Introduction to Voluntary Disclosure Agreements (VDAs)

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Introduction to Voluntary Disclosure Agreements
(VDAs)
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What is a VDA?

• A Voluntary Disclosure Agreement (VDA) is a
  formal pact between a taxpayer and a tax
  authority.
• It allows the taxpayer to report previously
  undeclared or underreported tax liabilities
  voluntarily.
• Benefits often include penalty waivers and a
  limited look-back period for taxes owed.

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Example Scenario

• Consider a business that missed paying sales tax
  in a jurisdiction for five years.
• Upon discovering this, they can enter into a VDA.
• Instead of facing penalties for five years of
  unpaid taxes, the VDA might limit the look-back
  period to three years and waive penalties.

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Objectives of VDAs

• VDAs encourage compliance with tax laws.
• They allow taxpayers to correct past mistakes
  under favorable conditions.

Financial Benefits

• Penalty Waivers Avoid penalties that could be
  substantial.
• Reduced Interest Rates Some jurisdictions offer
  lower interest rates on overdue taxes.

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Compliance Benefits

• Limited Look-Back Period Usually 3-4 years
  compared to an unlimited period during an audit.
• Legal Protection VDAs can provide protection
  from criminal charges related to tax evasion.

Eligibility

• Not currently under audit for the tax type in
  question.
• The taxpayer must initiate contact before the tax
  authority does.
• Agreement to settle the unpaid taxes and
  interest.

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VDA Process

• Step 1 Preparation Gather comprehensive records
  of business operations, sales, and previous tax
  filings to identify potential liabilities.
• Step 2 Anonymous Inquiry Many jurisdictions
  allow for an initial anonymous inquiry to discuss
  the possibility of a VDA without disclosing the
  taxpayer's identity.
• Step 3 Formal Application Submit the required
  documentation, often detailing the nature of the
  tax liabilities and the reasons for
  non-compliance.
• Step 4 Negotiation Work with the tax authority
  to agree on the terms, including the look-back
  period and the total amount owed.
• Step 5 Agreement Execution Sign the VDA,
  officially documenting the terms agreed upon.
• Step 6 Compliance Fulfillment File the
  necessary returns, pay the agreed taxes and
  interest, and ensure ongoing compliance.

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Best Practices

• Use Automation Software Tax laws and VDA
  policies vary widely by jurisdiction.
  Professional advice is crucial. Let Kintsugi
  manage your VDAs across all 50 states and in all
  jurisdictions where you do business.
• Accurate Disclosure Ensure all information
  provided is accurate and comprehensive to prevent
  future liabilities.
• Understand the Terms Fully understand the terms
  of the VDA, including any future compliance
  obligations.

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VDAs for SaaS

• Overview SaaS delivers software over the
  internet, posing unique tax challenges,
  particularly concerning sales and use taxes.
• Tax Challenges
• Jurisdictional Variation States tax SaaS
  differently.
• Nexus Considerations The presence of users in
  various jurisdictions can create tax nexus.
• VDA Benefits
• Clarification of Tax Liabilities Helps determine
  obligations.
• Reduction of Exposure Limits look-back periods
  and waives penalties.
• Implementation
• Conduct a nexus analysis.
• Assess taxability.
• Engage with tax authorities.

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VDAs for E-Commerce

• Overview E-commerce faces challenges due to the
  physical presence of customers. The South Dakota
  v. Wayfair decision allows states to require
  remote sellers to collect sales tax.
• Tax Challenges
• Economic Nexus States have thresholds based on
  sales volume or revenue.
• Product Taxability Varies, complicating
  compliance.
• VDA Benefits
• Mitigate Economic Nexus Risks Address past
  non-compliance.
• Simplify Tax Compliance Streamline processes.
• Implementation
• Review economic nexus.
• Assess product taxability.
• Engage proactively with tax authorities.

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VDAs for Services

• Overview Taxation of services varies widely
  among jurisdictions.
• Tax Challenges
• Service Taxability Complex and varies
  significantly.
• Jurisdictional Nexus May create tax nexuses
  without a physical presence.
• VDA Benefits
• Clarify Tax Obligations Determine liabilities.
• Reduce Liability Exposure Limit look-back
  periods and eliminate penalties.
• Implementation
• Nexus and taxability analysis.
• Engage with authorities.
• Develop a compliance strategy.

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Conclusion

• VDAs help businesses rectify past tax
  non-compliance under favorable terms.
• Understanding the unique challenges and engaging
  proactively with tax authorities is crucial.

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Thank You!
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