IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Martin Kreshon III of North City Law (https://martinkreshon.com/):

Understanding Washington’s Tax Penalties and How the Voluntary Disclosure Program Can Help

Operating a business in Washington comes with many responsibilities, and staying on top of state tax obligations is one of the most critical. However, many business owners—especially those operating from out of state or just starting out—may unknowingly overlook certain tax requirements.

Ignoring these obligations can lead to significant financial penalties. The good news? The Washington Department of Revenue (DOR) offers a “pathway to compliance” through its Voluntary Disclosure Program (VDP). Here is what you need to know about the penalties for unreported income and how you can mitigate them.

The High Cost of Waiting: Washington Tax Penalties

Washington state is strict regarding late filings and underreported tax. If DOR discovers unreported income through an audit or investigation, the penalties can stack up quickly:

Late Payment Penalties: These are graduated based on how late the payment is:

• 9% penalty if not paid by the due date.
• 19% penalty after the last day of the month following the due date.
• 29% penalty after the last day of the second month following the due date.

Assessment Penalty: An additional 5% penalty is often assessed for “substantially underpaid” tax (typically when the underpayment is 20% or more).

Unregistered Penalty: Businesses that should have been registered can face another 5% penalty.

The Total Risk: If discovered by DOR, you could face up to 39% in total penalties, plus statutory interest. Furthermore, DOR can “look back” and tax you for up to 7 years plus the current year.

A Second Chance: The Voluntary Disclosure Program (VDP)

If your business hasn’t registered or reported income, the Voluntary Disclosure Program is your best tool to limit your exposure.

Key Benefits of the VDP:

1. Limited Look-Back Period: Instead of the standard seven-year look-back for unregistered businesses, the VDP generally limits your tax liability to only the prior four years plus the current year.
2. Penalty Waivers: Most significantly, DOR will waive the 5% assessment penalty, the 5% unregistered penalty, and the 29% late payment penalty.
3. Peace of Mind: Coming forward voluntarily allows you to clear the slate and move forward as a compliant business without the fear of a surprise audit.

Note: You will still be required to pay full statutory interest on all taxes due.

Who is Eligible?

To qualify for the full benefits of the VDP, your business must:

• Not be currently registered with DOR.
• Not have been contacted by DOR for enforcement or audit purposes in the last four years.
• Not have engaged in tax evasion or misrepresentation.

Can You Get a Penalty Waiver Without the VDP?

If you are already registered but simply missed a deadline, you might still be able to request a penalty waiver. DOR generally grants waivers in two scenarios:

1. Circumstances Beyond Your Control: Such as a death in the immediate family, natural disasters, or unexpected bank errors. (Note: Lack of funds or being unaware of the law generally does not qualify). For more information, see WAC 458-20-228.
2. The “24-Month” Rule: If you have a perfect record of filing and paying on time for the 24 months prior to the late return, DOR may waive the penalty for one late return as a gesture of good faith.

Next Steps: Don’t Wait for the Audit

The Washington DOR is active in identifying unregistered businesses. If they find you first, you lose the ability to participate in the Voluntary Disclosure Program and will be subject to the maximum penalties and a longer look-back period.

If you think you might owe taxes in Washington, the time to act is now. You can even apply for the VDP anonymously through a representative to determine your eligibility before disclosing your business name.

If you have questions relating to the content of this article or legal issues associated with selling or buying a business, Martin Kreshon would welcome the opportunity to answer them.  Mr. Kreshon can be reached at (206) 929-0609 and [email protected].

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, accounting, legal, and financial planning communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.