tax evasion penalties

Establishing a business means thinking through tax and other compliance considerations. Important components of startup and financial planning include paying taxes and registering your business with the state. But the rules can be complicated and many business owners aren’t sure which taxes they need to pay.

Unfortunately, many businesses in Washington overlook their tax obligations, especially if the business isn’t yet registered. This can lead to steep penalties that any young business will want to avoid. 

Something called the voluntary disclosure agreement (VDA) program was implemented to help ensure businesses are getting registered and filing and paying taxes. But how does the Washington VDA program work? What are the benefits? This VDA guide walks through all the key factors you need to know.

What is Voluntary Disclosure in WA State?

The VDA program was created by the DOR to encourage new businesses to comply with all applicable tax laws, pay and file their taxes, and get registered with the state. The voluntary disclosure program lets you come forward voluntarily about unfiled taxes, and in exchange for coming forward, the DOR waives penalties and other consequences. 

Understanding VDAs in Washington

First is understanding the implications of failing to disclose your business. If you fail to notify the state of Washington of your business’s existence, and the Department of Revenue (DOR) discovers the business through its activities, you could be hit with tax owed plus up to 39% in penalties. The state has a “look-back” period that includes the current year plus the last seven to implement these fines.

To help businesses avoid this risk, the state created the VDA program. VDAs limit the look-back period to just four years instead of seven and waive penalties up to 39% of the amount of tax owed in those past tax periods. This program applies to these types of taxes: business, occupation, retail sales, use, and any other taxes imposed in business transactions.

Which Businesses Must Pay Taxes in WA?

To determine if your business is subject to WA State taxes, it’s important to understand something called substantial nexus. Businesses that have substantial nexus in Washington state are those that are required to pay state taxes because the business is:

  • Organized or commercially domiciled there, or 
  • Organized or domiciled in another state and brings in over $100,000 in gross receipts from Washington or has a physical presence in the state

Establishing a VDA can help these businesses avoid paying penalties for prior years that they weren’t in tax compliance in Washington.

Eligibility Criteria for a VDA in Washington

Not all businesses will qualify for a VDA arrangement. The Washington DOR states that a business must meet these criteria to take advantage of the state’s VDA program:

  • The business has never been registered with the DOR
  • The business has never filed taxes with the DOR
  • The business hasn’t been contacted by the DOR regarding enforcement
  • The business has not engaged in tax evasion or misrepresentation regarding their tax liability

Note that you can still be eligible if your business is registered with Washington’s Secretary of State’s office only.

So, if you established a business but have never registered it, filed taxes for the business, been contacted by the DOR about it, or engaged in evasion or misrepresentation, you qualify for the VDA program. 

You are encouraged to apply so you will be officially registered and can start paying taxes. The incentive means you won’t have to pay penalties for the years you were in operation but failed to comply with DOR requirements.

What Are the Benefits of a Washington VDA?

A big benefit of establishing a VDA is that the look-back period is a smaller time frame, so you only have four years plus the current year instead of seven plus the current year. This means a smaller window for review, a lower tax liability, and reduced penalties. 

Under a VDA, up to 39% of penalties can be waived. Here’s how that 39% is broken down:

  • 5% substantially underpaid tax assessment penalty
  • 5% penalty for being unregistered
  • 29% late payment of return penalty

Additionally, you may benefit from dealing with just one summarized tax assessment that the DOR issues, avoiding many different bills. Note that statutory interest is still imposed on your balance and is not waived under a VDA.

Another benefit of a VDA is confidentiality. The DOR states that it maintains the confidentiality of all of your business information you submit to apply for the VDA. These terms further help you protect your business identity.

How the VDA Application Process Works

Participating in the VDA and taking advantage of these benefits requires a submitted application. Here is a step-by-step look at what you need to do to apply:

  1. Gather all required documentation: To apply with what the DOR considers a complete application, you’ll need these documents and information:
    • The business’s name, address, and phone number
    • Your gross income represented in a spreadsheet per their instructions
    • A questionnaire regarding Washington business activities
    • The Confidential Tax/Email Authorization form
    • Reseller permits or exemption certificates
  2. Register your business: The DOR states you should register your business with them after submitting your VDA application. The DOR offers an online resource—the Business Licensing Wizard—to assist you with this process.
  3. Disclose business identity within 15 days: The DOR allows you to apply for VDA anonymously. However, you must provide business identity details within the following 15 days. Your VDA application cannot be approved until the DOR knows your business identity.
  4. Provide any missing information within 60 days: You have 60 days to send any additional documentation or information that an examiner notifies you is missing from your application.
  5. If approved, complete your agreement: The DOR will review your application, and if they approve your business, they’ll send you the VDA to sign and return within 30 days.
  6. If not approved, read the explanation: If for some reason the DOR rejects your application for the VDA program, they’ll notify you of their reasoning. This document will also give you instructions for next steps.
  7. Review your tax assessment: The department will then calculate what your business tax liability is. They’ll send you an assessment for review, followed by an invoice to provide payment. Follow all instructions on your invoice carefully as far as how and when to pay.

