How long does it take to complete the VDA process?
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The time required to complete the Voluntary Disclosure Agreement (VDA) process can vary depending on several factors, including the number of states involved, the complexity of the taxpayer’s situation, and the responsiveness of both the taxpayer and the state tax authorities. However, there are general timelines and expectations that can guide taxpayers considering a VDA for tax compliance, including VDA sales tax and other state tax liabilities.
Typical Timeline for the VDA Process
For most states, the VDA process from initial application to final resolution takes approximately four months when dealing with a small number of states and when there are no significant counteroffers or complications. This estimate is based on the procedures outlined by the Multistate Tax Commission (MTC), which coordinates the Multistate Voluntary Disclosure Program (MVDP) for taxpayers with liabilities in multiple states. The process may take longer if the taxpayer is applying to several states at once, if there are complex issues to resolve, or if the state tax authorities request additional information or make counteroffers.
Sample VDA Process
The following gives insight into the typical VDA process:
- Initial Contact:
A third-party representative (e.g., tax attorney or accountant) initiates anonymous contact on behalf of the taxpayer by the relevant state authority.
- Electronic Letter Request:
The representative submits a letter or online application explaining:- The cause of the applicable tax liability.
- Confirmation that the taxpayer has not been previously contacted by the relevant state taxing authority.
- An estimated liability amount for the applicable lookback period.
- Business Activity Disclosure (if applicable):
Typically, the application or subsequent disclosures require the Company to detail the nature and start date of the taxpayer’s business activity in the respective state as well as provide and explanation that include all nexus issues, such as personnel, inventory, property, and other considerations.
- Draft VDA Issuance:
The Comptroller’s Office sends a draft agreement to the representative and taxpayer for review.
- Revisions and Finalization: The representative may suggest revisions to the draft and, if acceptable, a final version is sent for the taxpayer’s signature.
- Disclosure of Identity:
The taxpayer’s identity is revealed only after the final VDA is signed and returned to the state taxing authority. As a reminder, some states requiring that the taxpayer self-identify at the application phase, making the eligibility review even more critical.
- Tax Filing and Payment:
After execution, the taxpayer typically has 30 to 60 days to file all required returns and pay the tax due.
- Interest and Audit:
Interest is calculated by the state and is typically payable after tax has been paid by the taxpayer. States may audit any amounts reported within the lookback period.
- Agreement Validity:
Taxpayers should note that the VDA becomes void if any misrepresentation is found, which includes misstatements or failed compliance after the VDA process is closed.
Refer to the MTC timeline flow chart for the VDA process.
Factors That Can Affect the Timeline
- Number of States Involved:
The more states included in the VDA process, the longer it may take, especially if each state has different requirements or requests additional information.
- Complexity of Tax Issues:
Complicated nexus determinations, questions about the type of tax (e.g., VDA sales tax versus income tax), or the need to reconstruct records can extend the process.
- State-Specific Procedures:
Each state sets its own lookback period and may have unique documentation or procedural requirements. Some states are able to process VDAs more quickly than others.
- Responsiveness:
Delays can occur if the taxpayer does not promptly respond to requests for information or if the state’s review process is backlogged.
Summary
In summary, the VDA process typically takes about four months from application to completion for most straightforward cases. This includes time for application review, negotiation, agreement execution, filing, payment, and final certification. Taxpayers should be prepared for possible extensions if their case is complex or involves multiple states. Prompt and complete responses to state requests can help ensure the process moves as quickly as possible. For more detailed, state-specific timelines, taxpayers should consult the relevant state tax authority or the MTC’s published guidance. Bennett Thrasher’s experienced State & Local Tax team can help guide you through the VDA process efficiently and minimize potential tax exposure. Contact Brian Sengson, State & Local Tax Partner or the rest of the State & Local Tax team today.
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