Pennsylvania’s Voluntary Disclosure Program can be an excellent opportunity for taxpayers who discover that they have an unreported Pennsylvania tax obligation. In exchange for voluntarily coming forward, filing the required returns, and paying the tax and interest, the Pennsylvania Department of Revenue generally waives penalties and limits the lookback period for many taxes.
But there is an important catch: not every taxpayer with an unpaid Pennsylvania tax liability can use the program.
In fact, determining whether a taxpayer is eligible before contacting the Department of Revenue can be one of the most important steps in the entire process.
The Voluntary Disclosure Program Is Truly “Voluntary”
The program is designed for taxpayers who recently became aware of an outstanding Pennsylvania tax liability and voluntarily come forward before the Department discovers the problem. Pennsylvania describes the program as an opportunity for eligible taxpayers to resolve their tax obligations while generally paying tax and interest but avoiding penalties.
That means the program is not simply a way for any delinquent taxpayer to eliminate penalties.
Some circumstances make a taxpayer ineligible.
1. The taxpayer is already registered for the tax
One of the most important restrictions is that a taxpayer generally cannot use the Voluntary Disclosure Program for a tax for which the taxpayer is currently registered with the Pennsylvania Department of Revenue.
For example, suppose a business has been registered for Pennsylvania sales tax for several years but failed to file its sales tax returns for the past three years. The business generally cannot use the Voluntary Disclosure Program simply to eliminate the penalties on those delinquent returns.
The VDP is intended for taxpayers who have not previously registered for the particular Pennsylvania tax obligation.
This distinction matters because Pennsylvania evaluates eligibility on a tax-by-tax basis. A taxpayer’s registration for one Pennsylvania tax does not necessarily prevent the taxpayer from seeking voluntary disclosure for a different tax.
2. The taxpayer was previously registered
A taxpayer also generally cannot qualify merely by closing an old account and then attempting to enter the VDP.
If the taxpayer was previously registered with the Department for the tax involved, that history can make the taxpayer ineligible.
For example, assume a company was registered for Pennsylvania sales tax from 2018 through 2022, closed its sales-tax account, and continued making taxable Pennsylvania sales after the account was closed.
The company should not assume that closing the account makes it a new, unregistered taxpayer eligible for voluntary disclosure.
The Department will look at the taxpayer’s history.
3. Pennsylvania Has Already Contacted the Taxpayer
This may be the most important eligibility issue.
The VDP is generally unavailable once the Department of Revenue has already contacted the taxpayer concerning the liability.
The program is designed to encourage taxpayers to come forward before Pennsylvania discovers the problem. Pennsylvania’s guidance specifically identifies taxpayers who have already been contacted by the Department as ineligible.
Consider this example:
A company realises in January that it may have had a Pennsylvania sales-tax obligation for several years. Before the company contacts Pennsylvania, it receives a letter from the Department asking about its Pennsylvania sales.
At that point, the company should not assume that it can still enter the VDP.
The timing of the disclosure matters.
Don’t wait until Pennsylvania contacts you
This is why taxpayers who suspect they have an unreported Pennsylvania tax obligation should investigate the issue promptly.
Once a Department notice arrives, the opportunity to make a voluntary disclosure may already be gone.
4. The Taxpayer Is Already Under Investigation or Enforcement
A taxpayer who is already the subject of Department enforcement activity or an investigation generally cannot use the VDP to resolve that matter.
This makes sense: the program rewards voluntary compliance, not a penalty waiver after the Department has already begun pursuing the taxpayer.
For example, if Pennsylvania has already opened an audit concerning a company’s sales-tax liability, the company generally cannot use the VDP to convert the audit into a voluntary disclosure.
The Department has historically described VDP eligibility as being limited to taxpayers who are not currently the subject of enforcement and have not been contacted by the Department.
5. The Taxpayer Has Already Participated in the VDP
The Voluntary Disclosure Program is not intended to be a recurring penalty-abatement mechanism.
A taxpayer that has previously participated in Pennsylvania’s Voluntary Disclosure Program generally cannot simply return to the program again for another disclosure.
This is another reason practitioners should carefully determine the scope of a client’s Pennsylvania obligations before entering into a VDA.
6. What About a Taxpayer Who Doesn’t Actually Owe Pennsylvania Tax?
This sounds obvious, but it is an important point.
The VDP is intended for taxpayers who have an actual Pennsylvania tax liability.