If you do not agree with the DOR’s decisions or your assessment, you have the right to appeal. Talk to a tax attorney when you’re in this situation so you have expert guidance behind you.

Terms and Conditions of the Washington VDA

The DOR offers a sample agreement online so you can see everything that the VDA will entail. Here’s a brief overview of all the terms you will agree to under the Washington VDA:

  • That you meet the eligibility requirements.
  • That you will register with the DOR within 60 days.
  • That you will comply with the terms of the Revised Code of Washington.
  • That the DOR will waive tax liability for:
    • Business, occupation, retail sales, use, and any other applicable taxes related to transactions before the VDA period.
  • That you will provide gross income in a spreadsheet within 60 days.
  • That you will, upon the DOR’s request, provide any applicable tax exemption certificates or proof supporting deductions or credits you claim.
  • That the 39% penalties will be waived.
  • That interest will still be assessed on the tax owed.
  • That the DOR will calculate and send the tax assessment.
  • That you agree to pay the assessment by the due date on the invoice or incur further penalties.
  • That you will start filing the state’s combined excise tax returns starting with the next quarter after the VDA period ends.
  • That the DOR will keep the agreement confidential.
  • That if you violate the agreement terms or provide false information, it will be null and void, and the DOR can take necessary steps to ensure compliance.
  • That any notices or modifications will be in writing.
  • That the tax assessment under the agreement doesn’t involve a “detailed review of accounting records” and is thus limited in scope.

Ensure that your business details and contact information are correct at the top of the agreement. Review all terms carefully, and talk them over with a legal professional. Sign the VDA and send it back according to the DOR instructions you received.

Alternatives to the VDA Program

If you realize your business hasn’t been compliant with Washington tax compliance laws, applying for a VDA is a wise choice so you’re not on the hook for all the penalties you may owe on your back taxes. However, if you don’t qualify, what are your alternatives to a VDA?

In that case, you may just need to work with a tax pro to file your unfiled returns. Then, work with the WA DOR to request penalty abatement and payment plans. 

What If You Have Unreported IRS Taxes?

The VDA program discussed in this post is only available for Washington State taxes. However, if you have unfiled IRS taxes, you may be able to take advantage of the IRS’s voluntary disclosure program. If you have unpaid IRS taxes, there are a few IRS relief programs that could help you deal with the tax debt:

Payment Plans

You may be able to set up a payment plan, or installment agreement, with the IRS when you can’t afford your full tax bill. This allows you to pay a monthly amount for a set period of time instead of making one lump payment. You can apply online for a long-term payment plan as a business if you have filed all required tax returns and your bill is $25,000 or under for tax, penalties, and interest combined.

Offers in Compromise

You also may qualify for an offer in compromise, which allows you to pay what you can and the IRS will accept that amount and settle your debt. The agency looks at a variety of factors when making this call, including income level, expenses, ability to pay, and asset equity. They approve offers in compromise if you offer an amount that is the most they “can expect to collect within a reasonable period of time.”

Temporary Not-Collectible Status

Sometimes the IRS will agree to delay collections if you are experiencing a financial hardship. This is known as currently not collectible (CNC) status. While you will eventually have to pay your full tax bill, delaying payment may help you get into a better financial situation so you can pay what you owe. 

FAQs

What is the deadline to apply for a VDA in Washington?

There is no deadline to apply for a VDA, but the longer you go without registering or applying for a VDA, the more risk you have of the DOR discovering your business through their audit or investigation processes. Then, you may face a 39% penalty on top of your tax liability for the unreported period. 

Can a business with an ongoing audit apply for a VDA?

Generally, businesses do not qualify for a VDA if they have previously been contacted by the DOR regarding enforcement. Businesses also cannot have registered or reported taxes to the DOR previously.

Are nonprofit organizations eligible for Washington’s VDA program?

Yes. In Washington, nonprofit organizations are taxed like other businesses. They would have the same eligibility requirements to apply for a VDA.

How long does the VDA process take in Washington?

The processing time for VDAs will depend on whether everything was submitted with the original application, whether the business applied with anonymity, whether an appeal process is initiated, and other factors. Doing your due diligence, working with an expert, and carefully reviewing all instructions can help you speed up the process.

What happens if a business defaults on the agreement terms after entering a VDA?

If a business violates the VDA they have established with the DOR, the agreement usually states that it will become null and void, and the DOR may take steps such as tax assessments, interest accrual, and additional penalties.

How the VDA Program Can Help Your Business

Washington businesses may not be registered with the DOR or filing their required tax returns. If this is the situation you’re in, the state offers the VDA program to help you get in compliance and incentivize you to register and file your taxes.

It’s always important to stay proactive and aware so you never miss any tax requirements that apply to your business. When in doubt, consult the team at Seattle Legal Services. We will help you navigate any IRS issue you’re having and guide you to the best option for your business. 

Get in touch with Seattle Legal Services today to learn more.