On January 19, 2016, the Massachusetts Department of Revenue (DOR) released a working draft of an administrative procedure (AP) entitled AP XXX: Voluntary Disclosure Program for the Settlement of Uncertain Tax Issues (hereafter “working draft”). The working draft is available here: http://www.mass.gov/dor/businesses/help-and-resources/legal-library/administrative-procedures/working-draft-ap-xxx.html.
At this point, the proposed voluntary disclosure program would only be open to business taxpayers with potential liabilities of $100,000 or more for the following tax types:
- Corporate excise taxes (“tax returns filed pursuant to G.L. c. 62C . . . §11”);
- Financial institution excise taxes (“tax returns filed pursuant to G.L. c. 62C . . . §12”);
- Fuels taxes, including taxes on special fuels (“tax returns filed pursuant to G.L. c. 62C . . . §16”);
- Meals taxes, including local options (“tax returns filed pursuant to G.L. c. 62C . . . §16”);
- Cigarette excise taxes (“tax returns filed pursuant to G.L. c. 62C . . . §16”);
- Room occupancy excise taxes (“tax returns filed pursuant to G.L. c. 62C . . . §16”);
- Sales and use taxes (“tax returns filed pursuant to G.L. c. 62C . . . §16”);
- Direct broadcast satellite service taxes (“tax returns filed pursuant to G.L. c. 62C . . . §16”); and
- Alcoholic beverages taxes (“tax returns filed pursuant to G.L. c. 62C . . . §16”).
The proposed voluntary disclosure program is designed to identify and resolve uncertain business tax issues on an expedited basis (generally within four months).
In order to be eligible for participation in this pilot program, business taxpayers must first identify a tax issue “for which the proper tax treatment is uncertain.” The working draft defines an “uncertain tax issue” as “one for which there is no clear statutory guidance or controlling case law, and which has not been addressed by the Department in a regulation, letter ruling, or other public written statement.” The working draft further clarifies that the “issue must not have been addressed as part of a prior audit of the taxpayer, a prior application for abatement or amended return filed by the taxpayer, or a prior ruling request made by the taxpayer.”
Interestingly, the working draft leaves the door open for businesses that have previously filed tax returns that erred on the side of caution by taking a tax position more favorable to the DOR than to the taxpayer. Assuming that the statute of limitations is still open for that particular tax type, businesses that have taken a relatively conservative (i.e. risk-averse) position for one of the above-listed tax types may potentially be eligible for participation in the voluntary disclosure program (which may yield a better result than filing an application for abatement and proceeding before Appeals and, potentially, the Appellate Tax Board).
The procedure set forth in the working draft consists of an anonymous inquiry by the taxpayer or its representative by a letter that includes a statement of relevant facts, an explanation of why the tax issue is uncertain, and the tax periods and amounts in dispute. If, after reviewing the anonymous letter, the DOR determines that it is “appropriate to commit resources to the matter and to attempt to negotiate a settlement of the uncertain tax issue(s),” then it will notify the taxpayer within 30 days of the anonymous letter. The taxpayer will then have 45 days from the date of the DOR’s acceptance letter to notify the DOR that it intends to proceed with the voluntary disclosure program.
The working draft’s proposal of an “anonymous” application to the voluntary disclosure program leaves open several unanswered questions:
- How can a taxpayer identify an uncertain tax issue on a truly anonymous basis if the tax issue is unique to that particular business? This question appears to be limited to those businesses that file a relatively unique tax type. For example, any “anonymous” inquiry regarding direct broadcast satellite service taxes is only likely to apply to a handful of taxpayers; if the taxpayer is required to identify all relevant facts regarding a particular tax issue, then it is likely that the DOR will be able to identify that particular taxpayer (either by process of elimination or through a close review of each taxpayer’s returns). However, this does not appear to be a systemic barrier to anonymity for most applicants to the voluntary disclosure program.
- How can a taxpayer submit an initial application letter on a truly anonymous basis if it prepares the letter on its own (without the assistance of outside tax counsel) and includes an accurate return address? A practical difficulty with a truly anonymous application process arises when one considers the mechanics of the letter itself. The taxpayer must provide a return address to which the DOR can respond with a “yes” or “no” answer regarding that taxpayer’s eligibility for the program. This difficulty associated with paper letters back and forth to and from the DOR could be avoided by (1) shifting the entire application process online, (2) creating a truly anonymous online application template, (3) assigning a unique username and password to each applicant, and (4) posting the DOR’s decision regarding each taxpayer’s application on a secure database.
- How can a taxpayer’s representative submit an initial application letter on a truly anonymous basis without identifying his or her client by association? Even if the taxpayer’s representative prepares the letter instead of the taxpayer itself, only those practitioners who represent a significant number of business tax clients will likely feel comfortable with the anonymity of the application process. A practitioner who represents hundreds of business tax clients may not even feel comfortable with maintaining anonymity because he or she might only represent a small number of taxpayers that file a particular tax type. Thus, the only way to ensure a truly anonymous application process might be for the DOR to shift the entire application process online (as proposed in Question 2, above).
The working draft states that the taxpayer will be required to identify itself at the time that it notifies the DOR of its decision to proceed under the voluntary disclosure program. The taxpayer will also be required to provide detailed information and calculations regarding the uncertain tax position, including but not limited to a description of the taxpayer’s business activities, a position statement setting forth the taxpayer’s legal analysis of the uncertain tax issue(s), copies of all relevant documents, a request for a conference (if desired), and a settlement proposal. Even if a taxpayer has not requested a settlement conference, the DOR may nevertheless schedule such a conference if it determines that it will be “beneficial to its review of the taxpayer’s request.” After the conference, the DOR will “prepare a settlement recommendation which will include a summary of the information presented at the conference.”
If the DOR and the taxpayer agree to the terms of a settlement, then both parties must “sign a written settlement agreement reflecting those terms.” Once a settlement agreement has been signed, then the matter subject to the agreement “may not be reopened absent fraud, omission of a material fact, misrepresentation of a material fact, or mutual mistake regarding a material fact.” Furthermore, the settlement may not be treated as precedent in any other matter, including other settlements, regardless of whether those other settlements involve the same taxpayer.
If the DOR and the taxpayer do not agree to the terms of a settlement, then the taxpayer will be vulnerable to a DOR audit on the same uncertain tax issues disclosed and detailed in the application and settlement process: “[T]he Department will not be precluded from utilizing the information provided to it during the voluntary disclosure process for purposes of auditing the taxpayer’s return(s) or defending any subsequent appeal of such an audit.” However, if the DOR subsequently audits the disclosing taxpayer’s returns and assesses additional income tax in connection with the uncertain tax issue(s), “any penalties that may otherwise be imposed, including penalties that may be imposed under G.L. c. 62C, §§35A and 35D, with regard to the uncertain tax issue(s) will be waived . . . .” In order to be eligible for the waiver of penalties, however, the taxpayer must have “acted in good faith in pursuing the transaction(s) or other matter(s) giving rise to the voluntary disclosure case and in presenting the facts, and analysis thereof, to the Department throughout the voluntary disclosure process.”
The public comment period for Working Draft AP XXX: New Voluntary Disclosure Program for the Settlement of Uncertain Tax Issues is open until the close of business on Monday, February 1, 2016.