It is not a program for obtaining a “clean bill of health” when no Pennsylvania tax is owed.
If an investigation determines that a taxpayer did not have a Pennsylvania filing or payment obligation during the relevant period, there may be no reason to enter into a VDA in the first place.
A practitioner should therefore determine the taxpayer’s nexus, filing obligations, and tax liability before approaching the Department.
7. Foreign Corporations Require Special Attention
Pennsylvania has an additional restriction involving corporations.
The Department’s VDP guidance states that foreign or domestic corporations registered with the Pennsylvania Department of State or Department of Revenue are not eligible for VDP.
This can be particularly important for businesses that have registered to do business in Pennsylvania.
A company should not assume that it can qualify for VDP simply because it has not filed its Pennsylvania tax returns.
Its registration history may disqualify it on its own.
8. Being Contacted About One Tax Doesn’t Necessarily End VDP Eligibility for Every Tax
One of the more interesting features of Pennsylvania’s program is that eligibility is determined on a tax-by-tax basis.
Suppose a company is registered for Pennsylvania sales tax and has been contacted by the Department regarding its sales-tax account.
That does not necessarily mean the company is automatically prohibited from considering VDP for a completely separate Pennsylvania tax obligation.
Pennsylvania specifically recognizes the tax-by-tax nature of VDP eligibility.
This is an area where practitioners should be careful not to make an overly broad assumption that a taxpayer is either “eligible” or “ineligible” for the entire program.
The better question is:
Eligible for which Pennsylvania tax?
9. Trust Fund Taxes Are Different
Another important limitation involves trust fund taxes, particularly taxes that a business collected from other people or withheld from employees.
Examples include:
- Pennsylvania sales tax collected from customers; and
- Pennsylvania employer withholding tax withheld from employees.
The VDP’s normal lookback provisions do not necessarily allow a taxpayer to simply ignore older trust-fund liabilities.
Pennsylvania requires taxpayers participating in the program to address applicable collected or withheld taxes for the relevant periods.
This makes the VDP particularly different for a business that collected the tax but failed to remit it.
For example, a retailer that never registered for Pennsylvania sales tax but collected Pennsylvania sales tax from customers for six years should not assume that the VDP will eliminate the older collected-tax liabilities simply because the normal lookback period is three years plus the current year.
The Biggest Mistake: Filing Before Checking VDP Eligibility
One of the biggest practical mistakes a taxpayer can make is to discover an old Pennsylvania tax problem and immediately:
- Register with the Department of Revenue;
- File several years of delinquent returns;
- Pay the tax; and
- Ask Pennsylvania to waive the penalties.
That approach can potentially destroy the opportunity to use the Voluntary Disclosure Program.
The VDP should generally be evaluated before the taxpayer takes those steps.
Pennsylvania allows taxpayers to make an initial voluntary disclosure inquiry without immediately identifying themselves. This can give a taxpayer or tax professional an opportunity to determine whether the situation fits within the program before moving forward.
What If You Are Eligible?
For a taxpayer who qualifies, the benefits can be significant.
For many Pennsylvania taxes, the program generally provides:
Taxpayer voluntarily comes forward ? limited lookback ? tax and interest paid ? penalties waived.
Pennsylvania currently provides a lookback of three years plus the current year for applicable taxes, including corporation taxes under VDAs entered into on or after August 1, 2023.
The taxpayer must comply with the VDA, file the required returns, and pay the tax and interest. In return, penalties can generally be waived.
The program therefore can be particularly valuable for a business that discovers it has had a Pennsylvania filing obligation for many years.
The Bottom Line
Pennsylvania’s Voluntary Disclosure Program can provide substantial relief, but timing is critical.
A taxpayer may be unable to participate if it:
- Is currently registered for the tax;
- Was previously registered for the tax;
- Has already been contacted by the Department regarding the liability;
- Is under Department investigation or enforcement;
- Has previously participated in the VDP;
- Does not actually have an applicable Pennsylvania tax liability; or
- Falls within one of the specific exclusions applicable to its tax type.
The most important lesson is simple:
If you discover an unreported Pennsylvania tax obligation, don’t automatically register or file delinquent returns. First determine whether the Voluntary Disclosure Program is available.
Once Pennsylvania discovers the problem, the taxpayer may lose an opportunity that could otherwise result in significant penalty savings and a limited lookback period.
If you or your business has discovered a previously unreported Pennsylvania tax obligation, the timing of your first contact with the Department of Revenue can make a substantial difference.
