Voluntary Disclosure Agreements 101

Hosts & Guests

Alexander Korzhen, State and Local Tax Senior Manager

Meredith Smith, State and Local Tax Senior Manager

Tram Le, State and Local Tax Senior Manager


[00:00:52] Alex Korzhen: A voluntary disclosure agreement is an agreement that most states have. At the administrative level with the department of revenue that allows a company to voluntarily and sometimes anonymously come forward and disclose, uh, their non-compliance, uh, in return for a break on penalties and a break on look back period.
So, what that means in English is that you've been bad, and you can come forward and approach the state prior to them catching you. In return for that, they will usually look back only about three or four years, generally speaking, and make you file three or four years of back returns.
[00:01:58] Alex Korzhen: Pay the tax pay the interest and then they'll waive penalties and be a good taxpayer going forward and be correct. It's a pretty sweet deal. If your facts kind of line up, right. If you've only been in business about a year, then maybe a VDA might not be the best again. Maybe, maybe it still is a good value. If you've been in business 50 years, it's a home run, you should do it. And thank your lucky stars that you haven't been caught already.
[00:02:28] Meredith Smith: So, I think what that does is, and where we do them a lot is when clients have kind of gotten caught in one state and they're like, oh, like, wow, that was a really big pain in the butt to fix eight years’ worth of, of issues in California.
I know I've been non-compliant in all of these other jurisdictions for a long time. How do I fix this and not have to go back eight years? So that's or, you know, it's a legal agreement that kind of provides documentation at some point in time that says, I took my taxes seriously. I'm good. Now with Arizona.
So, I can provide that in due diligence, in funding, in acquisition activities. So, we do a lot. I would say kind of clean up and remediation as a result of, of due diligence, on the, on the, okay. We want to sell in a year, or we want to go public in a year and we know we have this past that's bad and murky, or they got bought.
And as part of this, they had this giant escrow for what they weren't doing, and then we're fixing them, you know, post-acquisition. So that their new buyer doesn't have to, and they still get to control their narrative, which is another part that, you know, you get to come to the state with your facts, with your circumstances, with your taxability decisions and present your case to the state and get that buy off, working directly with an agent versus either on an audit where things can be a little bit more combative.
There's a little less capacity and a little less friendly. On kind of the reactive side versus the proactive side.
[00:04:14] Alex Korzhen: Yeah. States, I mean, we, we found that that states are much easier to deal with. Again, kind of painting with a broad brush here, but states are much easier to deal with under a VDA.
Scenario then if, if they caught you, right. If you received the nexus questionnaire or, or if you're even being audited, um, you know, it's, it's not that it's hostile, but there's definitely kind of this undertone of, of gotcha. Right. Um, so you're either approaching on your terms or you are being reviewed on their terms.
[00:04:48] Tram Le: Yeah. And I, and I also think that, um, kind of what both y'all have said, I mean, it's a good deal because pretty much at the end of the day, you know, generally they'll wave the penalty. And then sometimes some states like Texas will waive interest. And so pretty much the cost of, you know, paying for a voluntary disclosure agreement for us to, you know, negotiate that agreement as well as provide, you know, that self-audit to a state.
I mean, it pretty much pays for itself. So, I think that's probably another great reason why, uh, you know, a client would want to do it.
[00:05:27] Alex Korzhen: without getting into the specifics of, of pricing, because we, we do price VDA. Individually by state and, and, and, you know, and, and very heavily dependent on the fact pattern.
Um, how do you, how do, how do you guys do your pricing? How do you evaluate pricing versus from a, from a, the perspective of, is the BDA worth it, right? Because there's a, there's a professional services fee associated with negotiating this legal agreement. And then, and then going through. The various, um, uh, uh, elements of, of meeting the, the terms of the, the VDA process. So how do you tip the scale typically? I mean, I would think or how you advise.
[00:06:14] Tram Le: And I think it really, you know, depends on the process at the state level, right. Or even the local jurisdictions, uh, such as in Colorado with the home rules. I think it really depends on, you know, what that process entails.
Right. It’s pretty much we having to fill out a ton of forms or are we having to, you know, answer or provide a narrative? I. The timing factor, um, plays a big role as well as our clients or, you know, that perspective client's situation. Because if we're dealing with like bad data, we can't really do the self-audit efficiently.
Obviously, that's going to take you more time. So, in those, you know, cases where you're spending a lot of time looking at client data or their, their facts, aren't clear when we're coming forward. I think that that definitely plays. Um, a, a huge role in the cost.
[00:07:07] Meredith Smith: Well, and speaking to that kind of value component tram that you brought up earlier, we can, you know, you're almost automatically granted penalty waiver, you know, assuming you haven't collected non-IT and whatever, without getting into too much detail, but we kind of see that penalties are about 50% of the tax that you are to remit oftentimes being, you know, 5% per month.
Capped at a certain amount for failure to file and failure to pay. So, you're looking at kind of two 25% penalties, um, which is what you're able to go to get absolved. Right. Um, so is there, you know, are, are fees that can range, you know, anywhere from $2,500 to $30,000 for VUA like, they can be really expensive in time consuming sometimes.
Like, does that penalty waiver eliminate kind of pay for that, you know, the fees associated with that, but also how long have you been in business? Right. So, we did a VDA for Colorado for a use tax. This company had been around. This company predated use tax in Colorado, they had never done anything. So, we literally eliminated 60 years of use tax in the state of Colorado and only did a use tax VDA for three years, which was maybe, I don't know, five, $5,000 that we remitted.
So, our fees were more than that. But if you think about like, that backlog that we literally got permission to never have to do anything in. That value was there.
[00:08:49] Tram Le: The value is certainly there. Yeah. Yeah. That's, that's huge. I completely agree. Well, we've had clients in that same boat where they've been doing business in the, uh, jurisdiction for.
No. I don't know if I've had one, a client with 60 years of, uh, risk, but yeah, like 20, 30 years even like, so the, the three, four-year lookback period is amazing. Um, though, I think like Hawaii's lookback period is like 10 years, so it's not always, yeah. You know, the best path to remediate, but I mean, definitely a great option for many clients.
[00:09:22] Alex Korzhen: I think Hawaii. And then was it new? Is it New Mexico?
[00:09:25] Meredith Smith: New, New Mexico is fairly long and they're it's
[00:09:27] Alex Korzhen: eight, six or eight. Yeah. They're but those are the outliers generally speaking as three or four, thankfully.
[00:09:37] Meredith Smith: There's a lot of value and I think where we, you know, try to pride ourselves and our advice is like, we're never going to make you do something that doesn't make. Right. We're you know, we're not, we're going to encourage you to not lie on forms. Um, you know, about the date that you started doing business, we're not going to advise you, or we try, unless it really truly makes sense.
Like we wanted you to get the value out of your money. And so, we really come strategically and work with you on a state-by-state basis. Cuz. You know, we've also initial data says we should do a VDA in Indiana. When we look at things, it's like, oh, well actually these sales weren't in Indiana, or, you know, there's a position that we can take, so we're not going to make you do something just so that we make money.
We work hand in hand with you to make that best business decision. And so sometimes it is a VDA, sometimes it isn't, but it is always worth the conversation and are sometimes seemingly annoying questions. Try to get to that best answer for you and the best way to fix your problems and also spend your money wisely

