If your business has not paid its required state taxes and you’re worried about being audited, you might consider filing a voluntary disclosure agreement, or VDA. State tax authorities have created voluntary disclosure programs that allow businesses to receive tax benefits by reporting unpaid taxes. A VDA can eliminate some of your tax liabilities and allow you to pay less taxes than what you would normally owe. VDA agreements apply to all types of taxes that apply to your business in a specific state, so they include taxes that you may not have paid because you did not know about them.
VDAs Reduce Your Lookback Period
If state tax authorities decide to audit your business, they may assess additional taxes for any year when your business was operating. But if you file a VDA, you may only be liable for unpaid taxes during a specific lookback period, which is usually three to five years. For example, the Louisiana lookback period is four years including the current year. So if you didn’t pay your Louisiana state taxes five years ago and you file a VDA now, the state won’t make you pay taxes for that year even though you would otherwise be liable for them.
Lookback periods, like other VDA rules, are state-specific. For example, the Washington lookback period for a voluntary disclosure agreement is five years. So you’ll need to check your state’s VDA website if you want to see whether you’d be liable for paying taxes for a specific year if you filed the form.
VDAs Reduce Tax Penalties
If you file a VDA, you’ll still have to pay business taxes for the years included in the lookback period. But the state may waive or reduce some of these taxes if you file a VDA. States may also reduce tax penalties for businesses that file VDAs. For example, if you don’t file a business tax return by the applicable deadline, the state will charge you a late filing penalty. The state of Washington will reduce this late filing penalty for businesses whose owners file VDAs.
State tax authorities also charge penalty fees for operating unregistered businesses, and they may reduce these fees if your business files a VDA as well. State tax authorities may decide that you’re operating an unregistered business in a state if you’ve established substantial nexus there, even if your business has been properly registered in its home state. As the Small Business Administration explains, many types of businesses must register their business in every state where they operate.
How Substantial Nexus Works
You may have unpaid business tax liabilities that you don’t know about. One way for a business to incur unpaid tax liabilities in a specific state is by establishing substantial nexus there. Substantial nexus means that you have significant business operations in the state. For example, if your company headquarters is located in California but you operate an online store that sells products to customers in Tennessee, the Tennessee tax authorities may decide that your business must pay taxes in Tennessee.
The state of Tennessee lists several ways that a business can establish substantial nexus in Tennessee and thus become liable for business taxes in the state. State tax authorities consider several factors when they’re determining if you’ve established substantial nexus. For Tennessee, these factors include whether your business owns property in Tennessee, whether it hires employees to do work in Tennessee, and whether it sells products to customers in Tennessee.
The state will then use metrics such as the value of the property your company owns in the state and the size of its payroll in the state to decide if your business has established nexus there. If these metrics are above certain thresholds, the state government defines that as a bright-line presence, so the business is considered to be operating in the state and will be liable for state business taxes. If your business is in a situation like this, you might want to consider filing a VDA.
Business Taxes Covered by a VDA
Franchise taxes are paid by any registered business in a state, not just franchise owners.
Sales taxes are assessed when taxable goods are sold in a state.
Use taxes are paid by the buyer of taxable goods when the vendor does not collect state sales taxes.
Corporate income taxes apply to corporations that operate in a state.
Excise taxes apply to specific business activities, products, and services.
Other state taxes may be included in a VDA as well.
Automation Helps You Avoid This Problem
If you’re operating a business that sells products or hires employees outside of its home state, your business may be liable for state taxes in that location as well as the state where your headquarters is located. The tax authorities in the other state may not have noticed your business yet, but once they do, they may ask you to pay state taxes plus additional penalties. You can reduce these taxes and penalties by filing a VDA.
Of course, automated accounting software calculates your tax liabilities in the states where your business operates, which would make it much less likely for you to get into a situation where you have unpaid state taxes in the first place. Automated accounting software can also file the appropriate state tax forms for your business.