounds in traps for the unwary. For example, the apportionment of corporate income depends, in part, on whether a corporation is classified as a “manufacturing corporation.”[20] Under Massachusetts Department Directive 12-7, the misclassification of a “manufacturing corporation” may trigger a 20 percent understatement-of-tax penalty.[21] Thus, without skilled Massachusetts tax counsel, a taxpayer may choose to come forward expecting that corporate income will be allocated based on the normal three-factor allocation formula where sales are double counted. But once the taxpayers had given up the shroud of anonymity, the taxpayer is obligated to report and pay the correct amount of tax. In the case of a manufacturing corporation the correct amount of tax may be either substantially more – or substantially less – than the tax computed based on the threefactor allocation formula.

Tax counsel should have significant experience in all tax dispute settlement tools since voluntary disclosure is only one of several effective tools available to resolve taxpayers’ obligations efficiently.[22]

  1. Acceptance Into Voluntary Disclosure Programs

State departments of revenue find themselves caught between a rock and a hard place. See The Government’s Dilemma, above. While they must necessarily rely on voluntary disclosure, they do not want to encourage taxpayers to “game the system.” Therefore, departments of revenue typically take the following into consideration in deciding whether to allow a taxpayer admittance into their voluntary disclosure program.[23] The most important issues considered by state departments of revenue follow: [24]

  • Did the taxpayer act in good faith? Or was noncompliance due to a willful disregard for the tax laws?
  • Had the taxpayer previously contacted the department of revenue? If so, the taxpayer’s continued failure to collect and pay over was likely due to a willful disregard of the tax laws.
  • Had the taxpayer registered for the tax? If so, the failure to collect and pay over was possibly due to willful disregard for the tax laws, a potentially criminal offense.
  • Had the taxpayer actually collected the tax? If so, the failure to pay over was stealing and the taxpayer is not due any consideration, other than, perhaps, the avoidance of criminal prosecution in exchange for prompt and full payment of the taxes due.
  1. The Application for Voluntary Disclosure

Each state has a voluntary disclosure application process that should be complied with carefully and fully. Some states (and the Multistate Tax Commission) require online filing. Others mandate “paper” filing. The application should always be made on behalf of the taxpayer by a highly experienced practitioner for the following reasons:

  • The taxing authorities do not accept every voluntary disclosure request. They decide which to accept and which to reject.[25] Thus, taxpayers must rely on the judgment of skilled practitioners in crafting their story so that the government auditors who read the taxpayer’s application decide to accept the taxpayer into the state’s voluntary disclosure program.
  • The failure to be completely candid with the taxing authorities can have very serious consequences to the taxpayer. The taxpayer admits that it has failed to comply with the tax law, where willfulness is a criminal offense. The taxpayer may claim, however, that the non-compliance is due to mistake, inadvertence, distraction and inattention. If, however, the taxpayer fails to be completely candid, the taxing authority might refuse to give the taxpayer the benefit of the doubt and may even assert that the underlying non-compliance was willful, triggering a possible criminal prosecution. Thus, all facts should be checked – especially facts that the taxing authorities can easily check by accessing their computer databases.
  1. Anonymity Should Be Preserved Until the Taxpayer is Accepted Into the Voluntary Disclosure Program

Generally, it is not a problem to maintain anonymity until the taxpayer is accepted into the voluntary disclosure program. But there are significant problems in maintaining anonymity where the taxpayer is currently noncompliant with ongoing sales and/or payroll taxes. The taxpayer faces the following dilemma:

  • The taxpayer may be in violation of the criminal laws by intentionally collecting sales taxes and failing to properly report and remit them.
  • The taxpayer and its financial executives are also “responsible parties.” If these persons fail to collect the tax, they may be personally responsible for paying those uncollected taxes to the taxing authorities. Meantime, it may be impractical or impossible to recover these taxes from customers or employees.

Thus, these situations must be treated with a great deal of urgency and the taxing authorities must be asked to deal with the related voluntary disclosure requests on an expedited basis.[26] The consensus of good practice is not to register for these taxes before attempting a voluntary disclosure.[27]

  1. The “Lookback” Period

How far back should the taxpayer be required to prepare and file new or corrected returns? The “lookback” period differs based on the state. Typically, it ranges from between three and six years.[28] For details, see, generally, the Summary of Voluntary Disclosure Programs for Selected States, below. In some cases, the company might no longer exist.[29] In such a case, the look back period might be limited to the last three to five years of the company’s existence. If taxes were collected, the look back will extend at least to those years where the taxes were collected.

  1. Audit Issues Involved with Voluntary Disclosure

State departments of revenue reserve the right to audit the taxpayer’s books and records. Therefore, it is very important that the taxpayer’s voluntarily disclosed returns be supported by accurate and clear supporting records.

