What are VDAs and what taxes are typically covered under a VDA program?

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What are VDAs and what taxes are typically covered under a VDA program?

A: A Voluntary Disclosure Agreement (VDA) program is a formal process that allows taxpayers to come forward and report previously undisclosed tax liabilities to a state tax authority, often in exchange for penalty relief and a limited look-back period. The types of taxes covered under a VDA program can vary by jurisdiction, but there are several core tax types that are commonly included. The Multistate Tax Commission (MTC) identifies the following taxes that are typically covered under a VDA program:

• Sales and use tax
• Corporate income and franchise tax
• Other Business Activity Taxes

1. Sales and Use Tax

One of the most frequently addressed taxes in a VDA program is sales and use tax. Businesses that have established nexus in a state but have not registered or remitted sales tax on taxable sales often use the VDA process to come into compliance. The VDA sales tax component typically requires the taxpayer to file returns and pay back taxes and interest for a defined look-back period, which is usually three to four years, depending on the state. If the business has collected but not remitted sales tax, the look-back period may be extended to cover all periods in which tax was collected but not paid over to the state.

2.     Income and Franchise Taxes

Corporate income tax and franchise tax are also commonly included in VDA tax programs. These taxes apply to entities that have earned income or conducted business in a state but have not filed the required returns. The VDA standards for income and franchise taxes generally mirror those for sales tax, with a look-back period that is typically three years, though this can vary. The taxpayer is required to file all delinquent returns for the look-back period and pay the associated tax and interest. Penalties are often waived as part of the agreement.

3.     Other Business Activity Taxes

Some states include additional business activity taxes in their VDA programs. These can include gross receipts taxes, excise taxes (other than motor fuels tax), and other state-specific business taxes. The eligibility and requirements for these taxes under a VDA program will depend on the state’s specific laws and administrative practices.

When entering into a Voluntary Disclosure Agreement, companies should note some special considerations:

• Eligibility: Generally, a taxpayer is eligible for a VDA if they have not previously registered, filed returns, or been contacted by the state regarding the tax type in question. If a taxpayer is already under audit or has been contacted by the state, they are typically ineligible for the VDA program.
• Benefits: The primary benefits of participating in a VDA program include the waiver of penalties, limitation of the look-back period, and, in some cases, protection from criminal prosecution. The taxpayer must pay all tax and interest due for the look-back period. Prior to entering into a voluntary disclosure agreement, Bennett Thrasher’s State & Local Tax team recommends consulting a tax advisor to ensure VDAs present the most cost-effective means for mitigating the tax liabilities.
• Process: The VDA process is usually initiated anonymously, and the taxpayer’s identity is disclosed only after the state and the taxpayer agree to the terms. The taxpayer must then file the required returns and pay the tax and interest due. Taxpayers should also note that entering into a VDA for one tax may necessitate including other taxes

 

In summary, The VDA process provides a structured way for taxpayers to resolve past noncompliance, limit their exposure, and avoid significant penalties, provided they meet the VDA standards set by the state. For specific guidance on which taxes are eligible and the requirements in a particular state, it is important to consult the relevant state’s VDA program documentation or a qualified tax advisor. Bennett Thrasher’s State & Local Tax team has extensive experience guiding businesses through the VDA process and can help ensure compliance while minimizing risk.  Contact Brian Sengson, State & Local Tax Partner, for any questions or you can contact the State & Local Tax team.

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