Voluntary disclosure agreement explained

In the United States, a voluntary disclosure agreement (VDA), is a program whereby taxpayers can receive certain benefits from proactively disclosing prior period tax liabilities in accordance with a binding agreement.^[1] Most states offer Voluntary Disclosure Agreements to encourage companies to comply with a state's tax laws and in turn generate revenue for the state that it may not have had if the company did not come forward and disclose its liabilities.^[2] Additionally, the state can generate future revenue by having a company register in their state to collect and remit certain taxes.

Benefits

The primary benefits of a voluntary disclosure typically include:

• Limitations of the prior look-Back period - Usually the look-back period is limited to between 3 and 5 years as opposed to having no statute of limitations if no return has ever been filed. However, for the offshore voluntary disclosure program, there is an 8-year look back period.^[3] In some cases prospective agreements can be reached in which the taxpayer is forgiven of all past liabilities, but agrees to future compliance.
• Abatement of penalties - Most states will waive penalties on any prior period taxes that are remitted in connection with a voluntary disclosure agreement.
• Full or partial interest^[4] - A limited number of states will abate interest in full. Many states apply a reduced interest rate to prior period taxes remitted in connection with a voluntary disclosure agreement.
• Friendlier sales and use tax audit - While state taxing authorities typically reserve the right to audit taxpayers who come forward pursuant to a voluntary disclosure agreement, the audit will typically be limited to the reduced look-back period, and it would generally focus more on understanding and confirming the reasonableness of the taxpayer's liability quantification approach, rather than on uncovering additional liabilities.
• Brings closure to prior periods - The taxpayer will be comfortable knowing that prior period liabilities are closed and will be able to concentrate its compliance efforts on current and future periods.
• Protects potential buyers from prior ownership's liabilities.

Disadvantages

• Cost - The main disadvantage of this alternative is the cost. This alternative usually requires the assistance of a third party service provider who will require a fee for their services and the compliance cost might outweigh the benefits (i.e. if the potential exposure is not material).
• Compliance burden - The taxpayer will have an increased compliance burden immediately and going forward, as they will now be required to remit and report taxes.

External links

• Voluntary Disclosure Agreements (96-576)
• Taxes - Voluntary Disclosure
• Voluntary Disclosure Program Guideline
• Voluntary Disclosure and Compliance Program

Notes and References

1. Web site: Voluntary Disclosure Program . CT.gov . 11 January 2014.
2. Web site: What is a Qualified Entity? . 11 January 2014.
3. Web site: Foreign Accounts Compliance . 27 February 2018.
4. Web site: Abatement of Interest . 11 January 2014.