Voluntary Disclosure Agreements Explained: Tax Implications

In the fast-evolving landscape of sales tax compliance, businesses face mounting challenges. Whether it’s navigating complex nexus laws, managing use tax liabilities, or ensuring accurate tax reporting, the risks of non-compliance are ever-present.

The stakes are high: penalties, audits, and reputational damage can cost businesses thousands, if not millions, in missed opportunities and fines. But there’s a silver lining— Voluntary Disclosure Agreements (VDAs). VDAs provide a strategic pathway for businesses to address past tax discrepancies while minimizing penalties and financial exposure.

This article delves into how VDAs work, their benefits, and how sectors like SaaS, e-commerce, and services can leverage them to stay compliant. We’ll also explore tools like Kintsugi’s tax automation platform, which simplifies tax compliance, from managing sales tax returns to navigating the filing process.

What is a Voluntary Disclosure Agreement (VDA)?

A Voluntary Disclosure Agreement (VDA) is a formal agreement between taxpayers and tax authorities, enabling businesses to voluntarily disclose previously unreported tax liabilities. In return, they benefit from reduced penalties, limited lookback periods, and other favorable terms.

For example, a company unaware of its economic nexus obligations might discover it failed to remit use tax in multiple states. Entering into VDAs with those states can limit exposure to three or four years of unpaid taxes, instead of an indefinite period, while waiving penalties. With businesses in the U.S. facing over $7 billion in sales tax penalties in 2022, VDAs offer a practical solution to avoid hefty fines and audits.

Benefits of VDAs: More Than Just Penalty Relief

VDAs provide businesses with several critical advantages. Here are some of the benefits of voluntary disclosure agreements.

1. Penalty waivers

VDAs often eliminate penalties associated with unpaid taxes, which can range from 10% to 30% of the total liability. This can save businesses substantial amounts, reducing financial strain and enabling them to focus on growth.

2. Limited look-back period

Without a VDA, tax authorities can demand unpaid taxes for an indefinite period. VDAs typically limit the look-back period to 3-4 years, significantly reducing the exposure to historical liabilities and associated interest. VDAs are better than a tax amnesty due to this advantage since the latter generally does not limit the lookback period.

3. Reduced interest rates

Many states offer reduced interest rates for taxes paid through VDAs, minimizing the overall amount owed. This makes it more manageable for businesses to settle outstanding obligations without disrupting cash flow.

4. Avoidance of audits

Entering a VDA proactively demonstrates good faith to tax authorities and can help businesses avoid disruptive audits. This spares companies from the administrative burdens and potential penalties of a formal investigation.

5. Clarity on tax obligations

VDAs help businesses better understand their tax liabilities, including use tax and sales tax obligations. This ensures compliance moving forward, reducing the risk of repeated mistakes and penalties.

6. Improved relationships with tax authorities

Voluntarily disclosing liabilities through a VDA builds trust with state revenue departments. This goodwill can be beneficial for future interactions, including resolving any disputes or clarifications.

7. Support for multi-state compliance

For businesses operating across multiple jurisdictions, VDAs streamline compliance by addressing liabilities state by state. This approach simplifies the process of managing varied regulations and tax codes.

8. Protection from criminal prosecution

In many cases, VDAs offer immunity from criminal charges for tax evasion or fraud. This critical benefit allows businesses to rectify errors without legal repercussions.

9. Streamlined tax processes

Using a VDA encourages businesses to implement better systems for tracking, reporting, and remitting taxes. Many companies leverage automation tools like Kintsugi to maintain compliance and avoid future discrepancies.

10. Trust and compliance

VDAs foster trust between businesses and tax authorities. By voluntarily addressing past errors, companies can avoid audits and demonstrate a commitment to long-term compliance.

With these benefits, businesses can ensure financial stability, maintain compliance, and establish a solid foundation for growth.

VDAs for SaaS Providers

The SaaS sector faces growing complexities in sales taxation due to economic nexus laws and the increasing taxability of digital services. A 2023 study revealed that 65% of SaaS companies were unaware of their tax obligations in multiple states. For example, a SaaS business might exceed sales thresholds in states like Florida or California without realizing it owes taxes.

Through VDAs, SaaS companies can clarify their obligations, reduce the lookback period, and mitigate penalties. Leveraging tools like Kintsugi ensures accurate sales tax calculation and simplifies sales tax returns, making compliance manageable.

VDAs for E-Commerce Businesses

E-commerce businesses, operating across multiple jurisdictions, often face economic nexus challenges post-South Dakota v Wayfair, Inc ruling. Many are unaware of varying sales thresholds, such as $100,000 in Colorado and $100,000 or 200 transactions in Georgia. Non-compliance can lead to audits and steep fines.