Topics Discussed in this Episode:

  • The VDA process and determining the value of them for clients
  • How VDA’s are priced state to state

What You Will Discover:

  • [00:49] Defining a VDA
  • [05:54] How to advise clients
  • [09:40] Working on a state-by-state basis


  • “A VDA is a legal agreement that provides documentation that says I took my taxes seriously so I can provide this in due diligence in funding, in acquisition activity. So we do a lot of clean up and remediation as a result of due diligence.” – Meredith Smith [02:47]
  • “States are much easier to deal with under a VDA scenario than if they caught you if you received a nexus questionnaire or if you are being audited. It is not hostile but there is this undertone of “Gotcha!”. So you either approach on your terms or you are reviewed on their terms. ” – Alex Korzhen [04:06]
  • “The cost of a VDA, to negotiate that agreement as well as provide that self-audit to a state, pretty much pays for itself. I think that is a great reason for a client to do it.” – Tram Le [04:50]
  • “Determining if a VDA is worth it depends on the process at the state level or local jurisdictions. I think it really depends on what that process entails. Are we having to fill out a ton of forms or provide a narrative? The timing factor plays a big role as well. If we are dealing with bad data we can’t do the self-audit efficiently. ” – Tram Le [06:00]

Relevant Links:

TaxOps Home – www.taxops.com