Voluntary Disclosure Agreement (VDA) are special programs for businesses that have not met or are yet to meet any kind of tax compliance requirements.
In brief, voluntary disclosure agreements are an agreement that permits companies & businesses (whether small or medium) to ascertain their potential state tax exposure (sales tax, income tax, or both) and to voluntarily come in light as subject to pay any shortfall before being identified as part of an audit or other outreach effort by Government.
The process of VDA often involves state legislature waiving the penalty associated that accompanies voluntary reporting tax due to a long phase, generally allowing a look back period of three-four years, potentially lowering the tax due greatly as opposed to an audit.
There is, however, another side to the VDA coin. Have you ever wondered what will happen if you fail to follow VDA’s rules and regulations?
In the event your company or a business fails to disclose the back taxes, then you will have to face audits and there is a chance that your company or business will be assessed various penalties, interest plus all historical taxes owed.
Although, it may prove advantageous for your business to go for a VDA if you have a history of delinquency. However, the audit penalties you could face as a small business could drastically affect and destabilize your financial status if the worse happens.
The next question you need to ask is whether VDA is a viable option for you? What will it mean for your business? There is no universal answer to these questions, but looking at the advantages and disadvantages of VDA might ease the decision-making process.
Advantages of the VDA
Performing a VDA has the following advantages:
- The most popular reason companies consider doing a VDA is that it allows business holders to look back 3-4 years. The benefit of this is that if a company has nexus and hasn’t collected sales tax or filed income tax returns for many years, it can take advantage of this provision.
- VDA programs typically do not impose penalties on businesses that opt to participate. Even in the most direct scenario, they may face a reduced penalty.
- Throughout the entire process, your company’s name & identity will remain anonymous. Although most states allow companies to remain anonymous, a few require them to disclose their identities.
Disadvantages of the VDA:
- In case you fail to provide a certain key detail including nexus activities, and the missing facts which are essential, to your representative then your business may end up deemed ineligible for VDA.
- The differing requirements of various states make it difficult to know how much information to gather and how much work you will have to do, which can be exhausting.
- The mission to be in compliance can turn upside down once additional tax liabilities are uncovered during the process.
Is your business in need of VDA?
For businesses or companies that qualify for the VDA, the best thing to do is to pay back what you owe as soon as possible. Despite this, you will face severe penalties if noncompliance within your business is found by an auditor. It is essential to weigh the pros and cons of VDA for your specific situation before making a decision.
In the event you are unsure whether a VDA is right for your business, or need help making a decision, and are seeking out an experienced sales tax advisor, call TaxConnex, and they will work with you.