States Taxes: What Will Make Your Company Change - Choice or Audit Notice?
This is my second day of being 40. . . so far so good. I want to thank you for the birthday wishes I received.
Over the past couple of weeks (either because I was turning 40 or because I am simply a deep thinker and emotional person), I was thinking about what causes REAL change in a person? Is it simply a choice a person makes, or is it usually because some outside force or factor occurred to cause that change? For example, you often hear about people getting involved in certain causes or nonprofit organizations after a loved one of theirs has a certain disease or a tragedy happens in their life. Some people lose their jobs which is the catalyst for them to finally chase their dream career.
My point is, I think some or most people will continue to do the same thing (even though they have a burning desire to do something else) until they are forced to by some outside factor. It is difficult for people to come to their "tipping point" on their own or simply out of choice. Why do you think this is?
I'm not sure what the answer is, all I know is that people generally change direction either out of fear or pleasure. However, based on what I have observed, it seems that fear or tragedy is the greater motivator or cause of change.
So how does this relate to state taxes? Well, I am so glad you asked. Companies more often than not seem to play the "wait and see game" when they expand their business across state lines. They may not comply with the new and complex rules of other states right away. As the company continues to expand in more and more states, the exposure for state tax liability may grow and grow. However, the company may choose not to file or comply because they are following the "same as last year" approach. The problem with this approach is that the statute of limitations don't start until the company files a tax return; hence, until the company starts filing, the company has state tax exposure for each tax year back to the first year it began doing business in the state. Add on interest and penalties and the exposure can be substantial. So what do you do if this scenario describes your company and you want to do something about it?
Well, the good news is that your company may be able to file what is called a "Voluntary Disclosure Agreement" (VDA) with the state. This allows your company to come forward and pay back taxes and interest with the benefit of abating all penalties. The biggest benefit is usually the limited look-back period. Meaning, most (not all) states' VDA programs only require a company to file returns for the previous 4 years instead of all of the prior years' returns that are required (which depends on each company's situation).
WHAT IS YOUR COMPANY'S TIPPING POINT?
So what has been your company's strategy in regards to filing in multiple states as it has expanded? What is your company's next step to mitigate any exposure?
Will your company CHOOSE to change its behavior on its own, or will it be FORCED to change once it receives the audit notice?
What is your company's "tipping point"?
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State Tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
You can reach Brian at firstname.lastname@example.org.
Because state and local taxes are deceptively simple and endlessly complicated.