Addressing tax compliance isn’t just a legal responsibility; it’s a strategic imperative in business. A Voluntary Disclosure Agreement (VDA) stands as a powerful tool for businesses seeking to correct past mistakes and pave the way for a future marked by fiscal integrity. In our experience, our clients tend to engage in VDAs for both of these reasons. They want to do “the right thing” while minimizing their tax burdens for retroactive liabilities.
If that all seems little weighty for just an article intro, don’t fret – here at Miles Consulting, we endeavor to make it all a little less scary. This article delves into the risks, benefits, and nuances of these VDAs, illuminating the path toward informed decision-making.
Here’s what you’ll find:
1. What Is a Voluntary Disclosure Agreement (VDA)?:
A VDA is a contract between a company and a state that outlines the benefits for both parties when a taxpayer rectifies retroactive tax exposure.
2. The Advantages of Voluntary Disclosure:
Voluntary disclosure programs provide reduced penalties, limited lookback periods, reduced audit exposure, and confidential handling of the disclosure process.
3. Eligibility and Participation Requirements:
Businesses must meet specific criteria, including full disclosure and compliance with payment terms, to participate in voluntary disclosure programs.
4. Unlocking the Benefits of Voluntary Disclosure:
Voluntary disclosure programs minimize financial impact, reduce audit exposure, and uphold business integrity through confidentiality.
5. Navigating the Risks of Disclosure:
Businesses must be aware of potential risks such as unintended audits, unanticipated tax liabilities, and data sharing between states when entering voluntary disclosure programs.
6. Evaluating the Path Forward:
A careful evaluation involves identifying issues, assessing benefits, evaluating risks, and conducting a comparative analysis to determine the most suitable compliance path.
1.What IS a VDA?
A VDA is a contract between a company and a state that outlines the benefits for both parties when a taxpayer becomes compliant for past tax exposure (sales tax, income tax, or both). It involves said taxpayer coming forward voluntarily to settle outstanding liabilities, before the state identifies these liabilities as taxation concerns. It’s important to note that companies can generally only participate in a VDA if they have not been previously contacted by the state and/or they have not collected (and not remitted) the sales tax.
VDAs offer a strategic avenue for rectifying past tax issues and setting your business on a path of financial stability – and of course, a good tax standing with the state.
2. The Advantages of Voluntary Disclosure
VDAs offer several compelling advantages for businesses:
- Reduced Penalties: Participating in the VDAs can lead to a significant reduction in penalties (and interest in rare cases) associated with past tax liabilities. This financial relief can alleviate the burden on businesses and improve their overall fiscal health.
- Limited Lookback Period: State programs often specify a limited lookback period during which businesses must address past tax liabilities. This period typically ranges from three to four years.
- Mitigated Audit Exposure: By voluntarily disclosing past tax discrepancies, businesses can shift their focus to future compliance. This proactive approach reduces the likelihood of intrusive audits, providing a more secure operational environment.
- Confidential Handling: The program ensures discreet handling of the voluntary disclosure process, maintaining confidentiality and instilling confidence in businesses as they rectify their tax liabilities.
- Offensive Advantage: The business has the advantage of being in the driver’s seat with respect to timing, documentation provided, etc., as opposed to being on defense in an audit situation.
3. Eligibility and Participation Requirements
The eligibility and participation requirements for VDAs typically include:
- Unregistered Taxpayers: Businesses that have previously not registered for sales or use tax in a particular state may be eligible to participate. This applies to businesses that have conducted activities triggering tax obligations in that state.
- Full Disclosure: Businesses must provide a complete and accurate disclosure of their past tax liabilities, including details of transactions and potential tax owed.
- Compliance with Payment Terms: Participating businesses must agree to comply with the payment terms and conditions set forth by each state’s VDA, including remitting any taxes and interest owed within the stipulated time frame.
- No Ongoing Non-Compliance: To maintain eligibility, businesses must commit to ongoing compliance with state tax laws and obligations beyond the voluntary disclosure process.
It’s important for businesses to carefully review the specific eligibility and participation requirements outlined by the program for the state in question. Seeking guidance from tax professionals can help ensure that businesses meet the necessary criteria and navigate the disclosure process successfully. We can help!
4. Unlocking the Benefits of Voluntary Disclosure
- Minimized Financial Impact: Alleviating Fiscal Burdens
Embracing VDAs can substantially ease the financial strain on your business. Reduced penalties and limited lookback periods serve as a lifeline, lessening the weight of past errors. By taking the initiative, you pave the way for a healthier bottom line, preserving valuable resources and bolstering fiscal stability.
Our clients also often ask about reduced or alleviated interest. In most states, interest is statutory and not able to be waived. The notable exceptions are Texas, which does waive interest in a VDA, and New York which charges a lower interest rate if companies come forward in a VDA versus if they are selected for a non-compliance audit.
