Amnesties vs. VDAs
When it comes to sales tax, many people don’t realize that lack of collection and remittance of tax on sales can lead to some pretty hefty penalties, not only civil but in some cases even criminal.
If a business discovers that they failed to collect tax in previous years and wants to mitigate past exposure, including the waiver of penalties, both civil and criminal, there are two primary options to achieve this goal.
Option 1: Tax Amnesty Program
Every once in a while, states can be helpful and offer a tax amnesty program that is geared toward a specified group of taxpayers to pay a defined amount. In exchange for payment of tax liability, the state may waive some or all of the interest and penalties relating to the previous tax period or periods without fear of civil or criminal penalties. It’s the state basically saying “If you pay us what you owe now, we’ll forgive you for not paying us when you should have.” Bear in mind that amnesties are not always true amnesties. Taxpayers still have to pay all of their delinquent taxes and possible penalties and interest.
Option 2: Voluntary Disclosure Agreement (VDAs)
When an amnesty program isn’t being offered, most states will still offer a Voluntary Disclosure Agreement program. A VDA is a program whereby taxpayers proactively disclose prior period tax liabilities in accordance with a binding agreement. Through this agreement, taxpayers can receive certain benefits such as the elimination of penalties or lower interest amounts.
Of course, both options depend on the taxpayer’s history within the state.
Which program is right for me?
Generally, VDAs are a better tool than amnesties because VDAs have a limited look-back period whereas generally, amnesties do not. Through a VDA, taxpayers generally do not have to pay tax prior to the statute of limitations period. For example, if a business were to send in a VDA application to Colorado, they would only have to pay the tax for up to three years prior to the date of application. In an amnesty, the taxpayer will generally owe delinquent taxes for all prior periods of tax liability.
In a VDA, states will generally waive penalties and in a handful of states reduce or eliminate interest. Amnesties generally waive penalties but are more forgiving of interest with almost all amnesties offering reductions or eliminations of interest. Amnesties are also generally less formal than VDAs and require less effort to complete.
One thing to keep in mind is that VDAs are generally only available to the taxpayer if they have not been previously contacted by the state. However, there are exceptions to this rule. For example, Michigan will allow a VDA after the state has contacted the taxpayer. Amnesties, on the other hand, generally don’t take into account whether the taxpayer has been contacted or not.
An example of an amnesty is Nevada’s program, beginning February 1, 2021, and ending on May 1, 2021. The program is for businesses that have an existing tax liability. Different programs include different tax types. In this instance, Nevada includes Sales and Use Tax, Modified Business Tax, Cigarette Tax, Insurance Premium Tax, etc. Basically, all taxes administered by the Nevada DOR except for lodging and real property transfer tax. Locally administered property tax is not included either.
To keep it simple, taxpayers may use a credit card or debit card online or send in a check by mail, to pay their delinquent tax.
As long as a taxpayer meets the state-given criteria, the program allows penalty and interest to be waived. Generally, the criteria include things such as:
Businesses to have filed all of the returns by a set date
Delinquent taxes must be paid in full
Delinquent taxes must be paid within the amnesty program dates
In conclusion, there are big differences between VDAs and amnesties and the impact on the amount of money you can save and/or have to pay the state. Your specific facts or circumstances will determine which program is best for you. If you need assistance or guidance as to which program you should choose we can help!
Update: Illinois is rolling out amnesty. Read our blog on that here!
By: Priya Sorathia
This blog is intended for educational purposes and not as tax advice. Tax policies and procedures change frequently, so specific information, such as thresholds, rates, etc. included in this blog may have changed since it was originally published. Please request a consultation for more in-depth information.