VOLUNTARY DISCLOSURE AGREEMENTS: A Pathway to Resolving Unpaid Taxes
If you have unpaid tax obligations and are concerned about being contacted by the Department of Revenue, a Voluntary Disclosure Agreement (VDA) may be the solution you need. VDAs are programs offered by many states that allow taxpayers to come forward voluntarily and disclose their unpaid tax liabilities. In this article, we’ll look closer at VDAs, how they work, and what you need to know to determine if they’re right for you.
What is a Voluntary Disclosure Agreement (VDA)?
A VDA is an agreement between a taxpayer and the state in which the taxpayer voluntarily discloses their previously unreported or underreported tax liabilities. VDAs are typically offered for all tax types, including income tax, franchise tax, and sales and use tax.
Under a VDA, taxpayers are required to file their delinquent tax returns and pay the tax due, along with any penalties and interest that may be assessed. In exchange for coming forward voluntarily, the state may waive specific penalties and reduce the lookback period for which the taxpayer must file delinquent returns and pay any unpaid tax.
Benefits of a VDA
There are several benefits to entering into a VDA, including:
- Reduced Penalties: States may waive or reduce specific penalties that would otherwise be assessed for failing to file returns or pay tax.
- Limited Lookback Period: States may reduce the lookback period, which reduces the years for which the taxpayer is required to file delinquent returns and pay any unpaid tax.
- Avoid Criminal Prosecution: By coming forward voluntarily, taxpayers may avoid criminal prosecution for tax evasion.
- Certainty: Entering into a VDA provides taxpayers with certainty that their tax obligations are resolved, and they can move forward without fear of being contacted by the Department of Revenue.
VDA Processes
The VDA process varies by state but typically includes the following steps:
- Contacting the State: Taxpayers or their representatives must contact the state to express their interest in entering a VDA.
- Application Form: Taxpayers must complete an application form that includes detailed information about their unpaid tax liabilities and the reasons for noncompliance.
- Negotiation: Once the state receives the application, it will review the taxpayer’s information and negotiate the terms of the VDA.
- Agreement: If the state and the taxpayer agree on the terms of the VDA, the taxpayer must pay the tax due, file all delinquent returns, and comply with all future tax obligations.
Who is Eligible for a VDA?
Most states have a voluntary disclosure program that allows taxpayers to come forward and resolve their unpaid tax liabilities. To be eligible for a VDA, taxpayers must meet the following criteria:
- The Department of Revenue, regarding the unpaid tax, has yet to contact the taxpayer.
- The taxpayer is not currently under audit or investigation.
- The taxpayer has yet to file tax returns in the state where they have unpaid tax liabilities.
- The taxpayer is not a party to a multistate tax commission audit or compliance initiative.
- The taxpayer is not a party to a criminal investigation.
Working with a Taxpayer Representative
Taxpayers considering entering a VDA may benefit from working with a taxpayer representative. A taxpayer representative is a licensed professional who can assist taxpayers in negotiating the terms of their VDA and resolving their unpaid tax liabilities.
When working with a taxpayer representative, it’s essential to choose someone experienced in VDA processes and with a good track record of helping clients resolve their tax liabilities. The representative can help.