Virginia tax amnesty offers rare opportunity for cutting a “no hassle” deal with the dep

Your business recently may have received a notice from the Virginia Department of Taxation about the “tax amnesty” program that runs from Sept. 13 through Nov. 14, 2017.  Under the program, the department will waive 100 percent of the penalties and 50 percent of the interest on any amnesty-eligible bill.  To obtain these benefits, however, you must pay the full amount of the tax and the remaining 50 percent interest.  If the bill is not resolved by Nov. 14, the department will assess a 20 percent amnesty penalty.  The state estimates that amnesty will generate approximately $74 million in revenues this year.  

As Virginia conducted its last tax amnesty program in 2009, the current program offers a rare opportunity for taxpayers to quickly reduce their tax bills without having to file an offer-in-compromise or administrative or judicial appeal or any additional expense, delay, or uncertainty.  Accordingly, there is no better time than now for businesses to clean up old tax bills or to simply do a “health check” to make sure that they are compliant with their Virginia state tax filing and payment obligations. 

Amnesty covers most types of filing and payment obligations that apply to businesses, including corporate income taxes, pass-through entity returns, sales and use taxes, and employer withholding income taxes.  The eligibility dates and periods for each type of tax will vary.  Bills with an assessment date after June 15, 2007 generally are not eligible.  Also, taxpayers who are under criminal investigation are not eligible.  Other restrictions and limitations may apply, and amnesty does not apply to federal income taxes or any local taxes, such as property taxes or business license taxes. 

Amnesty is not just for delinquent taxpayers with known liabilities.  For example, you may be planning to sell or acquire a business.  As part of your due diligence, you discover that the target did not file all of its returns or pay all of its taxes due to the state.  Amnesty may offer an opportunity to correct the error at minimal cost.  In other instances, you may have a distressed company that failed to remit its “trust fund taxes” (e.g., unpaid sales and use taxes or employee withholding).  Trust fund taxes are dangerous in that they can be converted into individual assessments against the “responsible persons” of the business.  Amnesty may offer an opportunity for the business to pay off the trust fund taxes, and limit the individual exposure of its owners and operators.

A key part of amnesty is payment by Nov. 14.  However, if you cannot pay the full amount, guidance from the department provides that you may pay a portion of the bill (assuming multiple tax periods) and receive amnesty benefits for those amounts.  Also, taxpayers who cannot pay the full amount before Nov. 14 may enter into a payment plan with the department.  The taxpayer will not receive amnesty benefits, but it will avoid the 20 percent amnesty penalty if it stays current on the payment plan.  Similarly, taxpayers who already are on payment plans will not be penalized if they stay current on their plans.

Taxpayers who have an offer-in-compromise or an administrative appeal pending with the department have a difficult choice to make.  They must choose to either (A) withdraw the offer or appeal, and pay the tax and 50 percent of the interest; or (B) continue with their offer or appeal and risk a worse result but preserve their right to a judicial appeal.  Taxpayers who withdraw their appeal waive the right to an additional administrative or judicial appeal.  However, taxpayers who continue with their appeals will not be subject to the 20 percent amnesty penalty if they pay the liability within 30 days of the final determination.

The choice between continuing with the appeal or receiving amnesty benefits is even more difficult if the taxpayer requires a determination letter from the department for business certainty.  The savings under amnesty can be substantial.  However, the taxpayer also may believe strongly in its reporting positions, or it may have questions regarding its compliance with complex or ambiguous laws.  Typically, such taxpayers already have completed a lengthy and expensive audit process.  They want a determination letter from the department in order to make any necessary changes to their compliance procedures to limit their exposure on future audits.  Other taxpayers may simply want to preserve their rights to judicial appeal because they know that the same issues would come up on future audits. 

Amnesty is a great opportunity for businesses to comply with their filing and payment obligations.  However, it may not be for everyone.  Due to the limited nature of the amnesty program, businesses should make an informed decision as to whether they will participate in the amnesty program.  The department has published guidelines for the amnesty program to assist with your decision-making process.  If you received an amnesty notice from the department or have questions about the program, we urge you to contact a qualified tax professional for assistance. 

Kyle Wingfield is an associate at Williams Mullen (Richmond) who practices in the areas of federal, state and local tax controversy matters.  Stephanie Lipinski Galland is a partner at Williams Mullen (DC) and the co-chair of its state and local tax practice.