Pennsylvania Voluntary Disclosure Program

Maintaining compliance with state tax laws can be challenging for individuals and businesses, especially those companies that operate across state lines. Unlike the federal government, each state enacts its own tax laws, which often vary from jurisdiction to jurisdiction. These differences can be confusing and open the door to potential reporting issues with income and other taxes. Not only does this result in missed tax payments, but it can also cause the assessment of additional fines, penalties, and interest. If left unresolved, it can add up to a significant amount of money that needs to be paid. The good news is that relief is available in Pennsylvania through the state’s Voluntary Disclosure Program. This program provides the opportunity for affected taxpayers to “come clean” about unreported tax issues in exchange for a waiver of certain fees and penalties. To help clients, prospects, and others, Klatzkin has provided a summary of the key details below.

Who Is Subject to Pennsylvania Income Taxes?

In addition to full- and part-time residents and businesses located within the state, there are other taxpayers required to pay state income taxes.  Certain out-of-state businesses, estates, trusts, and sole proprietors are subject to state taxes. Even if a business isn’t registered in the state, if it maintains inventory and makes direct sales, a tax liability may exist. Finally, those that sell products or services through a marketplace facilitator – like Amazon or Etsy – may also be subject to state taxes if they don’t otherwise collect or remit sales tax.

For the corporate income tax, domestic and foreign corporations are subject to state taxes if they:

• Do business or carry-on business activities within Pennsylvania,
• Have capital or property employed or used in the state, or
• Own Pennsylvania property.

Like the personal income tax, corporate taxes are imposed on businesses that maintain inventory within the state.

Which Pennsylvania Taxes are Eligible?

Both corporate and individual Pennsylvania taxpayers can apply for penalty relief under the voluntary disclosure program. The following tax types apply; this isn’t an all-inclusive list.

Non-corporate Taxes

• Sales and use tax
• Employer withholding tax
• Personal income tax

Corporate Taxes

• Net income tax
• Gross receipts tax
• Bank shares tax
• Foreign franchise tax

Under the disclosure program, a non-corporate taxpayer must pay in full tax liabilities for the current year plus up to three years prior. Corporate taxpayers would need to pay the current year and up to five previous years. Although that can add up to a significant tax bill in one lump sum, all penalties for those years would be waived and any prior-year tax liabilities would be forgiven. For both corporate and non-corporate taxpayers, interest on accrued tax obligations is still due.

How to Request Penalty Relief Under the Program

Taxpayers interested in participating in the voluntary disclosure program need to request a case number. The first step is to email [email protected] and include all contact information for the taxpayer. From there, a case number will be assigned and instructions sent. The Business Activities Questionnaire, which the taxpayer will use to self-report tax obligations, can only be obtained through either the email or PA’s Voluntary Disclosure Office.

Along with the completed questionnaire, eligibility is determined based on:

• The type(s) of tax due,
• Date(s) the tax obligation(s) began,
• A detailed description of the taxpayer’s activities in Pennsylvania, including information on products sold or services provided,
• An explanation of why the tax(es) have not been paid, and
• Verification that the state Department of Revenue hasn’t previously tried to contact the taxpayer or collect an outstanding tax balance.

Ineligible Taxpayers

Taxpayers already registered with the PA Department of Revenue are not eligible for the Voluntary Disclosure Program. Taxpayers who the Department has contacted and pursued collection actions against also are not eligible to participate in the program.

The Department considers contact and registration on a tax-by-tax basis. For example, if a taxpayer has been contacted or paid/filed a return for one type of tax, it would not preclude the taxpayer from entering the program for other tax types.

Corporate tax liabilities of foreign and domestic corporations registered with the departments of State and Revenue will not be considered for the Voluntary Disclosure Program.

What Else Should Taxpayers Know?

Although in most cases, prior-year tax liabilities beyond three years (non-corporate taxes) and five years (corporate taxes) will be forgiven, that’s not always the case. For example, business trust fund taxes – like sales and employer withholding – that were collected but not remitted have to repay all past due taxes from the date originally collected. Penalties would still be waived, though.

It’s important to note that during the eligibility process, the taxpayer’s identity remains anonymous. Only the case number is used.

Once a request to participate in the voluntary disclosure program is received and the process started, the taxpayer may get audited. This can happen at any time regardless, but the chance of an audit could increase. Therefore, taxpayers should maintain all necessary documentation and be prepared to respond to the state DOR requests promptly.

Pennsylvania also reserves the right to garnish wages up to ten percent for unpaid tax liabilities. They can do this without prior notice or court order.

Finally, taxpayers that agree to participate in the voluntary disclosure program also agree not to claim a tax refund for any taxes reported through the program.

Contact Us

The voluntary disclosure program is an excellent opportunity for those with unpaid taxes to come into compliance. However, it is important to consult with a qualified tax advisor to assess your situation before disclosing any information to the state. If you have questions about the information outlined above or need assistance with a tax issue, Klatzkin can help. For additional information click here to contact us. We look forward to speaking with you soon.

©2022 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and should not be construed as accounting, tax, or financial advice. Please consult your tax advisor concerning your specific situation.