Voluntary Disclosure Programs are an important component in the administration of a tax system. Taxpayers may have deficiencies in their tax filings and disclosures for a variety of reasons which range from inadvertence to deliberate non-compliance (i.e. evasion). When confronted with the full weight of the penalties which could apply under tax laws, together with the payment of tax and interest on the tax and perhaps on the penalties, taxpayers may be inclined to conceal these deficiencies. By providing some leniency for taxpayers who voluntarily come forward to correct past deficiencies, a Voluntary Disclosure system can provide a win for all stakeholders.
Through the process, taxpayers become compliant, and often become very supportive of the tax system and strive to have an impeccable record of compliance going forward. For the tax authority, whose goal, among other things, is to raise revenue and encourage voluntary compliance, the Voluntary Disclosure Program can achieve these objectives remarkably well. In the vast majority of cases, the Voluntary Disclosure represents tax revenue which would otherwise be lost. This is often done at a remarkably low cost, in terms of the resources necessary to raise the revenue.
Thus the program represents a winning scenario for everyone, provided the Voluntary Disclosure Program is not perceived as being unfair to taxpayers who have complied voluntarily. Accordingly, the Voluntary Disclosure Program must be carefully constructed not to provide an overall advantage to those taxpayers who have failed to comply, and who make amends. In this regard, the Voluntary Disclosure Program should not be viewed as a tax amnesty, allowing a taxpayer to obtain a better result than what would have occurred if the taxpayer had complied from the beginning. For this reason, generally the Voluntary Disclosure Program should result in a waiver of penalties, and possibly some interest relief, but not a reduction in the tax payable.
A successful Voluntary Disclosure Program should have a number of characteristics, generally along the following lines:
- A voluntary disclosure, usually prepared with the assistance of a tax advisor, should be complete in all material respects.
- The program should not be used, generally speaking, to merely avoid a late filing penalty for the late filing of a tax return or form.
- The disclosure should be voluntary, and not prompted by enforcement actions of the tax authority.
- The program should not be used repeatedly by a taxpayer, especially in respect of the same item, such that some limitations may be placed on use of the program for repeat offenders.
It is important that a separate branch of the tax authority deal with voluntary disclosures, and that the program be well publicized. A taxpayer should not be required to provide reasons for the filing deficiencies, as the point of the program is not to sanction taxpayers or characterize voluntary disclosures by reference to some degree of fault. It is important that all voluntary disclosures be treated objectively, without regard to the taxpayer's "story". However, some limited discretion should be given to the voluntary disclosure tax officers, as in practice various issues will arise such as the extent to which beneficial elections might be made on a late filing basis. Normally retroactive tax planning is not allowed in a voluntary disclosure. That said, there may be some discretion as to where the line is to be drawn.
One issue which always arises in designing a Voluntary Disclosure Program is how many years must a taxpayer submit. The answers vary from:
- All open years
- All open years plus 3
- Ten years
- All years
The Voluntary Disclosure Program should have a basis in law, and not be purely administrative. Otherwise, arguably too much discretion is granted to the tax officers, and the program will suffer from a lack of clarity and a degree of arbitrariness. It may also be illegal. Guidelines need to be developed so that taxpayers are, broadly speaking, treated equally under the program.
It is important that the Voluntary Disclosure Program be distinguished from a tax amnesty. A tax amnesty is often perceived as being unfair by the majority of taxpayers who are compliant, giving a benefit to those who come forward under the amnesty which is hard to justify. That said, on occasion it might be appropriate for a country to consider a tax amnesty in limited circumstances. It should be noted, however, that a tax amnesty has the ability to destabilize the tax system by rewarding persons who have been non-compliant and thus for getting away with it.
Statistics should be published of the results of a Voluntary Disclosure Program including, in general terms, the types of non-compliance encountered, the number of taxpayers making use of the program, the tax revenue raised, the cost of the program to the tax authority, and other relevant figures. It is perfectly reasonable for the tax authority to gain intelligence on taxpayer risk profiles in general, from the results of the voluntary Disclosure Program, to enable the tax authority to focus its audit programs on areas of perceived non-compliance.
Tax advisors play an important role in the voluntary disclosure process, since taxpayers often approach tax advisors for counselling in this regard. Accordingly, the program should be well publicized, particularly among tax advisors. Consideration should be given to allowing tax advisors an opportunity to come forward informally on a no-names basis on behalf of a client to work out an approach for dealing with a matter with the tax authorities.