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Handling State Tax Filing Delinquencies via Voluntary Disclosure

Sarah Kim, Principal, Citrin Cooperman Advisors LLC / Berdon Advisors LLC

10.19.21 | SALT Chat

As a state and local tax professional, I often advise clients on their state tax filing requirements from a prospective perspective (i.e., analyzing the state tax implications of potential business activity), but also from a retrospective perspective (i.e., rectifying noncompliance situations). Recently, I had the latter situation where a client never filed a New York City commercial rent tax return despite leasing a commercial property in midtown Manhattan for over a decade. If you are wondering how renting an office space in Manhattan results in a tax, here is a quick answer to your question.

A great way to handle your state tax filing delinquencies is to apply for a voluntary disclosure (VD) program. As the name indicates, a VD program gives delinquent taxpayers an opportunity to voluntarily disclose their past due tax liabilities and become current with their filing obligations. Note, however, not all taxpayers qualify for this program. Generally, to be eligible, a taxpayer must not have been previously contacted by the state tax department concerning the liability for which they are coming forward.

The details of the application process vary among states. Some states ask the taxpayer to submit an online or paper application form, but most states accept a written request stating the taxpayer’s activities, tax type, period, and liability being disclosed. Also, some states require taxpayers to disclose their identity in the application, while others allow taxpayers to apply on an anonymous basis.

Once the taxpayer is accepted to the program, the taxpayer may enter into a voluntary disclosure agreement with the state. Doing so will bring two notable benefits for the taxpayer:

  1. An abatement of penalties associated with prior delinquencies (interest is generally not waivable), and
  2. A limited lookback. A limited lookback simply means that the state will require the taxpayer to file returns and pay taxes only for a prescribed period (e.g., three years) regardless of the period they are statutorily entitled to the unpaid taxes.

In my client’s case, under New York City’s three-year limited lookback, they only needed to file and pay for the last three years and the current filing period, although they were delinquent for a longer period.

In addition to the VD programs, from time to time, states may provide noncompliant taxpayers an opportunity to come into compliance without being penalized under a tax amnesty program. While VD programs are available throughout the year for most types of taxes, amnesty programs typically have a strict application period and are offered to address a specific type of tax delinquencies. Also, in contrast to VD programs, amnesty programs sometimes offer an abatement or reduction of interest.

If you have found yourself or your business having failed to file tax returns and pay taxes, please feel free to contact me at 646.346.6467 | skim@berdon.com or reach out to your Berdon tax advisor.

Sarah S. Kim is a Senior Tax Manager in Berdon’s State and Local Tax Group with nearly 10 years of professional experience. Sarah advises Fortune 500 and middle market businesses across an array of industries. She has experience with various types of taxes, including corporate income and franchise tax, sales and use tax, personal income tax, unincorporated business tax, commercial rent tax, and real estate transfer tax.

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