Voluntary Disclosure Agreement (VDA)

Navigating tax compliance is a critical concern for businesses, particularly those operating across multiple states. Sales tax and other obligations can be difficult to track, leading to unintentional non-compliance. A Voluntary Disclosure Agreement (VDA) offers a strategic solution for businesses to address prior-period tax liabilities and mitigate severe consequences of non-compliance, including penalties and interest. Let’s explore what a VDA is, how it works, its benefits, and how Bennett Thrasher can assist with VDAs.

What Is a VDA?

A Voluntary Disclosure Agreement (VDA) is a legal agreement between a business and a state tax authority, allowing the business to voluntarily disclose any unpaid or underreported taxes. In exchange for this disclosure, businesses typically receive benefits such as waived penalties (and in very limited circumstances, reduction of interest), limited look-back periods, and potentially, the avoidance of criminal prosecution.

How a VDA Works

The VDA process typically follows these steps:

1. Assessment and Preparation: The business identifies specific tax non-compliance (e.g., estimated taxes, including any unremitted sales tax collected, penalties, and interest owed), by jurisdiction.
2. Initial Contact and Application: The business, often through a tax professional, determines its VDA eligibility, by jurisdiction, and contacts the state tax authority to express interest in entering into a VDA. To formerly initiate the VDA process, the business’s representative submits an application or letter with the tax authority, disclosing the details of the non-compliance and requesting a VDA. Where permissible, this is usually done anonymously to protect the business’s identity.
3. Negotiation: After reviewing the application, the state and business negotiate the terms of the VDA. This includes the limited look-back period (typically three to four years) and the amount of tax owed, penalties to be waived, and interest potentially reduced.
4. Disclosure and Agreement: Once the terms are agreed upon, the business discloses its legal identity and the state issues a legally binding agreement that both parties signs.
5. Payment and Compliance: After signing the VDA, the business must submit the necessary documentation, pay the agreed-upon tax and interest within the specified timeframe, and ensure ongoing compliance with tax obligations going forward.

Who Should Use a VDA?

A VDA is ideal for businesses that have unintentionally failed to comply with tax laws and want to resolve prior-period tax liabilities before they are discovered by state taxing authorities. Businesses should consider a VDA if they find themselves in any of the following situations:

• Expansion into New States: Businesses that have expanded into new states and may not have been aware of specific sales and use tax obligations. A VDA can help address uncollected taxes from past transactions in these new jurisdictions.
• Acquisitions: If a business has acquired another company, it may have inherited tax liabilities. A VDA helps manage and mitigate these inherited (or “successor”) liabilities.
• Unintentional Non-Compliance: Companies that have unintentionally overlooked sales tax regulations, whether due to lack of knowledge or simple oversight, can use a VDA to correct these mistakes without incurring heavy fines.
• Potential Audit Risk: Businesses at risk of being audited can proactively enter into a VDA to reduce potential liabilities before an audit begins.

Benefits of a VDA

The benefits of a VDA are significant and can provide financial and operational relief:

1. Reduced Penalties and Interest: One of the main advantages of a VDA is the elimination of penalties (and in limited cases, reduction of interest) on unpaid taxes. This can result in substantial savings compared to the penalties that would be incurred during a full audit.
2. Limited Look-Back Period: The look-back period under a VDA is usually limited to three or four years, reducing the amount of back taxes owed. Without a VDA, a state could assess taxes for a much longer period.
3. Avoidance of Criminal Prosecution: For businesses that have significantly underreported or failed to pay taxes, there is always the risk of criminal prosecution. A VDA allows businesses to come clean without the fear of criminal charges.
4. Improved Reputation with Tax Authorities: Voluntarily disclosing unpaid taxes demonstrates a willingness to correct past mistakes and comply with the law. This can improve a business’s relationship with tax authorities and lead to more favorable treatment in future dealings.
5. Peace of Mind: By addressing past tax liabilities, businesses can focus on their operations without worrying about future audits or legal action, providing peace of mind and stability.

Risks of Not Filing a VDA

Failing to enter into a voluntary disclosure program can lead to significant financial risks, as businesses that neglect to address their tax obligations may face various potential issues including:

1. Back Taxes, Penalties, and Interest: States can assess taxes for several years, and penalties and interest can accrue quickly. Without a VDA, businesses risk facing a much higher tax bill than if they had voluntarily disclosed their liabilities.
2. Tax Audits: If a business does not proactively address its tax liabilities, it may eventually be selected for an audit. Audits are time-consuming, disruptive, and costly, and they can lead to severe penalties.
3. Reputational Damage: Businesses that fail to disclose unpaid taxes may suffer reputational damage. If an audit uncovers significant issues, stakeholders such as customers, investors, and partners may lose trust in the company.
4. Criminal Prosecution: In cases of severe underreporting or tax evasion, businesses risk criminal prosecution. This can result in heavy fines and even imprisonment for responsible individuals.

How Bennett Thrasher Assists with VDAs

At BT, we provide expert support throughout the VDA process, ensuring businesses can resolve their tax compliance issues effectively. Here’s how we assist:

1. Nexus Analysis: We conduct a thorough nexus study to identify where your business has tax obligations, ensuring compliance with all relevant jurisdictions.
2. VDA Preparation: Our team helps gather necessary financial records and prepare the disclosure statement for submission to tax authorities.
3. Negotiation with Tax Authorities: We assist in VDA sales tax negotiations with state tax authorities to secure favorable terms, including minimizing penalties and reducing the look-back period.
4. Compliance Strategy: After the VDA is completed, we help implement strategies to ensure ongoing compliance with tax laws, avoiding future liabilities.
5. Peace of Mind: With our guidance, businesses can rest assured that their tax liabilities are addressed, allowing them to focus on operations without the looming threat of audits or legal action.

Conclusion

A VDA is a powerful tool for businesses looking to correct past tax discrepancies and avoid severe penalties. By proactively addressing tax liabilities, businesses can minimize financial risks and ensure future compliance. At Bennett Thrasher, our expert team is ready to guide you through the VDA process, helping you resolve tax issues efficiently and with minimal disruption. If your business is facing potential tax liabilities, contact us today to explore how a VDA can help resolve your issues and safeguard your financial future.