Executive summary: Pennsylvania makes taxpayer-friendly changes to corporate VDA
The Pennsylvania Department of Revenue recently announced in Tax Update, No. 226 (June/July 2023) the reduction of the voluntary disclosure agreement (VDA) lookback period for corporate taxes to three years, from five years, effective with VDAs entered into after July 31, 2023. The change effectively adds two more years of tax forgiveness for qualifying taxpayers and brings the corporate VDA lookback in line with the VDA lookback for non-corporate taxes. The other terms and requirements of the corporate tax VDA program remain unchanged.
Pennsylvania limits corporate tax VDA lookback to three years
The new lookback period for corporate tax VDAs is three years, plus the current year, effective with VDAs entered into on or after Aug. 1, 2023. Under the VDA program, the department forgives tax liabilities, and corresponding interest and penalties, for taxable years preceding the lookback period. Taxpayers are responsible for the tax and interest within the lookback, and once all requirements of the VDA have been completed, receive a waiver of penalties. Pennsylvania corporate taxes eligible for the revised lookback include the corporate net income tax, bank and trust company shares tax, mutual thrift institutions tax and gross receipts tax.
Taxpayers ineligible for the VDA program include those that have been contacted by the department, taxpayers that previously registered with the department for tax purposes, taxpayers that the department has contacted and pursued collection actions against or investigated, or certain taxpayers that have registered with the Pennsylvania Department of State to do business in the commonwealth (due to automatic registration with the Department of Revenue).
The announcement made no other change to existing VDA program terms and requirements beyond the reduction of the corporate VDA lookback period.
An additional two years of tax forgiveness under the updated program can be a huge benefit to taxpayers with exposure to Pennsylvania corporate taxes exceeding three years. This may especially be true for taxpayers subject to Pennsylvania’s corporate income tax economic nexus threshold that have not yet begun to file since the original nexus guidance was issued in 2019 and recently codified. The benefit to the VDA is even greater when considering the reduction or elimination of state income tax exposures reflected in a taxpayer’s financial statements due to ASC 740.
Since contact by the department prior to receiving a case number for a VDA may disqualify a taxpayer from participation, taxpayers should begin the process as early as possible. Taxpayers can begin the process anonymously. Additionally, taxpayers submitting a VDA for one tax type should consider whether exposure exists under other tax types to minimize revealing possible noncompliance. Importantly, the department does not allow tax forgiveness for trust fund taxes, such as sales tax and employment tax, that have been collected but not remitted.
There are a number of reasons why a business may have unpaid tax liabilities. The growth of the business, whether through mergers and acquisitions or high demand for the service or product, may have exceeded the capability of the tax function to remain current with multistate activities and tax registrations. Liabilities may be discovered through due diligence examinations or nexus studies. Inventory held in warehouses or on consignment, salesforce travel, solicitation activities that go beyond P.L. 86-272 protections are just a few of the reasons for potential exposure. VDAs are often an excellent mechanism to come into compliance and mitigate exposure, but should be done so thoughtfully and in consideration of each jurisdictions’ specific program requirements.
Taxpayers with questions about the change in the Pennsylvania corporate VDA or VDAs in general should reach out to their state and local tax adviser.