  1. Nexus Issues Involved with Voluntary Disclosure

Sometimes, it is not clear if the taxpayer is required to report, and/or collect and pay over. The issue might involve nexus, or, more likely, the application of Public Law 86-272.[30] In such cases, states may be willing to entertain a private letter ruling.

  1. The Voluntary Disclosure Agreement

The final step in the voluntary disclosure process is a voluntary disclosure agreement.[31] A voluntary disclosure agreement is a contract between the taxing authorities and the taxpayer. Therefore, it is critical to read it through carefully, before asking the taxpayer to sign. Double check that everything that was negotiated is included in this agreement.

When to Disclose?

The “book answer” is that taxpayers should disclose before being acquired and before notice of an audit. While an early disclosure is preferable, a later disclosure can provide significant benefits.

  1. Post-Acquisition Voluntary Disclosure

Sometimes the acquisition of a target cannot wait until state tax issues have been voluntarily disclosed and resolved. In such cases, the seller may set aside purchase money for the buyers that is contingent upon the successful resolution of the previously undisclosed tax exposure. If the exposure is material, the accountants may insist that accounting reserves be set up against a possible payment to the taxing authorities. For both reasons, it is appropriate for the buyers to prosecute the resolution of state and local tax issues via a voluntary disclosure after the acquisition.

  1. Post-Audit Notice Voluntary Disclosure

In my experience, I have found that voluntary disclosure can provide significant taxpayer benefits after an audit commences and even after a case has been designated for criminal prosecution. Here are two examples from my experience.

  • Failure to Report Significant Sales Taxes. A taxpayer received notice of a state and local tax audit. The taxpayer had not properly reported sales subject to sales tax. We concluded that there was “reasonable cause” for the failure to properly report these sales, including consistent errors by a CPA and a bookkeeper. We showed the state auditor how the mistake was made and the correct amount of the tax. The taxing authorities treated the taxpayer’s explanation as “reasonable cause,” thereby permitting the taxpayer to avoid over $200,000 in penalties and related interest.[32]
  • Failure to Report Income. The taxpayer consistently failed to report his income over a period of years. This failure was intentional and the taxpayer pleaded guilty to tax fraud. During the pendency of the case, the taxpayer provided IRS with revised and corrected income tax returns for the years at issue along with payment in full. At the sentencing hearing, the judge took the taxpayer’s cooperation into account and sentenced the taxpayer to a “half-way” house so the taxpayer would be able to continue to run his business, thereby preserving both the taxpayer’s business and the jobs of the employees.
  • Caution: Disclosure after the commencement of an audit should never be attempted without first consulting with a highly-experienced tax attorney.[33] The benefits and potential drawbacks of voluntary disclosure should be provided to the client, in writing. The client should be asked to “sign off” that the client understands both the advantages and drawbacks of voluntary disclosure in these circumstances.

Summary of Voluntary Disclosure Programs

For Selected States[34]

A summary of some of the important terms of voluntary disclosure programs for selected states is presented below. These states are: California, Connecticut, Illinois, Maine, Massachusetts, Michigan, New Hampshire, New York, Vermont, Texas and Virginia.

