VDAs can fix tax issues

Like most businesspeople, you make a sincere attempt to pay your taxes accurately. However, sometimes your best efforts are not enough, especially with state and local taxes. Although it may be an innocent mistake, filing noncompliance can be very costly if it is first discovered by the state or local taxing jurisdiction. The taxpayer will not only be subject to tax and interest but also harsh penalties.

On the other hand, you have options to come forward and minimize your exposure if you are the first to discover any noncompliance. Voluntary disclosure agreements, or “VDAs,” are a popular and generally effective method for taxpayers to clean up their state tax-compliance issues.

One big factor contributing to noncompliance with state tax-filing obligations is the application of ambiguous “nexus” rules that lack bright-line standards and uniformity among states. Not only are there different nexus rules among states (physical presence, economic presence, factor presence, etc.) but also among taxes.

Nexus rules can be complex even to the most seasoned state and local tax practitioner and much more so to the average corporate tax department that lacks the specific expertise and resources to keep track of all the company’s business activities that may contribute to establishing nexus in a state.

- Advertisement -

Taxpayers have two options when they are the first to discover their noncompliance: do nothing and play the audit lottery or come forward and enter into an agreement with the taxing agency to settle their past liabilities. The upside of playing the audit lottery is that you may never get caught.

If the exposure is material, however, it is a risky proposition. A taxpayer could face stiff penalties for noncompliance of up to 25 percent or more, in addition to interest on unpaid taxes. Further, the tax agency can look back to assess tax as far back as the date nexus was established since the statute of limitations doesn’t begin to run until a return is filed.

The more advisable option is to come forward and enter into a deal with the taxing agency to settle outstanding liabilities. Fortunately, most states offer VDA programs where taxpayers, through their representatives, can anonymously approach the taxing agency to self-report their unpaid taxes.

VDAs are contractual agreements whereby the state makes concessions to the taxpayer by offering the abatement of all penalties, limitations on the look-back period to three or four years and the opportunity to become current on their tax obligations in exchange for the taxpayer promising to come forward and pay its tax obligations under the look-back period.

The biggest downside to VDAs is that not all taxpayers are eligible to participate and if a taxpayer initiates the process but later is deemed ineligible after disclosing its identity, it may have exposed itself to the state without the protections of the program. In light of this risk, taxpayers and their tax representatives should carefully perform their due diligence to gather all the relevant facts surrounding the potential states where the taxpayer may want to enter into a VDA.

While VDAs theoretically represent contractual negotiations between the taxpayer and the state, in reality taxpayers have very little leeway to negotiate the terms of the agreement. The parameters of the programs are usually established by the state taxing agencies, which rarely deviate from their standard set of terms.

These programs are the most effective way for taxpayers to eliminate the state tax exposure while getting current with their tax obligations and responsibilities. Proceed with caution, however, because there are potential pitfalls for the unwary. •


Tarra Curran is managing director in the tax group at CBIZ Tofias. Claudia Mullen is a manager in the CBIZ Tofias tax group.

No posts to display