Accountant Checklist: Determining the Best Application of a VDA
Voluntary Disclosure Agreements, called VDAs for short, are fantastic tools accountants can use to help clients navigate state and local tax (SALT) non-compliance issues. VDAs allow business owners to become compliant by disclosing any non-compliance and offering to make things right by paying back unpaid taxes and interest for a specific period of time.
A VDA may be a great option if your client meets any of the following criteria:
- They operated a business and neglected to collect sales tax
- They stand to save significant money on waived penalties and interest
There are also circumstances where a VDA is not an option. For example, suppose a business owner collects tax but neglects to register with the applicable state as a seller. That's a serious offense that could be considered criminal fraud, and a VDA won't help.
Benefits of VDAs
Most states allow accountants to apply for a VDA confidentially on behalf of their client, and the taxpayer's identity is not disclosed to the state until the VDA is agreed to. In essence, it’s like an anonymous tax version of debt consolidation, as states will often reduce fees and penalties to a smaller time window – known as a lookback period – than an audit would assess.
Put simply, a lookback period is the duration of time a state’s tax authority uses to make sure your previous tax filings were correct. In the context of a VDA program, the lookback period – which can vary by state – is the number of years of returns that must be submitted by the taxpayer applying for relief. It also represents the number of years of past-due tax liability plus interest the applicant must pay. In return for paying the aforementioned overdue tax, the state waives tax liability for periods prior to the lookback period. While the state can still audit the taxpayer’s records for the lookback period, they generally waive the ability to audit the taxpayer’s records for the period before.
Filing a VDA can benefit your client in a multitude of ways. More specifically, it can:
- Reduce non-compliance penalty fees and non-payment interest, as mentioned above
- Allow your client to close out open statutory periods
- Waive issues that occurred prior to the defined lookback period
So how do you determine when and how to best use VDAs to support your clients?
Step 1: Determine if Your Client is Eligible to Submit a VDA
How do you know if your client is eligible to submit a VDA? Answer the following critical question about their current compliance situation: has the state contacted your client?
Or, more specifically, has your client:
- Previously filed tax returns with or made tax payments to the state?
- Been audited in the past?
- Had a prior contact with the state concerning a tax obligation?
- Received a nexus questionnaire from the state?
If the answer to any of the above questions is yes, a VDA is not an option for that client. It’s also not an option if the client is actively being audited.
However, if the to these questions is no, your client is eligible to be considered for a VDA, and you should read through the next section to determine the best way to utilize it in their situation.
Step 2: Assess Transactional Data Considerations
To take advantage of a VDA, you need to have all the transactional data necessary to file past returns and need to have a handful of other information on hand to submit to the state.
To make sure you have what you need, your team should:
- Figure out what data you need:
Identify each potential VDA state’s lookback period (generally 3-4 years) and make sure you have all the transactional data necessary to file back tax returns for that time period.
- Evaluate nexus triggers:
Determine whether the client has physical nexus, economic nexus, or both in each potential VDA state and identify grace periods for economic nexus. Physical presence nexus does not have a grace period; the client is immediately liable for any unpaid tax.
- Estimate your client’s liability:
Use the transactional data available to you and generate a good faith estimate of the business’s unpaid tax liability. Prepare a transactional analysis for review.
- Determine audit risk:
Evaluate whether, based on statutory periods and grace periods, your client can still be audited for the non-compliance time frame in question. Consider liability costs for the lookback period and the time before the lookback period.
Step 3: Decide if a Single-State or Multi-State VDA is Best
The Multistate Tax Commission, or MTC, allows taxpayers to submit applications for single or multi-state VDAs with participating states via the Multistate Voluntary Disclosure Program (MVDP). Once a single application is submitted, the taxpayer can negotiate each VDA through one platform - and there is no charge to use this service.
There are several reasons why you might want to utilize the MVDP. For example, if you have a client with economic nexus compliance issues in multiple states participating in the MVDP program, using a multi-state application will save a significant amount of time. A taxpayer with potential tax exposure in more than one state will also find this service more efficient and less costly than approaching each state separately.
Completing all the steps listed above will help you decide whether a single or multi-state VDA application is a better fit for your client.
Step 4: Provide Advisory Services
Post-VDA, the business's operational life will change, and it's up to the client's accountant to ensure the client is in the best position to succeed. At this stage, it's wise to provide some advisory components of SUT compliance.
You may offer to:
- Analyze product taxability
- Determine any exemption scenarios
- Evaluate tax technology, make recommendations, or assist with tax technology implementation and testing.
From an operational standpoint, your team should verify that tax calculations are properly configured and that rates are up to date. It's also a good idea to verify future tax return dates and put together a plan to make sure those returns are filed on schedule.
What Happens After You File
Once the VDA is submitted, the state will confirm whether or not the applicant is eligible to participate in the program. If approved, it’s time to file all necessary back returns and remit the required interest and payment due. In some cases, the state will request the ability to look at your client’s books and financial records. Generally, states only allow you to file for a VDA once, and any misrepresentation of facts can disqualify your client from participating in the program.
From a time-frame perspective, a single state VDA response generally comes back pretty quickly - often in 90 days or less. Multi-state applications may take time due to counter-offers, administrative issues, etc. You can anticipate that it will take around 4-6 months.
Now that you know the appropriate steps to determine the best application of a VDA for your clients, you can help them navigate non-compliance issues in the most cost-effective way possible.
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