Voluntary disclosure agreements or VDA is the most effective way of mitigating period tax exposure. They will come with plenty of misconceptions. Suppose you do not disclose back the taxes and are unearthed through an audit, you can end up getting assessed different penalties and interest and tax due. In many extreme cases, the penalty can be above 50% of the tax amount –the criminal offense. With VDA, for voluntarily reporting tax due, states normally grant the waiver of penalty & limited look-back time. When it comes to VDA process, make sure you analyze cost and benefit. So, to start, you have to look at the primary goal to pursue a VDA:
To eliminate liabilities before the look-back period – It is an important and highly valuable element of a VDA. Assuming that you have not collected any taxes, the state may waive off the right to collect sales tax exposure before its look-back period. Let us say if you have got $1mil in tax liability & $800,000 is beyond its look-back period, then the state will forgive that particular portion of your liability. In such a situation, the taxpayer will just remit $200,000 in a look-back period and interest.
Establish the company as a compliant for prior periods for the sales & use the tax purposes. States will audit your VDA periods, however, if there were not any material and intentional misstatements, the state won’t audit beyond its look-back period.
Suppose you have failed to remit the sales tax when owed, you might use VDA for becoming compliant as well as save some money on the penalties. This generally involves paying back an unpaid tax & interest for the specific time frame (the shorter timeframe than the audit will look at) that is determined by a department. While doing this, you need to avoid the worry of the audit. It will help with decreasing expensive penalties because of the tax non-compliance. The length of time, known as the “look-back period”, will be 3 years but shorter and longer, which depends on the taxpayer’s particular situations, thus you need to check this out.
VDA will be helpful in the following situations:
- Collected sales tax, and failed to remit.
- You must be collecting sales tax, but cannot
- VDA may not cover situations where you have collected sales tax, however didn’t have the sales tax permit that allows you to do it. The scenario is considered a fraud & criminal act.
- You can save a huge amount of money on the waived penalties & interest just by engaging in the VDA program.
Look-back Period
Department normally will need the look-back period the taxpayer is needed to pay the delinquent taxes. The length of a look-back period may depend on many different factors, which include the nature of a taxpayer’s activities or other info submitted in an application.
Look back period will be for a minimum of 3 years for tax types. When it comes to withholding tax and use tax, most of the time look-back period will be 36 months but you can possibly extend to recover any taxes that taxpayer have collected but didn’t remit.
Eligibility
Qualifying for VDA program, the taxpayer (business or individual) should:
- Submit the application form;
- Not contacted by Department for the enforcement purposes regarding tax obligation;
- Stay compliant with other tax obligations that won’t get covered by VDA.
Conclusion
Suppose your taxes are delinquent, then filing the VDA can be the smart business choice for you. Suppose you are running a small or medium-sized company, penalties that are levied by the governments can do some serious damage to the financial stability.
Suppose you have your own company that executes several transactions in one or more states, you have to review the sales tax just to ensure there are not any delinquencies. Suppose you find you haven’t collected or remitted your sales tax, then filing for the VDA protects the company from any kind of harsh penalties or allows you to settle on an amount you owe. The voluntary disclosure agreements or VDA will be the good business decision that you have to make. Government comes up with both good decisions like VDA and also those that accept business like Wayfair decision on sales tax.
