Compliance Corner

The Compliance Division’s work contributes to the mission of the Department of Taxes by informing and educating taxpayers about complex tax laws, selecting and conducting audits, and collecting unpaid taxes. We have 55 auditors, collectors, technical, and support staff working on behalf of all Vermonters to ensure taxpayers are paying the right amount of tax.

One of our primary goals is to encourage “voluntary compliance” – that is, to enable Vermont taxpayers to accurately determine what taxes they are liable for and pay the correct amount on their own. Another goal is to provide a level playing field for Vermont taxpayers by making sure that everyone is paying their fair share, in accordance with current law.

Tax laws are complex, which can lead to honest mistakes and there are people and businesses who under report taxes or do not file tax returns at all. We work diligently to identify people and businesses who are not reporting and paying the correct amount of tax and help bring them in to compliance. This is achieved through educational outreach, fact sheets, regulations, and audits conducted from our office in Montpelier and field staff located around the state.

We are continually looking for ways to improve service to Vermont taxpayers, and we welcome your feedback. You can contact the Compliance Division by phone at (802) 828-2514 or send an e-mail.


TIPS & NEWS

June 11, 2019

Tax-Exempt Nonprofit Organizations
During some recent audits, it was discovered that some nonprofits are incorrectly claiming exemption from Vermont Sales and Use tax.

Many nonprofit organizations that qualify for an exemption from federal income tax are also exempt from Vermont income tax. However, nonprofits are generally not exempt from paying other state taxes, such as Vermont Sales and Use Tax. Taxes are due on most purchases and sales made by your nonprofit.

Only federally designated 501(c)(3) tax-exempt nonprofit organizations are normally exempt from Vermont Sales Tax when making purchases of items that are taxable in Vermont, subject to certain requirements and limitations.

A tax-exempt nonprofit organization that is not a 501(c)(3) is not exempt from Vermont Sales and Use Tax. Organizations with tax exempt status under subsections 501(c)(4)-(13) and (19), and political organizations under 26 U.S.C. § 527(e), are subject to sales and use tax unless specifically exempted.

See more helpful tips & news


NOTABLE CASES

November 15, 2018

Proper classification of purchases in POS systems
We identified a business that was incorrectly exempting all purchases made by a customer who had previous purchases involving an exemption certificate.

The incorrect exempting of all purchases occurred because of the way the POS system was set up. The POS system identified exempted sales based on who the customer was, rather than considering if the purchase itself was exempt. This customer-based classification in the POS system caused 100% of all purchases made by certain customers to be exempted from tax. The audit found that while many purchased items were properly exempted from tax, there were purchased items that should not have been exempted. At the conclusion of the audit the entity was billed for sales tax that was not collected at the time of purchase.

Sales that qualify for no sales tax to be collected by the seller need an exemption certificate, which exemption is either entity-based or use based. 

Entity-based exemptions: An example of an entity-based exemption would include 501c3s, Vermont towns and schools, etc.  These entities may purchase all items exempt from Sales Tax. 

Use-based exemptions: Example of use-based exemption would include retailers, contractors, and farmers.  While a retailer purchases items for resale using a resale exemption certificate, or a contractor may purchase items exempt for an exempt real estate construction job using a contractor’s exemption certificate, or a farmer may purchase items used in the production of agricultural commodities using the agricultural exemption certificate, purchases like these, made with exemption certificates, are use-based purchases and would not be subject to sales tax. However, these customers would pay sales tax on other items that they themselves use or items that do not qualify for the claimed exemption. 

When accepting exemption certificates, it is important to set up your POS system to be able to distinguish between a taxable sale and an exempted sale made by the same customer.   

The Department has many resources to help you understand exemptions and exemption certificates

July 1, 2018

Multiple Home Businesses
We matched information and data to try to identify taxpayers who were misreporting expenses on Schedule C. In one case, we found that not only were deductions for one business being overstated, but that the individual was conducting multiple other lines of business but not reporting any of that activity on tax returns. Audit staff identified almost $50,000 of unpaid sales, use, and income tax across several years.


CURRENT WORK

Corporate/Business Income Non-Filers
In general, any business that operates or has any presence in Vermont is required to file an Income Tax return with the state, or report on 1040 Schedule C if it is a sole proprietor or single member LLC. Our Office Audit and Discovery teams have been working on ways to identify companies that are operating in Vermont, but not filing the required returns for Corporate or Business Income tax.

We have identified dozens of businesses that fall into this category. Recently, we have been using various information sources that indicate companies that have employees working in Vermont, or own or rent property in Vermont, to conduct business. Going forward, we have more data stores and avenues to uncover other companies similarly operating, but without filing or paying Income Tax.

We want to share this information for two reasons. First, to let businesses and preparers know that if they are conducting business in Vermont, to be aware that there is generally an entity-level Income Tax filing requirement, and that the Department is actively working to find companies that are not meeting this responsibility. Second, and equally importantly, we want to assure all taxpayers – Vermont businesses and beyond – who voluntarily report and pay the correct tax, that we are diligently working to ensure your colleagues and competitors in the business community are doing the same. We want all businesses to be on a level playing field and be paying the correct amount of tax.

For more information review our Corporate and Business income tax web page, as well as Technical Bulletin 70 on this topic.


Personal Income Tax Discoveries
The Office Audit team has four active Personal Income Tax (PIT) discoveries. Since July 1, 2018, the following discoveries have uncovered over 14M in unpaid taxes resulting in 4,866 notices to taxpayers.

  • CP2000 Discovery: A notice containing preliminary findings is mailed to a taxpayer based on information the Internal Revenue Service (IRS) has identified as being under reported, which information appears to not be considered on the Vermont tax return filed.
  • IRMF Non-Filer Discovery: A notice is mailed to the taxpayer when the Department has information that indicates a strong possibility a Vermont Personal Income Tax return should have been filed. The estimated tax liability on the preliminary notice is based on data received from the IRS and other information available to the Department. The preliminary notice indicates the taxpayer needs to file a return or let us know why they believe they do not have a filing requirement in Vermont.
  • IMF Non-Filer Discovery: This discovery covers situations where the taxpayer has filed a Federal return but did not file a Vermont Income Tax. The estimated tax liability on the preliminary notice is based on data received from the IRS and other information available to the Department. The preliminary notice indicates the taxpayer needs to file a return or let us know why they believe they do not have a filing requirement in Vermont.
  • Discrepancy Discovery: This discovery covers situations where the taxpayer has filed a Federal return and a Vermont Return, and it’s believed there is under reported financial income. The estimated tax liability on the preliminary notice is based on data received from the IRS and other information available to the Department.  The preliminary notice indicates the taxpayer needs to file an amended return or let us know why they believe they do not have to amend.

Over the course of 2019, we plan to release the following PIT discoveries:

Program tax year Expect Release 
Time Frame
IRMF Non-Filer 2015 February 2019
CP2000 2015 April 2019
IMF/IRTF Non-Filer 2015 April 2019
CP2000 2016 May 2019
IRMF Non-Filer 2016 June 2019
IMF/IRTF Non-Filer 2016 July 2019
Discrepancy 2016 August 2019

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