In previous posts, we’ve discussed many scenarios in which a business may find itself with unpaid tax liability. Whether a business has collected sales tax but has not remitted it to the state, failed to collect or pay when tax was owed, or failed to report use tax, penalties for these mistakes can add up quickly. Voluntary Disclosure Agreements (VDAs) are programs offered by state Department of Revenues that can be utilized to address unpaid tax liability and minimize potential penalties. 

What is a VDA?

A Voluntary Disclosure Agreement, as the name implies, is a program through which a business voluntarily comes forward to disclose tax liability. In return, the state Department of Revenue (Department) will waive or reduce penalties and limit the number of years for which penalties are assessed. 

In a typical VDA scenario, the business has discovered unpaid tax liability that the Department has not. Therefore, there is a mutual benefit to the agreement between the Department and business. The Department receives the tax it is owed but had not discovered, and the business receives a reduction or complete waiver of penalties. The purpose of the agreement is to encourage businesses to voluntarily report unpaid tax without fear of significant penalties or even legal enforcement. 

Benefits of a VDA

There are several benefits to a VDA even beyond the reduction or waiver of penalties. One of the most useful elements of a VDA is something referred to as the “look-back” period. Look-back periods limit the number of years for which a state will assess back taxes. Usually, the look-back period is limited to 3 or 4 years,1 which is an incredible incentive for businesses that have tax liability dating further back. Additionally, states generally agree not to audit the business for the tax periods that are covered in the agreement. Some states also allow businesses to apply anonymously, often through a tax representative. 

Another benefit to the process is that once a business is accepted into the program, the process moves forward with the assistance of a Department representative. The business has the opportunity to develop a working relationship with the representative, who can answer questions, give guidance, and assist with filing returns. Entering into a VDA can also save time and compliance costs, as representatives will often allow businesses to file a few annual returns instead of dozens of monthly returns, or even an excel file detailing the tax liability, as opposed to a paper or electronic return. 

Eligibility

The application process for a VDA varies greatly by state, but the first step is usually an eligibility determination. Most states require that a business has not been previously contacted by the state regarding the tax liability and has not registered with the state Department of Revenue. 

Some examples of disqualifying scenarios are when the state has already sent out an audit notice, or the business has filed returns for this tax type in the past. Depending on the state, collecting sales tax from customers and failing to remit it can also disqualify a business. However, most states use a case-by-case approach to determining whether a business is eligible. 

For example, some of the factors considered by the Connecticut Department of Revenue include the “nature and magnitude” of the business’s presence and activity in Connecticut, whether the business exercised “reasonable care,” and evidence that the business acted in “good faith” and not in “willful disregard of the tax laws.”2 Misrepresentation by the business or failure to comply with the terms of the agreement once it has started is usually an automatic disqualification in any state. 

After an eligibility determination, the remainder of the process typically includes an application, signing the agreement, and working with the Department representative to report the unpaid liability. 

State-Specific Examples

In California, the look-back period for a Voluntary Disclosure Agreement is 3 years.3 Without utilizing the program, the statutory period for which the Department can assess back taxes is 8 years.4 A benefit specific to California is that businesses can apply anonymously and describe their circumstances to the Department, and the Department will then issue a written opinion as to whether the business would be eligible for the agreement.5

In Florida, all penalties will be waived in a Voluntary Disclosure Agreement once the tax and interest has been paid, unless tax has been collected from customers and not remitted.6 However, in those cases, the Department allows a reduced penalty of 5%.7

Multistate Voluntary Disclosure 

If a business has tax liability in multiple states, the Multistate Voluntary Disclosure program may be beneficial. This program is coordinated by the Multistate Tax Commission and serves to provide businesses a way to address tax liability in multiple states through a single application.8 This is a faster and less costly alternative to filing individual applications in each state, but not every state participates in the program.9  There are both pros and cons to utilizing this application, depending on a business’s circumstances. 

Conclusion

Voluntary Disclosure Agreements are a valuable tool for businesses and can be a strategic way to minimize tax liability. If your business is dealing with unpaid tax, uncollected sales tax, or potential nexus concerns, contact us today. Our team at State Tax Advisors can assist in developing a strategy that will streamline your compliance process and make unpaid tax liability much less daunting.  

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1 https://www.salestaxinstitute.com/resources/pros-and-cons-of-sales-tax-voluntary-disclosure-
agreements.

2 https://portal.ct.gov/drs/voluntary-disclosure/voluntary-disclosure-program

3 https://www.cdtfa.ca.gov/taxes-and-fees/out-of-state.htm

4 Id.

5 Id.

6 https://floridarevenue.com/taxes/compliance/Pages/voluntary_disclosure.aspx

7 Id.

8 https://www.mtc.gov/nexus/multistate-voluntary-disclosure-program/

9 Id.