VDA: A Relief for High Net Worth Taxpayers
With travel, investments, business arrangements and transactions that are so varied and significant -- even with access to top advisors -- it is easy to overlook or be unaware of the myriad of taxes and tax collectors that high net worth individuals face.
Consider a simple illustration. An individual traveling overseas purchases art work for which the seller does not bill sales tax. Upon return and failure to voluntarily remit use tax to the taxpayer’s home jurisdiction, the individual is liable for tax, interest and penalty. A second example is illustrative in the income tax arena. A CEO makes business trips into a state where he does not reside or have an office. He does not file in that state, yet under that state’s nonresident tax rules, he is in fact under an obligation to file.
In each of these two examples, the burden can add up, since there is no statute of limitations running (because nothing was ever filed to begin the running of the statute). Over time, the interest can quickly surpass the actual tax liability. Add to that the predilection of the departments of revenue to make public examples of well-to-do taxpayers to gin up compliance among the entire body politic, and the innocent and uninformed taxpayer can find themselves in quite the predicament.
As to preexisting liabilities, such as failure to file any tax return, there is some relief for the harried taxpayer: the voluntary disclosure administration (VDA) program. Virtually every state affords this program. In short, VDA programs allow taxpayers to voluntarily come forward, admit to the taxing authority the lapse that occurred and offer to correct the omission. VDA programs contain several benefits:
- Limited Look Back. Most states provide a three-year limit on preexisting exposure, so deficiencies older than three years are wiped from the slate.
- Penalty Abatement. Penalties are excused in their entirety.
- The Cloak of Anonymity. Until the taxpayer’s representative and tax authority has concluded an agreement, the identity of the taxpayer is never disclosed. Thus if satisfactory terms cannot be agreed to, the taxpayer’s representative has the leverage of pushing back from the table and halting negotiations. Careful attention, however, must be given here as not all states allow for anonymity during the VDA process.
From the state’s perspective there are two benefits to VDA programs. First is getting taxpayers on track to ensure proper reporting on a go forward basis. Second is that any old liability that is paid under the program is found revenue, a considerable asset in an era of budget shortfalls.
Some taxpayers spend sleepless nights once they become aware of a tax gaffe and hope for their state(s) to adopt amnesty programs. Amnesty, however, is not nearly the panacea VDA provides. While VDA is an ongoing governmental program, amnesties are only available every number of years. Amnesty programs almost never provide a limited look back period. There is also no negotiating and hence no flexibility in amnesty programs. Finally and perhaps most severe, under the Internal Revenue Code it is questionable whether preexisting liabilities paid under amnesty are eligible for tax deduction when filing one’s federal income tax return.
It is important to note that there are limitations to participating in a VDA program. Competent tax representation is critical to successful VDA application, both to further the anonymous nature of the filing and because advisors experienced in these programs know how to negotiate and secure the best settlements with the tax authorities.
For more information, please contact your WTAS advisor.