Cleaning Up Your Tax (Obligations) with Voluntary Disclosure Agreements

While paying taxes might not to file and pay all of their tax best efforts to comply with

enough, especially in the state and local tax world. Although it may be an innocent mistake, such non-compliance may be very costly if it is first discovered by the state or local

the taxpayer will not only be subject to tax and interest but also harsh or more). On the other hand, the taxpayer to come

forward and minimize its exposure if the taxing is the first to discover any non-and generally

method for taxpayers to clean up their state tax compliance issues.

10/14/2014

How Did You Not Pay Your Taxes?Ben Franklin once said that the only two in life are death and taxes. So how is it possible that a taxpayer can be unaware of its In the complicated world of state and local

is possible. One big to non-compliance with state tax filing is the 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. For example, the temporary presence of a salesperson of tangible personal property for five days in a state will likely create nexus in that state for sales tax purposes, but not income tax purposes. These differences are further exaggerated when considering the large number of taxing (there are close to 10,000 sales

in the United States!).1

taxpayers are not able to keep up with all of their required state and local tax filings.

VDAs to the Rescue

st to discover their non-compliance: do nothing and

noncompliance of up to 25 percent. Further, the tax agency can look back to assess tax as far back as

filed.

contractual agreements whereby the state makes concessions to the taxpayer by offering the

provide benefits to both the taxpayer and the taxing

revenue with minimal cost.

VDAs are frequently used in furtherance of merge

from being delayed or even cancelled due to state tax issues. We recommend, however, that taxpayers thinking of selling their businesses perform a nexus review and corresponding VDAs prior to finalizing a deal with another party. VDA programs do differ on how long it takes to complete the program.

Note that VDAs are similar to tax amnesty programs but are not the same thing. Tax amnesty

a limited basis. Therefore, tax amnesty programs are generally not available in most states. If a tax amnesty program is available, then the taxpayer should carefully evaluate which program is more advantageous.

So What Could Go Wrong?

into a VDA. Typically, this can be achieved when a nexus review is performed prior to the

into the program.

Although the requirements vary among states, common requirements include that the taxpayer

example, most states allow taxpayers that have previously registered or filed returns with the state for income tax purposes to enter into a VDA for sales tax. There are a few states, however, that will disallow a VDA for sales tax once the taxpayer registered or filed returns with the state

misplacement of records or changes in personnel.

parameters of the programs are usually established by the state taxing agencies which rarely deviate from their standard set of terms regarding look-back period, abatement of interest, and other terms. Furthermore, some of the terms may take away certain rights available to the taxpayer, such as the ability to file amended returns or prevent the usage of loss carryforwards

to procure a more favorable outcome.

Conclusion

for this non-compliance if discovered by the state. We encourage taxpayers that discover state tax exposure from non-compliance to consider entering into a VDA with the state or states in

CBIZ MHM tax advisor.

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