If you have already determined that your ecommerce business should have filed income tax returns in multiple states, ecommerce Voluntary Disclosure Agreements may be the best way to correct those prior-year filing obligations.
The process is not as simple as preparing and filing the missing returns. Each state has its own voluntary disclosure procedures, lookback periods, application requirements and deadlines. In some states, we can approach the state anonymously on your behalf before your business is identified. Once an agreement is accepted, there may also be a relatively short period of time to prepare and file the required income tax returns.
Schultz & Associates has experience preparing income tax VDAs for ecommerce businesses in states with some of the more involved voluntary disclosure procedures, including California, Pennsylvania, New York, New Jersey, Massachusetts and Illinois. We can help determine which years need to be addressed, prepare the voluntary disclosure applications, work with the states during the approval process and prepare the required prior-year income tax returns.
If you already know you have a multistate income tax filing problem, you do not need to figure out the VDA process on your own.
Before You File the Missing State Income Tax Returns
If you have discovered several years of unfiled state income tax returns, don’t assume the next step is to simply prepare and file them.
Filing a delinquent return, registering with the state or otherwise contacting the state before applying for a ecommerce Voluntary Disclosure Agreements can affect your eligibility for the program. In some states, the VDA application needs to come first.
This is important because a VDA may limit how many prior years you are required to file and may eliminate penalties that would otherwise apply. Filing the returns first could mean giving up those benefits.
Before filing anything, we review when your income tax filing obligation began, estimate the potential exposure and determine whether you qualify for the state’s voluntary disclosure program.If a VDA is appropriate, we follow that state’s process first and coordinate preparation of the required income tax returns around the VDA deadlines.
How the Income Tax VDA Process Works
The voluntary disclosure process is different in each state, but the basic steps are similar.
We start by reviewing your business activities in the state, determining when the income tax filing obligation likely began and estimating the amount of tax involved. We then prepare the state’s VDA application and the supporting information required to explain the circumstances.
In several states, we can submit the initial VDA request on your behalf without identifying your business. This allows the state to review the facts and determine whether the business qualifies for voluntary disclosure before its identity is disclosed.
While the state reviews the VDA, we can begin preparing the required prior-year income tax returns. This is important because some states give businesses a relatively short period to file the returns after accepting the agreement. We don’t want to receive an approved VDA and only then begin gathering several years of information.
After the state accepts the agreement, we disclose the business’s identity when required, file the agreed-upon income tax returns and make the required tax payments. The state then processes the returns and completes its voluntary disclosure procedures.
The process requires coordination, but it does not mean months of continuous work for you. Much of the time after the returns are filed may simply involve waiting for the state to finish processing the voluntary disclosure.
Our Experience With State Income Tax VDAs
Schultz & Associates has experience completing income tax VDAs in California, Pennsylvania, New York, New Jersey, Massachusetts and Illinois. These states have some of the more structured voluntary disclosure processes and are states where ecommerce businesses frequently encounter income tax filing obligations.
We have not completed a VDA in every state, but our experience with these more involved programs gives us a strong foundation for navigating the process in other states as well.
Below, we explain what to expect in each of these six states.
California Income Tax Voluntary Disclosure Agreements
California generally limits a qualifying VDA to the six taxable years preceding the agreement and may waive applicable penalties.
We can begin the California VDA process anonymously on behalf of the business. After signing the agreement, the business generally has 30 days to file the required California income tax returns and make payment, although California may grant an extension of up to 120 days.
Because of the short filing period, we typically begin preparing the California returns while the state reviews the VDA application.California does not publish a standard timeframe for completing the state’s final processing.
Pennsylvania Income Tax Voluntary Disclosure Agreements
Pennsylvania generally limits qualifying corporate tax VDAs to three prior years plus the current year due and provides penalty relief once the business meets the agreement’s requirements.
We can begin the Pennsylvania VDA process anonymously. Pennsylvania may require a Business Activities Questionnaire and information explaining when the company’s tax obligation began, its activities in the state and the estimated tax due.
Pennsylvania states that its Voluntary Disclosure Office normally makes initial contact within one to two business days after receiving an application. Once both parties execute the agreement, the state provides instructions for filing the required returns and making payment.
New York Income Tax Voluntary Disclosure Agreements
New York’s VDA program can provide penalty relief and, depending on the circumstances, a limited lookback period for businesses with several years of unfiled income tax returns.
Also, New York specifically instructs businesses not to file delinquent returns before receiving acceptance into the program and the VDA. The state reviews the application first and may request additional information before determining eligibility.
Unlike several of the other states discussed here, we would not describe New York’s current process as anonymous. The state also does not publish a standard processing time, so the time required for review can vary depending on the facts of the disclosure.
New Jersey Income Tax Voluntary Disclosure Agreements
New Jersey allows a qualifying business to begin the VDA process anonymously and may provide a limited lookback period and penalty relief.
The state requires a Fact Pattern Form describing when the company’s New Jersey activities began, the estimated tax due and the nature of its activities in the state. For corporate income tax, New Jersey specifically asks about activities that may exceed the protections of P.L. 86-272, making the facts surrounding an ecommerce company’s operations particularly important.
Once the New Jersey VDA is accepted, the agreement establishes the filing period and deadline for submitting the required income tax returns and payment.
Massachusetts Income Tax Voluntary Disclosure Agreements
Massachusetts generally provides qualifying businesses with a three-year limited lookback period and waiver of applicable penalties.
We can begin the Massachusetts VDA process anonymously. Corporations must also complete a Massachusetts Activity Questionnaire describing their activities in the state as part of the voluntary disclosure process.
The business discloses its identity when it moves forward with the program and prepares to file the required returns. Massachusetts does not publish a standard processing time, so the time required to complete the state’s review can vary.
Illinois Income Tax Voluntary Disclosure Agreements
Illinois can limit the lookback period to four years for qualifying businesses and eliminate applicable penalties once the business satisfies the VDA requirements.
Once Illinois approves the VDA application, the business generally has 30 days to submit the required income tax returns and payment. A written request may provide an additional 60 days to complete the filings.
After the returns are processed, Illinois calculates any remaining tax and interest due. The business then has 60 days from the state’s notice to make the required payment and receive the applicable penalty relief.
What If You Have Income Tax Exposure in Several States?
It is common for an ecommerce business to discover that its income tax filing problem involves more than one state. Each state has its own VDA procedures, but we can coordinate the applications as part of one multistate project.
We can evaluate the states together, determine where VDAs make sense, prioritize the filings and coordinate preparation of the required income tax returns. This becomes particularly important when several states require the returns shortly after accepting the VDAs.
What About Sales Tax Voluntary Disclosure Agreements?
States do not always use the same voluntary disclosure process for income tax and sales tax. Depending on the state, they may involve different agencies, requirements and lookback periods.
This page focuses specifically on state income tax Voluntary Disclosure Agreements for ecommerce businesses. If sales tax exposure also exists, we evaluate that separately rather than assuming the income tax VDA resolves both issues.
Talk With Us About Your State Income Tax Filing Problem
If you already know your ecommerce business has unfiled state income tax returns, the next step is to determine which states qualify for voluntary disclosure and what you need to do before filing any returns.
Email Eddie White to schedule a Zoom meeting. We can review the states involved, discuss your prior filing history and determine the best way to move forward with the Ecommerce Voluntary Disclosure Agreements process.