A voluntary disclosure agreement may help a transportation company address unfiled state tax obligations while limiting the lookback period and reducing penalties, interest, or fees.
When State Filing Obligations Become Unclear
Many companies struggle to determine whether they have enough activity in a state, or nexus, to require state tax returns. The question can be especially difficult for transportation companies because even driving more than a de minimis number of miles through a state may create a filing obligation.
Income tax adds another complication. Transportation companies often must use special formulas to determine the portion of income apportioned to a state. Because nexus can be uncertain and the cost of compliance can appear greater than the perceived risk, companies sometimes decide not to file.
The risk changes when in-state miles increase or the company purchases or leases a terminal or land. Filing a first return at that point may invite questions about prior-year activity and lead to tax, interest, and penalties for earlier periods.
How a Voluntary Disclosure Agreement Works
In those circumstances, a voluntary disclosure agreement, or VDA, may be an option. VDAs generally offer two principal benefits:
- A limited lookback period
- Abatement of penalties, interest, or fees associated with noncompliance
Each state has its own process, but a VDA commonly begins with an anonymous letter to state officials describing the company's activity in that state. A detailed information-gathering and negotiation process follows. The company normally discloses its identity only after the parties agree to the terms.
Once the agreement is executed, and assuming the company has accurately described its activity, the company submits the outstanding returns and payment for the agreed lookback period.
Evaluating Whether a VDA Is Worth Pursuing
A company should compare the potential tax due under a VDA with the amount at risk if it does not participate and the state identifies it first. That analysis should include the years before the state's typical lookback period, whether the company had nexus in those years, and the amount of potential liability.
The cost of compliance under both scenarios also matters. A VDA is generally most compelling when liability before the normal lookback period is uncertain or potentially large, especially when compounded interest and penalties could create financial hardship.
Amnesty Programs Are Not the Same
States sometimes offer amnesty programs that resemble VDAs, but amnesty is available only during a specified period. These programs generally require a company to pay all or most prior-year taxes in exchange for relief from penalties or interest.
A company should determine whether a state recently completed an amnesty program before requesting a VDA. A state may be less receptive to a taxpayer that could have joined an amnesty program but chose not to do so.
At the time of the original article, Pennsylvania had an amnesty program running through June 19, 2017. It covered taxes administered by the Pennsylvania Department of Revenue for known or unknown delinquencies existing as of Dec. 31, 2015. The program waived all penalties, collection fees, and lien fees, along with 50% of late-payment interest.
Taxpayers eligible for that program who declined to participate and were later found delinquent could face an additional 5% penalty. Taxpayers that had participated in Pennsylvania's 2010 amnesty program were not eligible, and a taxpayer that had signed a VDA covering an amnesty-eligible period could not participate in the current amnesty program.
Moving Beyond the Audit Lottery
Voluntary disclosure programs give companies a way to come forward and reduce the tax, penalty, and interest they might otherwise owe. For transportation companies that have underreported tax or failed to file, a VDA may offer substantial benefits compared with waiting for a state to initiate an examination.