Voluntary Disclosure Agreements: Remediating Tax Issues for Multistate Businesses
Companies that sell products or services in multiple states routinely face tax obligations that involve complex taxability and complex nexus rules. Growing multi-state businesses often develop sales tax exposures or income tax exposures before the business has an internal sales tax team. One of the most effective ways to manage these risks is entering into a Voluntary Disclosure Agreement, an arrangement between your business and the relevant tax jurisdictions that lets you come into compliance while commonly waiving penalties and limiting the lookback period.
Benefits of Doing a VDA
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Limit the lookback to 3 or 4 years for most states.
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Most states will waive penalties.
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Some states will waive or limit interest.
Risks of Not Doing the Audit
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Most states will assess tax for periods where the taxpayer did not file, often including 7 to 10 years, and some states may go back even further.
Penalties can range from 25% to 100% for failure to file tax returns and failure to pay the tax.
While interest varies by state, when a state goes back 7 to 10 years the interest can become material.
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Submission of the VDA Request
Certain states request a letter be sent to the VDA unit at the Department of Revenue, while other states request that detailed applications be prepared.
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Submit the Applicable Returns.
We submit the sales tax, income tax, or nonresident withholding tax returns either online or to the VDA representative.
The Voluntary Disclosure Agreement Process
Generally, states prohibit a company that has previously been contacted by the state from entering into a voluntary disclosure agreement. Additionally, states will generally prohibit a company that is already filing that tax in the state from entering into a voluntary disclosure agreement. Certain states will prohibit a company that files one tax from participating in a voluntary disclosure agreement for another tax. Meanwhile, certain states, such as Ohio and Texas, will allow an existing filer to enter into a voluntary disclosure agreement.
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Review and Sign the VDA Agreement
We work with the state to confirm the terms of the agreement, the lookback, the applicable taxes, and any data issues.
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Submit Payment for the Taxes
The Company will pay the applicable taxes based upon the amounts reflected in the applicable returns.
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Prepare and File Any Registrations
We prepare the sales tax registrations or applicable income tax registration.
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The State Calculates the Interest
The calculation of the interest is very complex and, as a result, the state calculates the interest and sends a notice.
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Prepare the Applicable Returns.
We can prepare the sales and use tax returns or worksheets in lieu of returns as well as the state income tax or nonresident withholding tax returns.
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Submit Payment for Interest
The Company pays the interest and the Voluntary Disclosure Agreement closes.
What Does a Voluntary Disclosure Agreement Cost?
- We charge $5,000 for a voluntary disclosure agreement, which includes sales tax registrations. We typically charge $1,500 for a worksheet in lieu of return or $75 per return if we prepare and file actual monthly returns. In some cases, we may also charge a data processing fee for very complex tax calculations when we need to clean up the data. For some states, the states can move through a voluntary disclosure agreement process such that it can be completed in 90 days. Meanwhile, some states are extremely slow and the process can take more than a year. Some states will require copies of exemption certificates to be provided as part of the voluntary disclosure agreement process.