The Voluntary Disclosure Program (VDP) - Cowan & Carter Law Firm

What is Voluntary Disclosure Program (VDP)

The Voluntary Disclosure Program (VDP), specifically the Employee Retention Credit Voluntary Disclosure Program (ERC-VDP), is a temporary initiative by the IRS aimed at addressing the issues surrounding the Employee Retention Credit (ERC). Launched on December 21, 2023, this financial program targets employers who may have erroneously claimed the ERC during the COVID-19 pandemic. Individuals in the program can tax return the erroneously claimed funds while taking the opportunity to avoid severe penalties and interest additional typically associated with incorrect Canadian tax filings.

The primary features of the ERC-VDP include:

Participants are required to repay only 80% of the erroneous credit received, retaining the remaining 20%.
The program allows participants to voluntarily come forward to fix errors or omissions and avoid interest and penalties on the erroneous credit if the repayment is completed by the specified deadline, March 22, 2024.
This program is specifically designed for those who are not under criminal investigation for fraud and who have not previously been audited for the same claim.

The initiative is part of the IRS’s (Internal Revenue Service) broader effort to address compliance issues and rectify the misuse of ERC claims, which have been susceptible to aggressive marketing and misinformation, leading to numerous incorrect claims. Employers considering this program should ensure they meet the eligibility criteria, which include not being under criminal investigation or tax audit for the relevant periods. It’s also essential for participants to understand that while the program offers a chance to rectify erroneous claims without full penalties, it does not protect against possible criminal investigations if the claims are found to be fraudulent.

This program is a response to the widespread issues with the ERC process, where rapid legislative changes and the complex nature of the eligibility criteria led to significant confusion and misfiling. The IRS has taken these steps to mitigate risks and streamline compliance for businesses impacted by these issues

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The Scenario

Earlier this year, I met with a client who had immigrated to Canada some ten or so years ago. As is often the case for many immigrants, the process of bringing over one’s life savings and other assets to a new country can be a long and arduous process that takes a number of years. That was the case for this client, but the problem, as she frantically told me, was that she never filed her T1135s.

The T1135 Foreign Income Verification Statement is a reporting requirement that must be filed by all Canadian taxpayers who at any time in the year owned foreign investment property or properties with a total value greater than $100,000 CDN. Failure to file T1135s can result in a maximum penalty of $2,500 in a given year. My client, who was unfamiliar with the Canadian taxation system and had relied on her accountant to handle her tax affairs, was unaware of her T1135 reporting obligations for a long time.

Fortunately for her, the Canada Revenue Agency runs the Voluntary Disclosure Program (VDP), which allows non compliant taxpayers to correct mistakes or omissions on previously filed returns. In return, successful applicants to the VDP can avoid penalties, paying interest, and criminal prosecution.

Two Programs

Starting from March 1, 2018, the new VDP divided the application process into two tracks, the General and the Limited program. Of the two, the General Program is generally the preferred track as it provides relief from all penalties and partial relief on interest on the ten years preceding the three most recent years of that returns needed to be filed. As a general rule, the General Program is for taxpayers who are correcting unintentional errors or omissions in their tax filings.

On the other hand, the limited program only provides VDP grant relief from potential gross negligence penalties and does not provide any relief for interest. Generally speaking, the limited program is for scenarios where there was an element of intentional conduct on the part of the taxpayer with regard to their noncompliance with their reporting requirements. In both cases, a disclosing taxpayer will not be referred for criminal prosecution related to the information being disclosed.

Valid Application

In order for an application to the VDP to be accepted as a valid voluntary disclosure, the following five conditions have to be met:

It must be voluntary.
It must be complete.
It must involve, at least potentially, a penalty.
It must include information that is at least one year past due.
It must include payment of the estimated tax owing.

Appealing Details of the CRA’s Voluntary Disclosure Program Decision

As the VDP is a discretionary program by the CRA, the Income Tax Act does not provide any avenues for appeal to taxpayers unhappy with a CRA decision with respect to a VDP application. If the CRA rejects a taxpayer’s VDP application, the only potential recourse would be either to request that the CRA reconsider the original decision or to file an application to the Federal Court for judicial review.

Conclusion

There are numerous situations where a taxpayer should consider applying to the voluntary disclosure program. Consulting a civil litigation Toronto tax lawyer can benefit and help taxpayers effectively navigate the ins and outs of the program and increase their chances of success with the VDP. Contact our litigation firm in Toronto today and get expert litigation services to your benefit.

Published on November 29, 2021