Most entrepreneurs go into business because they have a passion for helping others, are committed to a product or believe in the service offered. Whatever the motivating drive behind starting the company, it’s almost certain that a love of taxes wasn’t behind it. Most business owners sooner or later discover that planning for and paying federal and state taxes are a necessary part of doing business. State taxes can be tricky because as a company’s business activities expand so does their task risk. In addition, because each state makes its own tax laws, situations that create a taxable event in one state may not in another. While this has the potential to create problems, the good news is that California offers a Voluntary Disclosure Program (VDP) to allow taxpayers with unreported or underreported liability to come into compliance penalty free. To help clients, prospects and others understand the program, JLK Rosenberger has provided a summary below.
The VDP is designed to permit qualifying entities, shareholders or beneficiaries that have an unreported or underreported California tax liability or filing requirement to come into compliance with limited consequences. When participating in the program, these taxpayers will be required to disclose their tax liability with the state for the preceding six years. As part of the program, the Franchise Tax Board (FTB) will waive its right to assess fees, fines and penalties for the period preceding the six-year look back period. To participate in the program, a taxpayer must send a completed application to the FTB and receive acceptance. Once approved, program participants must submit all filings and send payment plus interest within 30 days.
Only qualified entities, qualified shareholders and qualified beneficiaries can participate in the VDP. The qualifying criteria for each includes:
- Qualified Entities – To be considered a qualified entity, a company must:
- Be an S corporation, limited liability company or a trust
- Have never filed a return with the FTB
- Be a trust that has never performed its administration duties in California, has no resident beneficiaries and has never been subject to an inquiry by the FTB regarding tax liabilities
- Come forward to participate in the program without prior inquiry by the FTB
- Qualified Shareholders – To be considered a qualified shareholder, an individual must:
- Be both a nonresident on the date of signing the voluntary disclosure and a shareholder in an S corporation that has applied for the VDA
- Have disclosed all the material facts pertinent to the shareholder’s liability on that S corporation’s VDA
- Qualified Beneficiaries – To be considered a qualified beneficiary, an individual must:
- Be a nonresident the prior six years and on the date of signing the VDA
- Disclose all material facts pertinent to their liability for under reported or unreported taxes
What are the Benefits?
Once a qualified entity, shareholder or beneficiary has been approved for the VDP, the FTB will not assess penalties for failure to file or underpay taxes. The covered penalties include failure to make and file a return, failure to pay any amount by the date prescribed, underpayment of tax or estimated tax, Secretary of State penalty, failure to furnish information, failure to file information returns, late filing of partnership returns and contract void ability penalty. The FTB will also waive its authority to assess fees and penalties on tax returns for years prior to the six-year look back period of the VDP.
To participate in the program, eligible taxpayers must complete the Application for Voluntary Disclosure, submit it to the FTB and receive acceptance. If a program applicant wants to remain anonymous, applicants may have a representative contact the FTB to determine qualification. Once accepted, taxpayers have one month to submit all state filings and pay any outstanding balance and interest. Program participants must also agree to make future tax filings according to established deadlines.
The VDA is an opportunity to come into compliance with limited interest and no penalties. Taxpayers who have an unreported tax liability with the state may benefit from participation. Before disclosing any information, it’s important to contact an advisor to review the situation. If you have questions about the California VDA or need assistance with other tax concerns, JLK Rosenberger can help. For additional information please call us at 818-334-8623, or click here to email us. We look forward to speaking with you soon.