  1. California
  • Voluntary Disclosure Program: Yes.
  • Typical Lookback Period: 6 years.
  • Waiver of Failure-to-File/Failure-to-Pay Penalties: Yes.
  • Waiver of Interest on Underpayment: No.
  • Anonymity: Yes – Provided that a taxpayer representative calls the California Franchise Tax Board and does not reveal the name of the taxpayer.
  1. Connecticut 
  • Voluntary Disclosure Program: Yes.
  • Typical Lookback Period: The sales tax is 3 years plus the current year and all other types of tax are generally 3 years.
  • Waiver of Failure-to-File/Failure-to-Pay Penalties: Yes. However, offshore disclosure penalties may not be waived.
  • Waiver of Interest on Underpayment: No.
  • Anonymity: Yes.
  1. Illinois
  • Voluntary Disclosure Program: Yes.
  • Typical Lookback Period: 4 years by statute.
  • Waiver of Failure-to-File/Failure-to-Pay Penalties: Yes, upon approval of the Illinois Board of Appeals. This is not automatic, but is usually approved with a form to petition the Board.
  • Waiver of Interest on Underpayment: Yes, upon approval of the Illinois Board of Appeals.
  • Anonymity: Not allowed.
  1. Maine
  • Voluntary Disclosure Program: Yes.
  • Typical Lookback Period: Typically 3 years, but sales tax is includable for as long as collected.
  • Waiver of Failure-to-File/Failure-to-Pay Penalties: Yes.
  • Waiver of Interest on Underpayment: No.
  • Anonymity: Yes.
  1. Massachusetts
  • Voluntary Disclosure Program: Yes.
  • Typical Lookback Period: 3 years.[35]
  • Waiver of Failure-to-File/Failure-to-Pay Penalties: Yes.
  • Waiver of Interest on Underpayment: No.
  • Anonymity: Yes.
  1. Michigan
  • Voluntary Disclosure Program: Yes.
  • Typical Lookback Period: 4 years; or 3 years if the taxpayer included the unreported income in a return filed with another state.
  • Waiver of Failure-to-File/Failure-to-Pay Penalties: Yes.
  • Waiver of Interest on Underpayment: No.
  • Anonymity: Yes.
  1. New Hampshire
  • Voluntary Disclosure Program: Available for any tax administered and any type of taxpayer.
  • Typical Lookback Period: 3 years.
  • Waiver of Failure-to-File/Failure-to-Pay Penalties: Yes.
  • Waiver of Interest on Underpayment: Yes.
  • Anonymity: Yes. The program is not available for liabilities of less than $500.
  1. New York
  • Voluntary Disclosure Program: Yes.
  • Typical Lookback Period: 3 or 6 years. If the tax liability extends beyond 10 years, 6 years is typical.
  • Waiver of Failure-to-File/Failure-to-Pay Penalties: Yes.
  • Waiver of Interest on Underpayment: No.
  • Anonymity: Yes. Taxpayer must apply for the Voluntary Disclosure Agreement online.
  1. Rhode Island
  • Voluntary Disclosure Program: Yes.
  • Lookback Period: 3 years plus the current year. Not for corporations and individuals registered or living in Rhode Island and not available for taxes collected (Trust Funds).
  • Waiver of Failure-to-File/Failure-to-Pay Penalties: Yes.
  • Waiver of Interest on Underpayment: No.
  • Anonymity: Yes.
  1. Vermont
  • Voluntary Disclosure Program: Yes.
  • Lookback Period: 3 years, or to the date exposure is established (lesser of), but only for sales/use tax and corporation and business income. Others must contact the department for verification of the lookback period.
  • Waiver of Failure-to-File/Failure-to-Pay Penalties: Yes.
  • Waiver of Interest on Underpayment: No.
  • Anonymity: Yes.
  1. Texas
  • Voluntary Disclosure Program: Yes, but generally the program is designed for business returns and is not recommended for individuals “usually”.
  • Typical Lookback Period: 4 years.
  • Waiver of Failure-to-File/Failure-to-Pay Penalties: Yes.
  • Waiver of Interest on Underpayment: Yes on all taxes voluntarily disclosed and paid.
  • Anonymity: Yes.
  1. Virginia
  • Voluntary Disclosure Program: Yes.
  • Typical Lookback Period: 3 years.
  • Waiver of Failure-to-File/Failure-to-Pay Penalties: Yes.
  • Waiver of Interest on Underpayment: No.
  • Anonymity: Yes.

End of Article

End Notes

[1]I am grateful to Attorney Michael A. Jacobs of Reed Smith and John H. Kutsukos, Director, Connecticut Department of Revenue Services, Audit & Compliance Division, who presented on the topic of Voluntary Disclosure Programs and Other Alternative Dispute Resolution Methods at the November 16, 2015 conference of the State and Local Tax Forum held in Newton, Massachusetts. l am also grateful to Attorney Yale N. Robinson and Dean Jacobus, CPA, MST of M. Robinson & Company for their tax research in completing the Summary of Voluntary Disclosure Programs For Selected States. I am also grateful to Attorney Patricia Weisgerber, LLM for reading the manuscript and offering helpful suggestions.

[2]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 States Tax court and the Massachusetts Appellate Tax Board. See his blog entitled Defending Federal and State Tax Audits for High Net Income Taxpayers, dated April 14, 2014. Last visited November 22, 2015.  He also has significant experience representing both individuals and businesses in domestic and offshore voluntary disclosure programs with the Internal Revenue Service and state voluntary disclosure programs. See his blog dated September 16, 2014 entitled IRS Updates to the Streamlined Compliance Procedures under the Offshore Voluntary Disclosure Program: New Forms Standardize the Certification Requirement. Last visited November 22, 2015.

[3] I use the phrase “state department of revenue.” States sometimes give these departments of revenue different names such as the California State Franchise Tax Board or the New York State Department of Taxation and Finance.

[4] For at least a generation, the United States Department of the Treasury has also maintained a voluntary disclosure program. Over the past ten years, both the complexity and the number of United States taxpayers using these voluntary disclosure programs has skyrocketed. Today, these federal voluntary disclosure programs include separate domestic and international programs. The international voluntary disclosure programs include a tangle of programs including (1) the current 2014 Offshore Voluntary Disclosure Program; (2) an “Opt Out” version where the taxpayer is free to negotiate the penalties with IRS; (3) “Streamlined” programs for United States residents with reduced penalty rates and a reduced penalty base; (4) Streamlined programs for United States citizens who are not United States residents without penalties; and (5) a number of voluntary  programs where tax returns and reports containing financial information may be filed without any penalties. For details, see my blog dated September 16, 2014 cited in End Note 2, above.

