Don’t Worry. You are probably better off with a VDA anyway!
By Michael J. Fleming
Tax Amnesty programs wax and wane in popularity depending on economic conditions. Recently with the depressed economy, Amnesty Programs seem to be all the rage. State and local jurisdictions have been announcing them at a rapid pace with some jurisdictions, like the city of Philadelphia offering one for the first time in 19 years and the state of WA offering the program apparently for the first time ever. The programs usually have short windows of opportunity and require quick action in order to take advantage of the benefits. Many states increase the sense of urgency by threatening increased enforcement actions once the amnesty period ends. A prime example is Pennsylvania, who’s Revenue Secretary, C. Daniel Hassell said, “Before Tax Amnesty ended, we promised to step up enforcement efforts against anyone who did not take advantage … Now we’re delivering on a second promise, to hold corporate officers personally accountable for taxes their businesses owe.” It is statements like this that have caused many taxpayers who were not able to meet amnesty deadlines to worry that the states will soon be knocking at their door. If you are one of these taxpayers your worries may be over. You may be able to complete a Voluntary Disclosure Agreement (VDA) and actually be better off than if you filed for amnesty.
There are many similarities between VDAs and Amnesty Programs, however before we begin to compare and contrast the programs, let’s explore why a state (local jurisdiction can be substituted for state from this point forward) would offer programs like these. After all, if the states are looking for ways to increase revenues, why give taxpayers a financial break? At first glance it may not make sense, but after reviewing some of the reasoning you’ll hopefully see why it makes perfect sense.
- Best use of limited resources. State tax departments, just like company tax departments, are being asked to do more with less. Tax officials, who are being tasked with bringing more revenue into state coffers, have to choose where to devote their time and enforcement efforts. If companies step forward on their own, the time and resources that would have been spent finding those companies can now be targeted elsewhere. Simply put, they now have more time and resources to devote to you.
- New found cash. When a company voluntarily steps forward the state receives a lump-sum cash infusion consisting of numerous years of back taxes and some interest and/or penalty. This money flowing in through VDAs or rushing in through Amnesty is basically a windfall to the state.
- New streams of cash going forward. Not only does the state receive a lump sum for the back years when a company becomes compliant and pays the money it owes, but it now has a taxpayer that will likely continue to pay taxes on a going-forward basis.
Hopefully these points have shed some light on why a state would offer programs like these. Now the question is why companies would want to participate in these programs. Well, in order to convince companies to participate, the states offer enticements. Those enticements can include a waiving or reduction of the penalties and or interest as well as possibly limiting the look-back period. These enticements can add up to big money often totaling into the tens or hundreds of thousands and even millions of dollars. Taking advantage of these programs can sometimes make the difference between the life and death of a company. By becoming compliant there is also the possible added benefit of escaping the possibility of civil and or criminal prosecution.
Now that we know these programs are a win for the states as well as the taxpayer, you may be asking; what’s the difference between the two programs and which one is best for me. In order to answer this question let’s quickly look at the general characteristics of both VDAs and Amnesty programs. I say general characteristics because each state has its own twist on each of these programs and to cover the details of each program in each state would be too much to cover in one article. (If you have specific questions about individual state programs please contact me.)
The first thing to realize when talking about state tax amnesty programs is that they are generally not true amnesties. I say “true amnesties” because you don’t get out of the tax completely. They require you to at least pay back taxes. Some states offer a limited look-back period but the majority require all outstanding periods to be paid. In short, the look-back period is usually not limited. In addition to back taxes you may be required to pay either some interest and/or penalty. Some states will waive the entire penalty. Others will waive the penalty and a percentage of interest and a few the entire penalty and interest. Whatever the mixture turns out to be in a given state, you will be paying something in virtually all instances. (There is one exception for true amnesties, covering the states of Georgia, Ohio, Utah and Tennessee, where a seller’s uncollected sales tax, penalty and interest are all waived. However this is a complicated situation that can be explained in more detail by contacting me or by reviewing the article written by Andrew Johnson, founding partner of Peisner Johnson & Company, entitled “Are You For or Against Amnesty?”
