Wisconsin updates "voluntary disclosure" program for business non-filers. Is it time to come out of the cold?
The days when a business didn't have to worry much about taxes in other states are coming to an end. The 2018 Wayfair decision meant you could be taxed in a state without ever setting foot there. States are mining data and using artificial intelligence to snag businesses trying to fly under the radar. If you don't file, you never start a statute of limitations running, so the accumulated back taxes can be ruinous.
But how do you get right with the state taxers? A common approach is "voluntary disclosure." A third party - often a preparer - will contact the state revenue department and negotiate a deal. These are attractive to the revenue officials, as they get taxpayers filing who they might never identify otherwise. Once the state signs off, the taxpayer's identity is revealed; they file the agreed on old returns, pay up, and promise to be good taxpayers.
Allison Gregory, Senior Manager for Eide Bailly's State and Local Taxes Group, has participated in many such arrangements. She says that states typically negotiate in good faith and "in the wake of Wayfair, they are more urgent."
Wisconsin, like many other states, has a formal program for such deals. The state has just proposed new rules that illustrate how these deals can work. From Wisconsin's proposal:
The Wisconsin Department of Revenue encourages businesses and individuals who are not in compliance with Wisconsin tax laws to voluntarily come forward. Taxpayers may remain anonymous throughout the voluntary disclosure process.
The anonymity is a big comfort. Once a state knows who you are, you lose a lot of negotiating power.
Wisconsin offers some carrots to come in from the cold:
Benefits of Voluntary Disclosure
Written agreement to restrict the statute of limitations.
Waiver of negligence penalties.
Reduction of Interest from 18% to 12%, except for withholding taxes, motor vehicle floor taxes and intoxicating liquor floor taxes which remain at 18%.
Possible reduction in number of periods for which returns must be filed.
Elimination of the risk of being discovered under audit.
The first one - the restriction of the statute - is key. Taxpayers who never file never start a statute of limitations. That means they are exposed to taxes going back... forever. Forever being a long time, that can get expensive.
Like many states, Wisconsin requires taxpayers to meet some conditions before they will negotiate:
The following conditions must be met for a taxpayer to qualify for voluntary disclosure treatment.
No tax returns filed for the period in question.
No registration for the type of tax involved during the period in question.
No contact by the department within the last 6 years regarding a registration/filing requirement or an assessment/audit assignment.
Any partners of partnerships, shareholders in S corporations, trusts, or trust beneficiaries are considered to have been contacted if the pass-through entity has been contacted.
Any owners of disregarded entities are considered to have been contacted if the disregarded entity has been contacted.
Note: The request for completion of nexus questionnaires by the department constitutes the commencement of an office audit.
The last one is a big deal. If you wait for them to ask, it's too late. If it's not too late, then it's a good time to contact Eide Bailly's SALT team about getting right with the states.
Related: Identifying Your Sales Tax Risks.
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