VDAs allow e-commerce businesses to proactively address these liabilities. Automated tools like Kintsugi streamline tax reporting, ensure accurate sales tax filings, and minimize errors. Attending webinars tailored for marketplace sellers and utilizing a sales tax calculator can also help businesses stay compliant.

VDAs for Service Providers

Service providers grapple with inconsistent rules regarding the taxability of services. For instance, consulting services might be taxable in Florida but exempt in another state. Misunderstanding these rules often leads to underreported use tax liabilities.

By entering VDAs, service providers can rectify past mistakes and negotiate reduced penalties. Kintsugi’s platform simplifies compliance by tracking state-specific tax rules and automating the filing process.

The VDA Process: Step-by-Step

1. Preparation: Gather records, including sales data and past tax filings.
2. Anonymous Inquiry: Many states allow businesses to inquire anonymously about their tax obligations before committing to a VDA.
3. Application: Submit necessary documents to initiate the process.
4. Negotiation: Work with the state to finalize terms, including the lookback period and liability amount.
5. Agreement: Sign the VDA and settle outstanding taxes.
6. Ongoing Compliance: Use tools like Kintsugi to maintain compliance and avoid future issues.

Why VDAs Matter for Your Business

For SaaS, e-commerce, and service providers, VDAs are a lifeline in today’s complex tax environment. They provide a proactive solution to address past errors, limit financial exposure, and foster better relationships with tax authorities.

Here is a list why VDAs matter for your business.

1. Avoid costly penalties and interest

VDAs help businesses reduce or eliminate penalties and minimize interest on overdue taxes, which can amount to significant savings. Without a VDA, penalties can range from 10% to 30% of the tax liability, and interest can accrue rapidly. Proactively resolving these liabilities ensures financial stability and prevents future cash flow disruptions.

2. Limit financial exposure with a reduced lookback period

VDAs typically offer a limited lookback period of 3-4 years, whereas audits could hold businesses accountable for unpaid taxes going back indefinitely. This significantly reduces financial exposure and provides clarity on the exact amount owed. For companies with long-standing non-compliance issues, this feature alone can save hundreds of thousands of dollars.

3. Minimize audit risks

Entering a VDA demonstrates good faith and often helps businesses avoid extensive audits. Audits are time-consuming, costly, and can result in additional penalties or criminal investigations. By proactively disclosing liabilities through a VDA, businesses can maintain focus on operations without the fear of unexpected audits.

4. Gain clarity on tax compliance requirements

VDAs provide businesses with a structured process to understand their tax obligations, including nexus determination, use tax, and filing requirements. This ensures compliance with complex tax regulations and prevents future errors. Clear guidelines help businesses avoid recurring non-compliance and maintain operational efficiency.

5. Build positive relationships with tax authorities

Voluntarily addressing tax liabilities through a VDA fosters goodwill with state revenue departments. Establishing a cooperative relationship can make future compliance processes smoother and facilitate quicker resolution of any issues. This positive rapport may also lead to leniency in certain situations, such as requesting deadline extensions.

6. Support multi-state operations

For businesses operating in multiple states, VDAs provide a streamlined method to address compliance across varying jurisdictions. They help navigate state-specific rules, nexus laws, and lookback periods efficiently. This is especially valuable for e-commerce and SaaS companies dealing with multi-state taxation complexities.

7. Reduce the risk of criminal prosecution

VDAs often include provisions that protect businesses from criminal charges related to tax evasion or fraud. For companies that have unintentionally neglected tax obligations, this safeguard offers peace of mind. It allows businesses to resolve their issues without fear of legal consequences.

8. Simplify future compliance

Engaging in a VDA often leads businesses to adopt better tax tracking and reporting systems. Implementing tools like Kintsugi helps streamline compliance processes, ensuring accurate filings and timely payments. This proactive approach reduces the likelihood of future errors and penalties.

9. Prepare for growth and expansion

Resolving past tax issues through a VDA ensures a clean slate, enabling businesses to focus on scaling operations. By addressing liabilities and implementing compliance solutions, companies can confidently expand into new markets. This strategic move reduces risks and sets the foundation for long-term success.

VDAs provide businesses with a structured and cost-effective way to tackle tax liabilities while safeguarding their financial and operational future.

To stay ahead in the ever-evolving tax landscape, Kintsugi offers features like automated sales tax returns, real-time compliance monitoring, and integration with ERP, HR and e-commerce platforms like Shopify, BigCommerce, Stripe, WooCommerce and more.. This ensures that businesses not only meet their obligations but also avoid penalties and maintain their reputation.

Key Takeaways

By investing in a reliable tax automation tool, businesses can streamline their taxation processes, reduce errors, and allocate more resources to growth and innovation. Don’t wait for an audit to force your hand—take control of your tax compliance today with tools like Kintsugi, and safeguard your business from unnecessary financial and operational risks. Learn more by signing up or booking a demo to see how Kintsugi can revolutionize your tax compliance strategy.