Big Changes To Washington State Department Of Revenue's Voluntary Disclosure Agreement (VDA) Program

Washington State Voluntary Disclosure Program Overview

Washington State is a separate legal entity state with a unique tax regime. Frequently, taxpayers discover that they have not—but should have—registered and reported tax for a particular entity. For those taxpayers that want to come forward, there have often been hurdles with Washington State's program that created significant pain points, which complicated and often precluded compliance.

Historically, Washington State's Voluntary Disclosure Program (Program) attempted to encourage unregistered businesses to comply with Washington tax laws and voluntarily register and pay prior tax obligations. The Program has had a lot of benefits, including:

• Limiting the "lookback" period to the prior four years plus the current year (instead of seven years plus the current year);
• Waiving up to 39% in potential penalties:
  • 5% assessment penalty for substantially underpaid tax;
  • 5% unregistered business penalty; and
  • 29% late filing penalty.

But, to qualify for the Program previously, a business must have:

• Never registered with or reported taxes to the Department of Revenue;
• Never been contacted by the Department for enforcement purposes (e.g., audit or compliance contacts regarding registration or reporting requirements); and
• Not engaged in evasion or misrepresentation in reporting tax liabilities.

Notwithstanding the fact that Washington is a separate entity jurisdiction, the Department treats contact with any affiliate to be contact with all.

In short, a lot of businesses failed to qualify for the Program, and many found out when it was far too late to do anything about it.

The Department of Revenue Improves and Expands Its Voluntary Disclosure Program

What's Changing

The Department's Executive Team has been hard at work in determining ways to improve its Program and encourage more taxpayers to comply voluntarily. As a result, the Department is improving its Program with the following upcoming changes:

• July 2025: Temporary Investment Income VDA
• Fall 2025: Permanent VDA Program Changes
• Early 2026: Temporary Foreign Remote Seller VDA

Temporary Investment Income VDA Program

As a result of the Antio decision (discussed here), the Department is trying to encourage businesses with unreported investment income subject to Business and Occupation (B&O) tax to come forward. The benefits of the Program are that (1) no interest or penalties will apply (unless there are trust-fund taxes at issue, such as collected and unremitted sales tax), and (2) the benefit extends to other income streams, not just investment income.

To qualify for this temporary Program, a business can be either previously registered or unregistered, and it even can have other affiliates under current audit. As with the investment income deduction itself, the identified and defined "banking," "lending," and "securities businesses" cannot qualify, nor can taxpayers notified of an enforcement contact as of July 1, 2025.

This Program will roll out in two phases:

• Phase 1: July 1, 2025 – April 30, 2026
• Phase 2: July 1, 2026 – April 30, 2027

If you have investment income that could be subject to B&O tax, we should discuss whether this Program is right for you.

Permanent VDA Program Changes Overview

In addition to the temporary investment income VDA Program, the Department is rolling out five new permanent changes to its VDA Program beginning Fall 2025.

1. Limit the lookback period for prior registrants to the statutory period (four years plus current year).

This change affects taxpayers that previously registered their business in Washington State but subsequently closed their Revenue account. Under the new Program, if the taxpayer (1) did not receive enforcement contact with the open statutory period, and (2) did not engage in misrepresentation, then the Department would approve the VDA.

2. Convert the "Partial Modified" agreement into a full VDA.

Unknown to many, Washington State had three different VDA programs. Now it is going to make its "partial modified program" into a full VDA. An example of where this comes up is when a taxpayer registered and began reporting excise taxes (e.g., in May 2023, within the statutory period), but later finds revenue streams it should have reported for a prior period (e.g., January 2021–April. 2023). As a result, some taxpayers chose to apply for a VDA to report taxes owed for the prior January 2021–April 2023 period. Historically, the Department would have only considered issuing a partial modified VDA, waiving only the delinquent return (29%) and unregistered (5%) penalties. With this change, the Department will now approve a full VDA, including waiving the 5% tax assessment penalty as well.

3. Waive 5% tax assessment penalty for certain non-qualifying applicants.

The historic VDA Program penalized taxpayers that were previously registered. For example, if in January 2021 a taxpayer registered its business due to having employees in the state, it might later (let's say in February 2025) apply for a VDA for a valid business reason. The historic Program would deny this taxpayer because of the prior registration. Because the taxpayer voluntarily registers, the new Program will waive the 5% assessment penalty due to the taxpayer's willingness to come forward.

4. When considering enforcement contacts, limit the lookback to the statutory period (four years plus current year).

One of the most significant foot-faults in Washington's VDA Program related to prior contact from the Department. For example, if the Department sent a letter in 2015 to a taxpayer notifying the taxpayer that it was selected for Audit, that taxpayer—along with any of its affiliates or related entities—would be prohibited from coming forward. The historic reasoning was that because the letter also applies to affiliated and related entities, it was as if that affiliated taxpayer had also been contacted. With this new change, since the most recent enforcement contact was sent outside the statutory period, the Department would approve the VDA.

5. Audit cooperation leads to some affiliates qualifying for VDA Program.

Along the same lines as the above change, taxpayers with multiple affiliates often identified an affiliate in need of a VDA. As with the above scenario, as soon as any affiliate received enforcement contact, such as an audit letter, all affiliates were prohibited from using the Program.

Now, when a taxpayer receives an audit notification letter, the taxpayer can proactively respond to the auditor and indicate the taxpayer has affiliates interested in a VDA. Then the auditor will review the information, including the list of affiliated and related entities, and tell the taxpayer which entities will be audited. For the remaining entities that the auditor agrees are not selected for audit, those entities can participate in the VDA Program.

While these changes may not have gone as far as what some members of the tax practitioner and business community had advocated for, these changes do provide real and positive revisions to a program designed to enhance Washington State's voluntary compliance system.

Temporary Foreign Remote Seller VDA Program

Last but not least, the Department is creating a temporary foreign remote seller VDA program. Starting in early 2026, the current plan is to adopt a four-month pilot program. The program aims to incentivize unregistered, foreign (outside of the 50 U.S. states) remote sellers to register and comply with potential Washington State tax liabilities. Here, the remote sellers likely will be defined for purposes of this Program as businesses having no physical presence in Washington State and making retail sales to Washington State purchasers. Marketplace facilitators will not be eligible.

The benefits of this Program are as follows:

• For the B&O taxes, the lookback period is four years plus the current year.
• For uncollected retail sales taxes, the lookback period is only a one-year lookback period.
• Qualified participants receive a waiver of all penalties: late-filing penalty, tax assessment penalty, and the unregistered penalty.

Conclusion

The Washington State Department of Revenue is making significant and positive changes to its VDA program. Those changes should help many taxpayers deal with the burdens of voluntary compliance and reporting. To the extent you or your taxpayer may not qualify for one of the current programs, contact a member of our SALT Team to see if there is still a path forward.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.