You have a business that sells goods to your customers in other states. Recently, you heard that you should have collected sales tax on certain transactions or that the money you collected as sales tax should have been remitted to that state. You suspect that if you contact the state directly about your issue, the state may decide to audit you or bring you to jail for not remitting the taxes you collected. What do you do? What can give you peace of mind?
In comes the Voluntary Disclosure Program. With the Voluntary Disclosure Program, you pay the state its tax and interest, have most or all penalties waived, and most importantly, you avoid going to jail. At the end of the day, the Voluntary Disclosure Program truly is the best solution to some of the worst tax problems. But what is the Voluntary Disclosure Program and how do you qualify?
The Voluntary Disclosure Program is the process of initiating contact with a state to come clean on potential tax liabilities. To qualify for the Voluntary Disclosure Program, you cannot have been contacted by the state. If you have been contacted by the state before you apply for the program, most states recognize this contact as disqualifying you from the Voluntary Disclosure Program. However, some states may nevertheless allow you to enter the Voluntary Disclosure Program. The moral here is that as soon as you discover a tax liability that you wish to disclose, you need to enter the Voluntary Disclosure Program immediately.
Assuming you qualify for the Voluntary Disclosure Program, how do you determine the amount of tax you need to disclose? First, you need to figure out which states you have nexus in (a legal way of saying “connection”). For the states you have nexus in, you must then determine which of your sales are taxable. For instance, most states say that selling a computer would likely be taxable. If you were to sell medical supplies, some states may say this is an exempt sale. Thus, the tax liability would only be associated with the computer.
Once you have an estimate, you can file with the Voluntary Disclosure Program. You do not need to have an exact tax liability amount. Instead, having an estimate of your tax liability can help to not only get the process started, but also provide additional time to review your records to determine the exact liability amount.
From here, you should determine whether to work directly with each individual state for entering the Voluntary Disclosure Program or go through the Multistate Tax Commission (“MTC”). Working with each individual state means having to draft numerous applications to enter the Voluntary Disclosure Program in order to meet each state’s requirements. Furthermore, you then have potentially numerous points of contact to handle all of your Voluntary Disclosure Program applications. It makes a tough job even more challenging. However, you could attempt to enter the Voluntary Disclosure Program through the MTC.
Entering the Voluntary Disclosure Program through the MTC has numerous benefits. For one, you have a single point of contact at the Commission. This individual will be able to help you with every Voluntary Disclosure Program you want to enter. But, that only works for the states that have agreed to the MTC’s terms and are considered a “member state.” That is, not all states allow for you to enter into the Voluntary Disclosure Program through the MTC. While you may have ten states to disclose to, perhaps only eight of the states work with the MTC. The other benefit of working with the MTC is having a uniform application. This uniform application allows you to fill out most of the questions in a template, and then you can save the state-specific questions for each individual state. It helps you to be even more efficient with your time.
It is also worth noting that if you do not enter the Voluntary Disclosure Program, it truly is a roll of the dice. Many times, states have third-party information that the states can (and do) use in order to audit and assess you. For instance, some states have agreements with other states that they will share information with each other. For you, this means potentially having tax liabilities in multiple states.
In conclusion, the Voluntary Disclosure Program can be the perfect solution for tax liabilities. Having the ability to reduce or eliminate penalties (civil and criminal) goes a long way. Furthermore, you may be able to simplify the process of disclosing to multiple states by using the Multistate Tax Commission. Not entering the Voluntary Disclosure Program could lead to unmitigated risks. Knowing that you no longer have to look over your shoulder can make all the difference in moving forward.
David Brennan is an associate attorney with Moffa, Sutton, & Donnini, P.A. His primary practice area is multistate tax controversy. David received a B.S. in Accounting and Finance, with a minor in Computer Science, from Florida State University. He worked as an accountant for a CPA firm before attending law school at Regent University. He received his Juris Doctor in 2013 and was licensed to practice law in Florida in the same year. In 2015, David earned his Masters of Laws in Taxation from Boston University. David worked for the Florida Department of Revenue as a Senior Attorney before entering private practice. You may contact David via email at DavidBrennan@FloridaSalesTax.com or 850-250-3830. You can read his BIO HERE.
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ADDITIONAL ARTICLES TO READ
NJ Reconsiders and Ultimately Taxes I.T. Support Company, published April 10, 2017, by Jerry Donnini, Esq.
Pain in the SaaS: Navigating Sales Tax on Cloud Computing, published March 13, 2017, by Jerry Donnini, Esq.
Tennessee Jumps on Economic Nexus Train, published March 13, 2017, by Jerry Donnini, Esq.
FLORIDA USE TAX AUDIT LETTER?, published June 14, 2015, by James Sutton, CPA, Esq. and Jerry Donnini, Esq.