In addition to saving money, an amnesty program is a great vehicle to become compliant and is a step towards the possible avoidance of possible civil or criminal prosecution. Amnesty programs usually cover a wide range of taxes, are generally well publicized and run for specific period of time. The specific period of time is short, ranging from 30 days to 6 months, with the majority trending toward the lower end of the range. Amnesty programs are not offered on a regular basis or with any frequency. They are usually available only to participants who are not currently reporting or those with outstanding liabilities that have not been identified by the taxing agency. Participants are often required to waive their rights to an appeal or a refund of any monies paid under the amnesty. Sometimes, there can be harsh penalties for any taxes that could have been paid under the amnesty but were not. Amnesty is public and usually leaves a company open to greater scrutiny by other states. Amnesty is almost always followed with periods of increased enforcement against those who have not taken advantage of the amnesty.
Amnesty Pros & Cons
|1. Vehicle for compliance.||1. Usually no limitation on look-back period.|
|2. Avoidance of possible prosecution.||2. Short window of opportunity to act.|
|3. Usually offer a waiver of penalties.||3. No predetermined frequency of offering.|
|4. Potential waiver of some or all interest.||4. Available only if not already identified by the state.|
|5. Waiver of rights to an appeal or refund.|
|6. Possible harsh penalties for not taking full advantage.|
|7. Increased visibility by other jurisdictions.|
As mentioned earlier VDA programs are similar to amnesty programs. You can think of VDA programs as a sort of on-going amnesty. Both programs usually allow for at least the waiver of penalties and sometimes some or all of the interest. The differences between the two lie in the additional benefits and flexibility offered by VDAs. Let’s compare and contrast.
One of the great differences between the two programs is that most VDA programs offer a limited look back period. The look back period is usually 3-4 years. However there are a few states, with Hawaii being an example, with look back periods as long as 10 years. The importance of a limited look back period is paramount. If you have never registered in a state, then there is no statute of limitations on how far back a state can pursue you. If you have been doing business in a state for 20 years, then, at least theoretically, if not in actuality, a state has the right to pursue you for those 20 years. In actuality, states do routinely go back 7 years. Add up those back taxes, interest, and penalties and the numbers mount quickly. Additionally many states share this type of information when they find delinquent taxpayers in these situations; so you may soon find yourself being pursued by multiple states and your problems compounding.
This is usually an apocalyptic scenario for a company because, like amnesty programs, VDAs are usually available only to participants who are not currently reporting or those with outstanding liabilities that have not been identified by the taxing agency. (If you find yourself in such a dire situation, it would be in your best interest to call me immediately.) In order to prevent this type of scenario from happening most states allow for VDAs to be initiated by third parties on an anonymous basis. A taxpayer’s name is not disclosed until an agreement on the terms of the VDA is reached. A successful VDA strategy takes this into consideration and provides for a multi-state approach wherever a taxpayer has nexus but is not filing.
Another instance where the anonymous feature of a VDA comes in handy is in the potential avoidance of possible civil or criminal prosecution. In many instances the waiver of civil or criminal prosecution is addressed in the VDA agreement prior to the taxpayer’s identity being disclosed. Both programs are vehicles to bring a company into compliance.
Most states offer VDA programs covering a wide variety of taxes. Although not highly publicized, the programs are ongoing and can be taken advantage of at any time, unlike amnesty programs which have short windows of opportunity and are offered at long, irregular intervals. This is an added benefit when dealing with multi-state issues. VDAs also do not usually require the waiving of rights to an appeal or refund and usually do not have provisions for harsh penalties.
The following is a brief listing of the pros and cons of VDA Programs.
