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.

References

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