When Your Client Discovers It’s in a Tax Minefield, Consider a Voluntary Disclosure Agreement
"BABC SALT Corner," Alabama CPA Magazine
Let’s assume that last week, your client wrapped-up a sales, use, rental and business license tax audit by a contract auditing firm that represents a number of cities and counties in the state. It turns out that your client has never filed a consumer’s use tax return. “Mercifully,” the examiner only went back six years, and not all the way back to the date your client first started doing business in the targeted localities. You’ve reviewed the audit report and the legal authorities the auditor relies on and (gulp) conclude that your client probably owes the use tax. You also realize that your client has perhaps a BIGGER problem – it does business in a lot of jurisdictions that the audit didn’t cover and it also owes State use tax. Now, you’re preparing for a meeting with your client to discuss the next steps. What should you do?
In these situations, we often recommend that our clients consider pursuing a voluntary disclosure agreement (“VDA”) with the Alabama Department of Revenue (“ADOR”) and with other local jurisdictions that may be owed the same type of tax. A VDA allows a taxpayer to proceed with a clean slate. Indeed, taxpayers participating in a VDA program generally receive a contractual commitment from the taxing authority to limit the look-back period, waive penalties, and possibly even reduce (or eliminate) interest. In short, a VDA provides much greater certainty than the taxpayer’s most realistic other option – playing the audit lottery. And with recent changes in the law and enhanced cooperation between the taxing authorities, the chances of “winning” that lottery are slimmer and slimmer.
Thankfully, the ADOR offers a formal VDA program, and its guidelines are available on the ADOR’s website. In our experience, most (but not all) local jurisdictions offer very similar programs. Typically, to be eligible for a VDA, the taxpayer must not have been filing returns for the type of tax at issue and must not have been contacted by the taxing authority or its agents regarding potential liability. Importantly, the ADOR (and most local jurisdictions) permit taxpayers who were audited by other taxing authorities to enter into a VDA if you contact them first
For most tax types, a VDA will limit the look-back period to just 36 months from the date you or the client’s attorney contacts the taxing authority, although there may be exceptions for city business license taxes and for taxpayers who collected sales or seller’s use tax but failed to remit
it. In addition, the taxing authority agrees to waive all penalties. So, a taxpayer may be able to resolve decades of potential liability for just three years’ worth of tax and interest—and may even get a break on the interest. In exchange, the taxing authority receives an unexpected influx of revenue, with little effort, and a new taxpayer on the rolls. A win-win solution and you look like a hero to your client!
To initiate a VDA, we recommend that you or the client’s attorney call the taxing jurisdiction (or their contract auditing firm if they use one), on an anonymous taxpayer basis, to explain your client’s situation, find out the terms of their VDA program, and make sure your client is eligible to participate. Assuming your client is eligible, the next step is for you to send a letter to the taxing authority formally requesting participation in their VDA program, but without naming your client (yet). Typically, the taxing authority has a standard voluntary disclosure agreement they will send back to you to memorialize the terms and which provides a deadline for compliance. From there, your client simply determines its tax liability for the look-back period. It’s a relatively simple process that we successfully use for literally dozens of our clients each year.
Republished with permission. This article first appeared in the October 2014 issue of Alabama CPA Magazine.