VDA Pros & Cons
|1. Vehicle for compliance.||1. Available only if not already identified by the state.|
|2. Avoidance of possible prosecution.|
|3. Usually offer a waiver of penalties.|
|4. Potential waiver of some or all interest.|
|5. Limitation of look-back period.|
|6. Anonymity feature.|
|7. Easy to coordinate multi-state efforts|
If we compare the charts of the pros and cons of both amnesty programs and VDAs you will find that the VDA programs come out ahead in having both more pros and fewer cons. It is important to remember though that we have been talking in generalities. While we believe that in many instances the VDA is the better choice, each situation should be examined on an individual basis and all possible solutions should be explored to determine the best possible outcome. Sometimes the solution may require a third approach as is the case with New Mexico. New Mexico’s amnesty program expired last year and, as of now, they have no VDA program. Prior to their amnesty program beginning and after its expiration we have been very successful negotiating with the state to help companies solve their tax issues. Or maybe your best solution requires a multi-pronged approach.
Above all else, I believe there are eight important points to take away from this article.
- Know which states offer amnesty programs. There are a large number of states who have recently completed general amnesty programs or in the case of Washington and Michigan will soon be completing them. (WA runs from 2/1/11-4/18/2011 and MI runs from 5/15/2011-6/30/2011.)
- Expect increased audit activity. Keep in mind that all states are stepping up enforcement actions but states that have completed amnesties can be expected to be especially aggressive; as evidenced by the Pennsylvania Revenue Secretary’s comment about stepping up enforcement actions as well as actually coming after corporate officers.
- Be proactive. Do not let the states find you first. As you can see from the comparison the one negative that both programs have in common is that neither is usually available once the state has found you. Look into the possibility you may have exposure.
- Don’t be complacent. Just because you believe you don’t have issues does not make it true. Of the myriad horror stories I hear, many could have been prevented by performing routine checkups. Review your operations. Has anything changed about where or how you do business, perform services or deliver your products? Keep abreast of changing nexus definitions or interpretations. Maybe your business has stayed the same but the state has changed their nexus interpretations. Educate yourself.
- Don’t assume that your employees or CPAs can stay on top of every little nexus change for you. While some of them may be on top of these issues, it is usually not necessarily “top-of-mind”. They have daily tasks and duties that keep them busy. For many CPAs, federal taxes are the main concern, and well they should be. CPAs are usually very much on top of what’s happening in their own states, but every state is different, and many simply don’t have the resources required to stay on top of the multitude of ever changing multi-state tax issues.
- Don’t just “get registered.” Never try to just register in a state where you believe you may have the potential for exposure. You can open yourself up to a whole host of negatives and will probably not be able to take advantage of either a VDA or amnesty.
- Don’t forget about Canada. Canada does not appear to be as aggressive as some states in the US, but you may still have potential issues there. Revenue Canada as well as the non-member provinces all offer VDA programs. (We can help.)
- Don’t be afraid to ask for help or to ask questions. No matter what your position, be it the boss, employee, or advisor to the company, the question you ask may save everyone a whole lot of trouble. The question may be internal or it may go to one of the handful of specialized firms throughout the country.
Peisner Johnson & Company is one of those specialists that can help. We are the country’s largest CPA firm that limits itself entirely to state and local taxes. We work directly with companies as well as in tandem and sometimes totally behind the scenes with many CPAs and attorneys. Please feel to contact me with any concerns or questions you may have. Many times we can answer your question or put you at ease with a quick answer. If not, then we can let you know how we would approach a solution. In addition, we also offer free webinars that provide for CPE credit. One of our most popular is about Nexus and covers VDAs. I would be happy to provide you with our upcoming schedule.There are currently so many differences in the state VDA and Amnesty programs it is hard to cover them in detail in a single article like this. It was my intention to provide you with as much general information as I could. If you have any questions or would like additional information, including a list of states that have completed general Amnesty programs, please contact us.