The Franchise Tax Board (FTB) has a formal Voluntary Disclosure Program, but it is narrower than many people assume. It is built for out-of-state businesses that have never filed in California and for certain nonresident owners of those businesses. Other taxpayers who need to correct past filings have different options.
Who the Program Is For
The program is governed by Revenue and Taxation Code (R&TC) sections 19191 through 19194. It covers a qualified entity and certain of its qualified shareholders, members, partners, and beneficiaries. In general, a qualified entity is a corporation, limited liability company, qualified trust, or qualified partnership that has never filed a California return, has not been the subject of an FTB inquiry about its California tax liability, and applies before any unilateral contact from the FTB. It cannot be organized in California, registered with the California Secretary of State, or maintain a permanent facility in California.
The owners and beneficiaries who can be covered, such as S corporation shareholders and LLC members, generally must be nonresidents. The FTB’s program page summarizes the disqualifiers this way: an applicant does not qualify if it has registered with the Secretary of State, ever filed a return in California, or received a notice to file a return in California.
What the Program Offers
The main benefit is a limited look-back. The FTB waives its authority to assess tax for taxable years ending more than six years before the agreement is signed (R&TC § 19191), and the FTB’s program page states that applicants need to file only as far back as six years. For the six covered years, the FTB may waive certain penalties, including those for failure to file (R&TC § 19131) and failure to pay (R&TC § 19132), and the addition to tax for underpaying estimated tax (R&TC § 19136). Tax and interest remain due.
The FTB also states that an applicant may apply anonymously. Applications are made on form FTB 4925, Application for Voluntary Disclosure Agreement.
What the Program Requires
An applicant must disclose all material facts bearing on its California tax liability. After the agreement is signed, the required returns must be filed within 30 days, or within up to 120 days if the FTB grants an extension, and all tax, interest, fees, and penalties that are not waived must be paid. The taxpayer must also comply with California franchise and income tax laws going forward. According to the FTB, the agreement can be terminated if the taxpayer fails to file returns or pay taxes for the covered periods or fails to continue to comply with California tax law.
Timing is part of eligibility. Once an entity has registered with the Secretary of State, filed a California return, or received a notice to file, the Voluntary Disclosure Program is no longer available to it.
The Filing Compliance Agreement
The FTB also offers a Filing Compliance Agreement for qualifying out-of-state businesses that can show reasonable cause. The FTB describes it as a chance to file returns for prior years, pay back taxes, and have some penalties waived. Unlike the Voluntary Disclosure Program, it has no defined look-back period, and it is not available to an applicant that has received a notice or bill from the FTB.
Options for Individuals and California Residents
California residents, and most individuals, fall outside the Voluntary Disclosure Program. For them, the path is to file any missing returns and correct returns already filed. For tax years 2017 and later, a California resident amends by filing a corrected Form 540 with Schedule X, California Explanation of Amended Return Changes.
Penalties may still apply, but relief can be requested. Penalties for late filing, late payment, and failure to respond to a demand do not apply when the failure was due to reasonable cause and not willful neglect, and individuals may qualify for a one-time abatement of late-filing or late-payment penalties for taxable years beginning on or after January 1, 2022 (R&TC § 19132.5).
Sales and Use Tax Is Separate
The California Department of Tax and Fee Administration (CDTFA), not the FTB, administers sales and use tax. CDTFA has its own Out-of-State Voluntary Disclosure Program for retailers (R&TC § 6487.05), which can limit the period for assessing unpaid use tax to three years instead of eight and allows penalty waivers for qualifying out-of-state retailers.
When Coming Forward Makes Sense
A voluntary approach is generally most valuable before the FTB makes contact. The Voluntary Disclosure Program requires an application before any unilateral contact from the FTB, and the Filing Compliance Agreement is not available after the FTB has sent a notice or bill. The decision should be based on a clear picture of the filing obligations, the years involved, and the penalties that could otherwise apply. If the facts raise concerns beyond civil tax liability, it is prudent to obtain legal advice before contacting any agency.
The Bottom Line
California’s FTB Voluntary Disclosure Program is a useful tool for out-of-state businesses and their nonresident owners, with a six-year look-back and possible penalty waivers. Individuals and California residents generally correct past filings through delinquent or amended returns and then pursue penalty relief where the facts support it.
Considering coming forward to the FTB?
Tax attorney Cassra Minai, Esq. can review whether a voluntary disclosure or another approach fits your situation in a confidential consultation.