Most, if not all, states have a voluntary disclosure agreement program that permits a taxpayer to come forward on a voluntary basis and settle prior tax obligations.  In return for the taxpayer’s voluntary compliance, states will limit the “look-back” period, usually to the particular state’s statute of limitations for routine compliance audits, and will usually abate or waive penalties in most instances.   However, interest is due on the unpaid tax in just about all cases.  Texas is one of the few states that will also abate interest associated with a voluntary disclosure agreement.

 

Why is it a good idea to voluntarily pay tax to a state or taxing authority when you become aware of an unpaid tax obligation?  Answer:  Tax exposure can be minimized significantly.

 

Imagine if a taxpayer, a for-profit healthcare provider, opens an ambulatory surgical center in January 2003 in Alabama; a state that taxes most medical supplies.   Also consider that some medical supply vendors that do not have a physical presence in Alabama may not charge the appropriate sales tax on its sales to the surgical center.  Finally, what if the ambulatory surgical center was not registered for Alabama’s consumer use tax… What might happen if the Alabama Department of Revenue schedules a routine compliance audit of this ambulatory surgical center?  The Alabama DOR can go all the way back to January 2003 and assess tax on all untaxed purchases of its medical supplies and assess penalties on the tax due.  But, what if the taxpayer decided prior to being contacted by the Alabama DOR to enter into Alabama’s voluntary disclosure program?

 

If the Alabama ambulatory surgery center would have come forward on a voluntary basis to settle its use tax obligation prior to being contacted by the Alabama DOR, the related tax, penalty and interest would have been about 25%-30% of the total assessment calculated by the Department had the taxpayer not come forward on a voluntary basis.  The audit period in the VDA program would have been limited to three years as opposed to a little over six years, penalties would have been waived, and interest associated with the tax due would have also been reduced.

 

It’s all a big gamble, does a taxpayer continue to go on conducting business without being registered for a certain tax and avoid paying the tax for the time being, or might the taxpayer’s luck run out and get scheduled for an upcoming audit?  Note that many states have laws on their books that do not limit the look-back period if a taxpayer is not registered or has not filed for a specific tax.  Although many states can go back quite some time to audit an unregistered taxpayer, they rarely go back further than seven to ten years.

 

How does a taxpayer enter into a VDA and what are some of the requirements?  Not all taxpayer’s are permitted to enter into a particular state’s voluntary disclosure program.  Most states have similar requirements, such as:

 

1.       Usually a taxpayer cannot enter into a voluntary disclosure agreement with a state if they have already been contacted by the state about their non-filed returns or unpaid taxes for the tax that they propose to voluntarily disclose.

2.     Most states will not permit a taxpayer to enter into a voluntary disclosure agreement if they are currently registered for the tax that they propose to voluntary disclose.

3.      Taxpayer’s must request permission in writing to enter into a state’s voluntary disclosure program.  Most taxpayer’s use a consulting firm to make initial contact with the Department of Revenue on an anonymous basis, so no specific taxpayer information is divulged prior to getting written permission by the state to enter into the VDA program.

4.     Once acceptance into the VDA program has been granted, taxpayers generally have a relatively short period of time, oftentimes around 60-90 days, to calculate the tax due for the limited look-back period, pay the related tax due from the self-audit, and register for the tax as part of the VDA.  Generally, a separate bill for the related interest will come shortly after payment for the tax has been made.

5.      A taxpayer must begin filing its returns on a timely basis on a going forward basis after it voluntarily pays the tax and interest due from the limited look-back period of the VDA.

 

One more final important point to make; most states reserve the right to come back and review the taxpayers work papers and taxpayer documents to determine that the correct amount of tax due has been paid.   Penalties will sometimes apply to any additional findings determined by the Department.  For this reason, many taxpayers hire a consultant that specializes in the particular tax in question to assist the taxpayer with the entire VDA process.

 

Salestax@silveroakadvisors.com

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