Approach your historic exposure

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Introduction

Once historical transactions and employee details are loaded into Anrok, a picture emerges of historic exposure that can be daunting. Some important things to consider when making decisions about what to do with historic exposure:

  • Risk assessment versus cash outlay — The amount of risk is a company willing to assume not to have a large cash outlay cleaning up exposure.
  • Potential acquisition — The acquisition is when significant exposure may become relevant in negotiating the purchase price.

There are four common approaches to address historic exposure, each with varying levels of risk and cost. The approach taken in one state doesn’t have to be the same across all states, and most businesses find a mix of approaches works for them.

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The below is just a presentation of options and is not tax advice. As always, please consult a tax advisor to determine the best fit for your business.

 

 

Voluntary Disclosure Agreements

A Voluntary Disclosure Agreement (VDA) is a formal, contractual agreement between a taxpayer and the state to limit lookback periods and waive penalties for historic exposure in exchange for the taxpayer voluntarily coming forward to settle historic liabilities. This is the most common approach for taxpayers with larger exposure amounts (e.g., $70K + in tax exposure).

Key benefits of a Voluntary Disclosure Agreement (VDA)

  • Limited lookback period (3-4 years typically).
  • Full cleanup of historic exposure from a financial statement perspective.
  • Waiver or limitation of penalties.
  • Depending on the size of your exposure, you may be able to negotiate a payment plan with the state as part of the VDA.

Important considerations of a Voluntary Disclosure Agreement (VDA)

  • If you are already filing other taxes (e.g., withholding) in the state or have been contacted by the state about filing obligations, a taxpayer may be ineligible to pursue a VDA.
  • A VDA will cover all outstanding tax obligations (e.g., income taxes, property taxes, etc.) and are not just limited to sales tax.
  • Do not submit a registration for sales tax through Anrok until you have conclusively decided you don't want to pursue a VDA. Submitting a registration may preclude your ability to enter into a VDA with a jurisdiction.
  • Typically, taxpayers will hire a consulting firm to do the VDA, which comes at a financial cost. Accordingly, it may be prudent to determine whether the tax benefit you are getting outweighs the cost you will incur to do the VDA.
  • A VDA can be time-intensive, meaning on the sales tax side, you may incur a few months of additional out-of-pocket payments before the VDA is finalized, and you can begin charging sales tax to your customers.
  • Most states do not allow for amended returns for periods covered by the VDA. Meaning, that if an inaccurate amount of tax was reported or newly uncovered facts change a nexus date or product taxability, the taxpayer cannot recover any money paid under a VDA.

Anrok partners with several consulting partners who can help you execute VDAs with competitive rates. For Anrok filing partners, we offer the data lift that VDAs incur, leaving our partners more time to focus on the value drivers of VDAs - state negotiation, project management, and taxability determinations. Our partners could also have access to:

  • All of the detailed reporting you need to file your VDA.
  • Anrok can prepare and file all of the historic returns required under the executed VDA. 

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Depending on your Anrok plan, these services may be restricted. Please contact hello@anrok.com for more information on what is supported in your current plan.

 

 

File historical returns

Filing all historic returns with a state is another option to address historic exposure. Like a VDA, this puts a taxpayer in full compliance with the state and gets the entirety of exposure from your financial statements.

Key benefits of filing historical returns

  • Full cleanup of historic exposure.
  • Technically correct position to address exposure (other than a VDA).
  • If your exposure is insignificant, this can be a cheaper option than pursuing a VDA with the same benefits of full compliance.

Important considerations of filing historical returns

  • You will pay penalties and interest.
  • Less time time-consuming than a VDA, you can get registered right away to start charging customers sales tax rather than wait for a VDA approval, which can incur additional out-of-pocket tax expenses.

Anrok can register you with all jurisdictions where you want to file historic returns and request the state open up applicable prior periods for filing. Our tax team can draft and file all historic returns on your behalf (U.S. jurisdictions only).

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Depending on your Anrok plan, these services may be restricted. Please contact hello@anrok.com for more information on what is supported in your current plan.

 

 

Place exposure on initial return(s)

This middle ground is a common solution for smaller exposure amounts and taxpayers who want to get exposure off of their books but don’t want to pay for historical returns or outlay cash for penalties and interest.

Key benefits of placing exposure on initial return(s)

  • Quick and easy way to get exposure off financial statements.
  • Stops the accrual of additional penalty and interest accruing.

Important considerations of filing historical returns

Placing exposure on the first return means you have paid your tax owed, not the penalty and interest associated with that, leaving those amounts as potential risk items on audit.

Under any Anrok plan, Anrok will calculate and place transactions on your initial returns. Our return edit functionality lets you control how to spread your historic transactions across several filing periods if preferred. This ensures that you control cash outflow for paid out-of-pocket exposure and can avoid spikey returns to potentially reduce audit risk.

 

 

File prospectively

This “do nothing” approach is also viable for taxpayers who don’t want to expend cash and are willing to take the full audit risk on their exposure. This is the most common approach for taxpayers with relatively small exposure amounts.

Key benefits of filing prospectively

No out-of-pocket expense for the taxpayer.

Important considerations of filing prospectively

Unpaid exposure remains outstanding, and penalties and interest on these amounts continue to accrue.

Under any Anrok plan, Anrok will calculate and place transactions on your initial returns. Anrok will also always have a record of historic exposure. So, in the unfortunate event of an audit, you are armed with the reporting and support you need to proceed.

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