Accountant Checklist: Determining the Best Application of a VDA

In short: A Voluntary Disclosure Agreement (VDA) lets a non-compliant business come forward and pay back unpaid tax and interest for a set lookback period. In return, states often waive penalties and earlier periods. Your client is only eligible if the state has not contacted them.

Voluntary Disclosure Agreements, called VDAs for short, are great tools for accountants. They help clients deal with state and local tax (SALT) non-compliance issues. With a VDA, business owners disclose any non-compliance and offer to put things right. They do this by paying back unpaid taxes and interest for a specific period of time.  We cover this in more detail in What Is a VDA (Voluntary Disclosure Agreement) and Do You Need One?.

A VDA may be a great option if your client meets any of the following criteria:

• They operated a business and neglected to collect sales tax
• They stand to save significant money on waived penalties and interest

In some cases, a VDA is not an option. For example, say a business owner collects tax but doesn't register with the state as a seller. That's a serious offense that could count as criminal fraud, and a VDA won't help.

What are the benefits of VDAs?

Most states let accountants apply for a VDA confidentially for their client. The state doesn't learn the taxpayer's identity until the VDA is agreed. In essence, it’s like an anonymous tax version of debt consolidation. States will often limit fees and penalties to a shorter time window than an audit would assess. This window is known as a lookback period.

Put simply, a lookback period is the length of time a state’s tax authority checks to make sure your past tax filings were correct. In a VDA program, the lookback period can vary by state. It is the number of years of returns the taxpayer must submit to get relief. It is also the number of years of past-due tax plus interest the applicant must pay.

In return for paying this overdue tax, the state waives tax liability for periods before the lookback period. The state can still audit the taxpayer’s records for the lookback period. But it generally gives up the right to audit the records for the period before.

Filing a VDA can benefit your client in many ways. More specifically, it can:

• Reduce non-compliance penalty fees and non-payment interest, as mentioned above
• Allow your client to close out open statutory periods
• Waive issues that occurred prior to the defined lookback period

So how do you decide when and how to use VDAs to best support your clients? Read more in our guide: 8 Lucrative SUT Advisory Add-Ons Your Accounting Practice Can Offer Clients.

Step 1: Is your client eligible to submit a VDA?

How do you know if your client is eligible to submit a VDA? Answer this critical question about their current compliance situation: has the state contacted your client? 

Or, more specifically, has your client:

• Previously filed tax returns with or made tax payments to the state?
• Been audited in the past?
• Had a prior contact with the state concerning a tax obligation?
• Received a nexus questionnaire from the state?

If the answer to any of these questions is yes, a VDA is not an option for that client. It’s also not an option if the client is being audited right now.

But if the answer to these questions is no, your client is eligible to be considered for a VDA. Read the next section to find the best way to use it in their situation.

Step 2: What transactional data do you need to assess?

To use a VDA, you need all the transactional data required to file past returns. You also need some other information on hand to submit to the state.

To make sure you have what you need, your team should:

• Figure out what data you need:
  Find each potential VDA state’s lookback period (generally 3-4 years). Make sure you have all the transactional data you need to file back tax returns for that time period.
• Evaluate nexus triggers:
  Work out whether the client has physical nexus, economic nexus, or both in each potential VDA state. Identify any grace periods for economic nexus. Physical presence nexus has no grace period. The client is liable for any unpaid tax right away.
• Estimate your client’s liability:
  Use the transactional data you have to make a good faith estimate of the business’s unpaid tax. Prepare a transactional analysis for review.
• Determine audit risk:
  Based on statutory periods and grace periods, check whether your client can still be audited for the non-compliance time frame in question. Weigh the liability costs for the lookback period and for the time before it. 

Step 3: Is a single-state or multi-state VDA best?

The Multistate Tax Commission, or MTC, runs the Multistate Voluntary Disclosure Program (MVDP). Through it, taxpayers can apply for single or multi-state VDAs with participating states. Once a single application is submitted, the taxpayer can negotiate each VDA through one platform. There is no charge to use this service.

There are several reasons to use the MVDP. Say you have a client with economic nexus compliance issues in several states in the MVDP program. A multi-state application will save a lot of time. A taxpayer with possible tax exposure in more than one state will also find this service more efficient. It costs less than approaching each state separately.

Completing all the steps above will help you decide whether a single or multi-state VDA application is a better fit for your client.

Step 4: Which advisory services should you provide?

After the VDA, the way the business runs will change. It's up to the client's accountant to put the client in the best position to succeed. At this stage, it's wise to offer some advisory services for SUT compliance.

You may offer to:

• Analyze product taxability
• Determine any exemption scenarios
• Evaluate tax technology, make recommendations, or assist with tax technology implementation and testing.

On the operational side, your team should check that tax calculations are set up correctly and that rates are up to date. It's also a good idea to check future tax return dates. Then make a plan to make sure those returns are filed on time. 

What happens after you file?

Once the VDA is submitted, the state will confirm whether the applicant is eligible for the program. If it’s approved, file all the back returns you need and pay the interest and amount due. In some cases, the state will ask to look at your client’s books and financial records. States generally only let you file for a VDA once. Any misrepresentation of facts can disqualify your client from the program.

How long does it take? A single state VDA response usually comes back fairly quickly, often in 90 days or less. Multi-state applications may take longer due to counter-offers, admin issues, and so on. You can expect them to take around 4-6 months.

Now you know the steps to find the best use of a VDA for your clients. You can help them deal with non-compliance issues in the most cost-effective way possible. You can also read The True Cost of Sales and Use Tax Non-Compliance.

How can LumaTax help you provide proactive SUT management and better advisory services?

Our innovative SaaS platform gives accounting firms strong technology. It helps you provide the best possible SUT compliance advisory services and support. We offer a quick and easy compliance score tool that helps you spot at-risk clients. You can also use our software to create a detailed state-by-state nexus analysis and jurisdiction report. This gives you the information you need to prepare VDAs.

Our tools help you work smarter, not harder, by removing the manual work in a nexus study. Ready to boost your team's productivity while providing in-depth compliance analysis to your clients? Give LumaTax a try today

How Taxually handles this

Taxually’s LumaTax runs a nexus analysis on your sales, helps you register in the states where you must collect, and prepares and files multi-state sales tax returns, including Canadian GST/HST. LumaTax is currently available to enterprises and accounting firms. For the full workflow, read how to automate US sales tax filing in every state.

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