FTB Voluntary Disclosure Program

What Is the FTB Voluntary Disclosure Program?

The California FTB Voluntary Disclosure Program (VDP) allows taxpayers who have not filed required California returns or who have underreported California income to come forward voluntarily, pay the tax owed, and receive significant penalty relief. The VDP is designed for taxpayers who have not yet been contacted by the FTB — once the FTB has initiated an audit or collection action, you are no longer eligible for the program.

The VDP is particularly valuable for: individuals who moved to California but did not file California returns, business owners who were unaware of California's economic nexus rules, and taxpayers who underreported California income on prior returns and want to correct the record before the FTB discovers the discrepancy.

Who Qualifies?

To qualify for the FTB VDP, you must: (1) not have been contacted by the FTB regarding the tax years you want to disclose, (2) not be under criminal investigation, (3) be willing to file all required California returns for the disclosure period, and (4) pay all tax and interest owed (penalty relief is the benefit, not tax or interest relief). The VDP covers California personal income tax, corporation franchise tax, and LLC fees.

Benefits of Voluntary Disclosure

The primary benefit of the FTB VDP is penalty relief. Under the VDP, the FTB waives all penalties — including the failure-to-file penalty (up to 25%), the failure-to-pay penalty (up to 25%), and the substantial understatement penalty (20%). For a taxpayer who owes $100,000 in California tax on unfiled returns, the penalty savings can be $50,000 or more. Interest cannot be waived — you owe interest from the original due date of each return. The VDP also provides protection from criminal prosecution for the disclosed years.

The VDP Application Process

The FTB VDP process: (1) Submit a written VDP request to the FTB's Voluntary Disclosure Unit, identifying the tax years and issues you want to disclose. (2) The FTB reviews the request and issues a VDP agreement specifying the terms. (3) You file all required returns and pay the tax and interest. (4) The FTB issues a closing letter confirming the penalty waiver. KDA prepares VDP applications and negotiates the terms of VDP agreements. The application must be carefully drafted — disclosing too little can leave you exposed, and disclosing too much can create issues for years not covered by the VDP.

VDP vs. Waiting for an Audit

The decision to use the VDP versus waiting to see if the FTB discovers the issue involves a risk-benefit analysis. The FTB has sophisticated data matching capabilities and shares data with the IRS — if the IRS has information about your California income, the FTB likely does too. The penalty savings from VDP are substantial, and the program provides certainty and closure. KDA's general recommendation: if you have unfiled California returns or significant underreported California income, the VDP is almost always preferable to waiting for an audit — the penalty savings alone typically far exceed the cost of the disclosure process.

Coordinating with IRS Voluntary Disclosure

If you have both federal and California disclosure issues, KDA coordinates the IRS Voluntary Disclosure Practice (VDP) and the California FTB VDP simultaneously. The two programs have different eligibility requirements and timelines, and the order in which you approach each agency matters. KDA has experience navigating both programs simultaneously to achieve the best combined outcome.