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Overview of Voluntary Disclosure Agreements
A voluntary disclosure agreement (VDA) is a contract between companies and states. Companies choose to enter into the contract to reduce the amount of outstanding tax, interest or penalties they owe.
If you conduct certain activities in a state and establish nexus, you may be required to pay tax. Common business activities that create nexus include:
Sometimes, taxpayers overlook these activities or don’t know state tax laws, and mistakes happen. Businesses find themselves in a situation where they have years of unpaid state taxes. When this happens, VDAs are great solutions to solve the problem.
Understandably, VDA programs vary between states. The names of programs may differ, as well as the rules, agreements and processes. Some states don’t have official programs but will coordinate with you if you come forward.
Here’s a generic outline of the VDA process:
The main benefit of a VDA is it saves your business money. Potentially, a lot of money. Here’s how:
Here’s an example. Imagine you created nexus but haven’t filed or paid taxes in Ohio for 15 years. If Ohio discovers this, they could assess the unpaid taxes for all 15 years, plus interest, plus penalties for underpayment, late payment, late filing and failure to file. Your business could be hit with a massive, unexpected tax bill. And, the bill will continue to grow for each tax you haven’t paid (sales tax, use tax, income tax, etc.).
But, if you proactively enter into a VDA, Ohio limits the tax and interest you owe to four years. Plus, they may waive all penalties. This is better than paying 15 years of unpaid taxes plus penalties, right?
Generally, no. Many states have formalized their VDA programs. Therefore, companies know which terms to expect when they wish to use the program. States have varying terms, but it’s typically better to choose a VDA rather than waiting for the state to catch you and assess all taxes, interest and penalties.
Technically yes, but we don’t recommend it. Once you submit a request to participate in a VDA program, you should feel confident with your facts and want to proceed.
If you start the process anonymously, you can change your mind until it’s time to sign and submit the actual voluntary disclosure agreement. If you back out, you may forfeit the VDA and its terms. There’s a good chance you won’t be able to ask the state for the same VDA later.
Once you sign the agreement, you enter a legal contract with the state. If you attempt to back out of the deal, the state can assess tax, interest and all penalties for all years you should have filed returns.
There’s no catch, but timing is important. You must start the VDA process before states determine you haven’t paid taxes and contact you. If a state contacts you first, you usually can’t initiate the VDA process. It’s no longer an option; you have no way to reduce your tax liability. Also, if you register to pay taxes with a state or just started filing taxes, you typically lose the right to a VDA.
Are you sure about that? Consider this.
If you’ve never filed taxes and should have, the statute of limitations (time to assess tax) NEVER starts. This means the state has an infinite amount of time to catch you. If they do catch you, they can go back to the first day you started taxable activities in their state. Maybe that’s 2020, 2000 or 1987.
You’re mistaken if you think states are sitting back and accidentally finding non-filers. They’re actively seeking out non-filers. Most states have discovery divisions dedicated to finding taxpayers who haven’t been filing taxes.
Our accountants have even seen a business get caught because of a LinkedIn post!
Don’t risk it. The longer you go without paying taxes, the more your tax bill grows. And, if you have one tax obligation in a state, the chances are good that you have many tax obligations in that state.
Consider the following examples. In the first example, we share the many tax liabilities that may result from one employee working in another state. In the second, we show how the VDA process can significantly reduce a company’s tax bill.
|Ohio||Voluntary Disclosure Program|
|Michigan||Voluntary Disclosure Program|
|Illinois||Voluntary Disclosure Program|
|Indiana||Voluntary Disclosure Program|
|Texas||Voluntary Disclosure Program|
|Florida||Voluntary Disclosure of Tax Liabilities|
Again, voluntary disclosure agreements are great ways to limit outstanding tax bills. States offer these programs because they receive unexpected revenue with little effort. And taxpayers benefit from huge savings and reduced risk. If you think you have nexus in select states, contact Doeren Mayhew’s business tax accountants today! If you don’t know whether you have a taxable presence in other states, discuss this with your accountant ASAP. It’ll save you in the long run.
By Elizabeth Potocki, Tax Shareholder
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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