- Audit Exposure Reduction: Embracing a Forward-Looking Approach
Voluntary disclosure is a strategic shift from dwelling on past missteps to forging a proactive, forward-looking approach in business. By acknowledging errors and seeking resolution, the likelihood of intrusive audits is reduced. This shift in focus promotes a more secure compliance environment, allowing your team to concentrate on future growth and strategic goals. We will note here that states do not contractually agree in the VDA not to audit the VDA period or future periods. However, in our many years of experience, we’ve very rarely seen a state audit the VDA period.
- Discreet Confidence: Upholding Business Integrity
Confidentiality provisions inherent in VDAs provide a layer of discreet handling. The assurance that your efforts are handled with discretion instills confidence within your organization. This confidentiality preserves your business’s integrity, allowing you to address compliance concerns without unnecessary public exposure.
In the realm of tax compliance, VDAs offer more than financial relief; they unlock a pathway to renewed fiscal health, reputation protection, reduced audit exposure, and fortified business integrity. By embracing these benefits, businesses position themselves for a future defined by responsible practices and sustained growth.
5. Navigating the Risks of Disclosure
While VDAs offer a path to rectify past errors and achieve compliance, businesses must navigate potential risks that could impact their journey:
- Unintended Audits: Unveiling Scrutiny
Taking the step towards voluntary disclosure might inadvertently shine a spotlight on your business, attracting the attention of tax authorities and potentially triggering an audit. This unintended consequence could introduce complexities that require careful management. Again, as noted above, we’ve seen very few states ever audit the VDA period. One notable exception is New York, which may on occasion audit the VDA period.
- Unanticipated Tax Liability: Balancing Expectations
In some cases, engaging in voluntary disclosure may reveal a greater tax liability than initially anticipated. While the program aims to provide relief, the discovery of higher obligations could offset the expected benefits, introducing financial challenges. As consultants, we don’t ever want our clients to meet with that kind of surprise. We always work with them to calculate the exposure before coming forward in a VDA. There are companies out there (yes, we’ve seen them) that push their clients into filing VDAs quickly and in great volume. Oftentimes, the full exposure has not been calculated. Our team takes a measured approach that thoughtfully considers the ramifications and cost/benefit of VDA in each state to be considered. We caution readers against entering into VDAs without such thoughtful analysis up front. Rather, talk to us first!
- Identification in Other States
We’ve included this here because companies are often concerned that states share data, and that by coming forward in a VDA in one state, they will be contacted by neighboring states. And while we cannot guarantee that they won’t, we also don’t see it happen all that often. Still, it is for this reason that we don’t generally recommend using the VDA program offered by the Multistate Tax Commission (“MTC”) (because we do believe that data is more likely to be shared there). That said, we do recommend to clients that once they embark on a program to come forward and voluntarily file, that they do have a path to complete all the VDAs and filings for multiple states within a reasonable timeframe. If a company is in non-compliance, there is always a ‘game of cat and mouse’ to see if the company can come forward in a qualifying VDA before they are notified for audit. And, the longer a company is in non-compliance the more liability continues to accrue before the company can become registered and collect and remit tax.
6. Evaluating the Path Forward
Embarking on the path of voluntary disclosure requires a careful evaluation of your unique circumstances:
- Issue Identification: Precision in Problem-Solving
Begin by conducting a comprehensive review of your state tax landscape. Identify areas where disclosure is necessary, ensuring a precise understanding of the issues at hand.
- Benefits Assessment: Weighing Relief Potential
Quantify the potential benefits and savings that voluntary disclosure can provide. Monetary benefits include reduction of penalties and reduced lookback. These can be big dollars. Penalties are often in the 15-20% of tax owed realm. What’s more, reduced lookback means that a company may be able to shed the liability of some of its earlier years. Being on the offense in the negotiations (as opposed to having to deal with the complexities of an audit – where the state is on the offense) is also a huge benefit.
- Risk Evaluation: Balancing Potential Consequences
Thoroughly assess the risks associated with voluntary disclosure. Consider how the potential unintended outcomes might impact your business and weigh them against the benefits you anticipate. As a general rule, we advise our clients that the benefits of a VDA most often outweigh the risks. Why? Let’s talk – reach out to us here.
- Comparative Analysis: Exploring Alternatives
Before finalizing your decision, perform a comparative analysis. Evaluate voluntary disclosure against other compliance options, such as contesting penalties, back-filing returns outside of a VDA or engaging in audit defense (generally not a great option), to determine the most suitable path forward.
With a clear understanding of both the benefits and risks, your business can make an informed choice that aligns with its goals and values. Through careful evaluation, you pave the way for a more secure and compliant future.
In the balance of informed decisions, VDAs pave the way to rectify past missteps and embrace fiscal integrity. Guided by our expertise, businesses can confidently traverse the maze of taxation, making choices tailored to their unique circumstances. This is how you can become empowered to take control of your tax, and so foster a future marked by financial responsibility and compliance excellence in business.
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