|Stephanie Lipinski Galland|
In order to survive, businesses must overcome a variety of unprecedented human resources, operational and logistical challenges. However, the good news is that tax compliance issues do not need to be a reason to shut down a business during COVID-19.
Tax compliance issues can be handled in a practical and efficient manner if a business understands its options. The risk of doing nothing, in the mistaken belief that nothing can be done, may damage the actual business in the form of liens. It also may damage the people functioning as the decision makers, as responsible officer liability can convert a business liability to a personal liability.
The tax relief programs offered by the IRS often get more attention, but every state taxing authority offers several methods for a taxpayer to get compliant with their tax issues. Although it is outside the scope of this article, some states are enacting programs specifically in response to COVID-19. Also, many localities are offering similar programs.
While the exposure varies by the type of tax, an understanding of the general collection alternatives can help guide the business and its decision makers to safe harbor. This article summarizes several collection alternatives offered by most state taxing authorities.
States generally provide three different alternatives to taxpayers with tax reporting or payment issues: (1) voluntary disclosure agreements, or VDAs, (2) offers in compromises, and (3) payment plans. Each alternative has its own benefits and depends on the tax and the situation of the taxpayer.
Before reviewing the alternatives to collection, we note that a business and its owners may have significantly fewer options or less time to become compliant if the taxing authority initiates the contact.
1. Voluntary Disclosure Agreements
Most states offer a VDA program for taxpayers that have not filed or paid their taxes. Under a typical VDA, the state will typically limit the look-back period —to three years, for instance — and waive penalties.
In exchange, the taxpayer will agree to pay the tax and interest. The terms of the VDA can vary by state and the type of tax. Some states have longer look-back periods, and others waive only half of the penalties. Amnesty programs are similar to VDAs and are periodically offered by states.
The benefit of a VDA can be significant. We've seen taxpayers with state tax compliance issues going back 10 or 20 years. Under the VDA, the taxpayer only paid taxes and interest for three years.
Also, at the end of the VDA process, the state will often give the taxpayer a closing letter stating it will not audit or assess any taxes prior to the disclosure period. A closing letter can be useful for due diligence purposes if the business is sold in the future and the purchaser has any questions about the seller's compliance history.
Taxpayers are usually not eligible for the VDA program if they've previously registered for the tax type in question or if they are first contacted by the state. However, many states will allow the taxpayer to request a VDA on an anonymous basis and offer full protection from the date of the request. If the state initiates an audit before the taxpayer discloses its name, the taxpayer would simply produce its anonymous VDA request.
Offers are another collection alternative provided by state taxing authorities. Under an offer, a taxpayer would agree to pay a certain dollar amount to satisfy the entire tax liability. There are generally two grounds for a state to accept an offer: (1) doubt as to liability, and (2) doubt as to collectability. Doubt as to liability may result from the state operating on incomplete or erroneous information or miscalculating the tax and interest owed by a taxpayer.
Doubt as to collectability results from a taxpayer's inability to pay its taxes. Usually, state taxing authorities are unwilling to accept an offer based on a taxpayer's temporary circumstances. Instead, the standard is usually the taxpayer's reasonable collection potential in the future. Before accepting an offer, the state will generally require the taxpayer to file all of its outstanding tax returns and stay compliant with all future reporting and payment obligations.
Unlike a VDA, the taxpayer usually will not receive a closing letter if the state accepts the offer. Also, while an offer will not prevent the state from filing tax liens against the taxpayer, it usually will prevent the state from any tax levies, seizures or garnishments.
Plans can be used in combination with VDAs and offers. They are also a great alternative when all else has failed. The terms of a plan can vary. One strategy is to negotiate to get the longest term possible in order to minimize the taxpayer's monthly payments. A taxpayer's compliance issues may multiply if sets the bar too high and defaults on any payment.
As with an offer, a taxpayer generally must stay current on its plan and agree to file and pay all taxes for future periods on time. Penalties and interest will continue to accrue on any unpaid balance, and the state will likely file liens against the taxpayer to secure payment. However, a plan is a viable alternative to immediate payment or any levies or property seizures.
State taxing authorities are hurting for revenue and some states will be aggressive with collections in the coming years to make up for budget shortfalls caused by the coronavirus pandemic.
If a business has suffered a disruption in its tax filings and payments, there are proactive steps it should consider to ensure that tax does not become an insurmountable obstacle. Being proactive about outstanding tax compliance issues, can make the difference between staying in business and having to close down for good.
Stephanie Lipinski Galland and Kyle Wingfield are partners at Williams Mullen.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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