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Voluntary
Disclosure Agreements 3-30-06
Introduction
Many states offer
a program whereby taxpayers can receive certain benefits from proactively
disclosing prior period tax liabilities in accordance with a binding agreement.
Most states offer Voluntary Disclosure Agreements to encourage companies to
comply with a states 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. Additionally, the state can generate future revenue by having a
company register in their state to collect and remit certain taxes.
The Process And
Benefits
The process
initially involves contacting the relevant taxing authority through a third
party on a no-name basis and working out terms pursuant to which the taxpayer
could bring closure to certain prior state tax liabilities and prospectively
comply with the states tax laws.
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. In some cases prospective agreements can be reached in which the
taxpayer is forgiven of all past liabilities, but agrees to comply going
forward.
- 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
Abatement - 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.
Before entering
into such an agreement a company should weigh the benefits (e.g., penalty
abatement, look-back period savings, etc.) against the associated professional
fees. The decision should hinge on the materiality of the potential exposure.
If potential tax exposure is material, it would probably make sense to enter
into such an agreement, as this is clearly the preferred alternative in such a
case. If not, alternative approaches such as filing tax returns on a
prospective basis or leaving the tax function unchanged might make more
sense.
The information
provided is for informative purposes only. Should you have questions or require
further assistance please contact an Olivier & Associates Sales and Use
Tax professional.
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