[5] The willful violation of state tax laws is usually a serious criminal offense. Therefore, the anonymity of the taxpayer should be preserved until tax counsel reaches a deal with the state taxing authorities and the attorney/client privilege should be maintained throughout the process from beginning to end.

[6] 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. For details, see typical lookback periods in our Summary of Voluntary Disclosure Programs For Selected States.

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

[8] See Multistate Voluntary Disclosure Program. Multistate Tax Commission Website. Last visited November 22, 2015. This multistate voluntary disclosure program only applies to member states. The list of member states is listed at Last visited November 22, 2015.

[9] Generally, a state must assess a tax before it can be collected. Therefore, the purpose of most settlement programs is to determine the appropriate assessment. As a practical matter, the only time a taxpayer can obtain a post-assessment settlement is if the taxpayer is able to achieve an offer in compromise based on doubt as to liability.

[10] 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.

[11] 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.

[12] Massachusetts AP 635: Early Mediation Program.

[13] Massachusetts AP 628.5.2 Expedited Settlements.

[14] 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. See clause (1), above.

[16] Many penalty statutes permit the abatement of penalties for “reasonable cause”, even if a voluntary disclosure is not made.

[17] In Massachusetts, such taxpayers may have to request a private letter ruling.

[18] Instead of “boots on the ground,” both the United States and the state have made computers the cornerstone of tax administration. Thus, today, there is about one IRS employee for every 3,879 residents. In Massachusetts today there is one Massachusetts Department of Revenue employee involved in tax administration for each 5,621 Massachusetts residents. In contrast, the historian Edward Gibbon estimated that the number of soldiers needed to control a city of ten million was about 1 solder per hundred residents. Gibbon, The Decline and Fall of the Roman Empire. To obtain these statistics, I simply divided the estimated populations of the United States and Massachusetts by the estimated number of people employed by the United States Internal Revenue Service and the Massachusetts Department of Revenue. I excluded the Massachusetts DOR employees who are engaged in administering child support programs or similar activities.

[19] Once compliant tax returns are filed, the attorney-client privilege is lost with respect to the information contained in those returns.

[20] Under Massachusetts tax law, the income of manufacturing corporations is apportioned based on a single sales factor: sales.

[21] Massachusetts DOR Directive 12-7, Example 2. Last visited November 22, 2015.

[22] These tools are listed at the bottom of Page 1 and the top of Page 2.

[23] The Internal Revenue Service displays similar caution when admitting taxpayers into its domestic and offshore voluntary disclosure programs. See End Note 4 above.

[24] For example, see the Massachusetts Department of Revenue policy statement. Last visited November 22, 2015.

[25] See Paragraph 2, above: Acceptance Into the Voluntary Disclosure Program. See, also, The Government’s Dilemma, above.

[26] Generally, departments of revenue will act expeditiously and sympathetically in these situations – provided that taxpayers act responsibly and in a prompt business-like manner.

[27] This was the consensus of Attorney Michael A. Jacobs of Reed Smith and John H. Kutsukos, Director Connecticut Department of Revenue Services, Audit & Compliance Divisions who presented on state voluntary disclosure programs at the recent New England State and Local Tax Conference.

[28] For example, the current Massachusetts lookback period is set forth in TIR 11-1. Last visited November 22, 2015.

[29] The taxpayer, for example, might have been acquired as part of the purchase of a business and then “merged” out of existence. I am indebted for this insight to Attorney Michael A. Jacobs of Reed Smith, who recently presented on this topic before the New England State and Local Tax Forum.

[30] Many states have regulations which describe the reach of Public Law 86-272 in their state. See the Massachusetts regulation on Public Law 86-272, as an example. Last visited November 22, 2015.

[31] IRS, however, does not issue voluntary disclosure closing agreements in cases involving the streamlined voluntary offshore program.

[32] AP 633: Guidelines for the Waiver and Abatement of Penalties. VII Procedures. A. Waiver of Penalties. Last visited November 22, 2015.

[33] This is necessary (1) to protect the attorney/client privilege and (2) to anticipate, if possible, the range of reaction by the taxing authorities to the taxpayer’s possible voluntary disclosure.

[34] This Summary is based on Reed Smith Program Materials, which our firm modified following our own independent research. See End Note 1, above. The states profiled include a representative sampling of major industrialized states plus Massachusetts and the remaining five New England states.

[35] In one egregious case, I used a seven-year look back period.

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