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

February 3, 2020

1099R

Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.  If you receive a distribution from these types of accounts or similar plans, it is important for you to know if the amounts received should be reported as income on your Federal Income Tax return. If the distribution is reportable income, you also need to consider the income when filing your Vermont State Tax return. Any time a taxable distribution is made, a 1099-R form is issued with data populated in Box 2a or 2b. Please review any 1099-R forms received carefully and refer to information provided by the IRS to determine if you should include this as income on your Federal return. The distribution code plays a large part in how or if it is reported as income.  Please be sure to enter the correct distribution code when filing your 1099R. We have had several e-filed 1099R’s filed with distribution code 7 (Normal Distribution) when in fact it was a distribution code 1 (Early Distribution, No Known Exception).  Another area where common mistakes are made are with distribution code 3 (Disability Pensions).  If you retired on disability, you must report your taxable disability payments as wages on line 1 of Form 1040 until you reach minimum retirement age. Entering the correct distribution code and reporting it correctly can avoid an audit in the future.

January 2, 2020

Business Deductions Related To Reimbursements

Businesses must follow IRS Publication 535 guidelines related to (employee and/or owner) reimbursements such as per diems and allowances, mileage reimbursements, and other types of arrangements for meals, vehicles, etc. In an audit, reimbursements which do not follow an accountable plan, as outlined in IRS publication 535, may be denied as a deduction and/or treated as income for the individuals. Contact a qualified CPA to find out more about accountable plans.

September 20, 2019

Tipped Wages

During audits, the Vermont Department of Tax routinely reviews records to ensure proper reporting of tipped wages. It is important to ensure that you properly report tips on your employees' W-2’s and the company W-3. Tips that are not included in your quarterly withholding could show as cash variances resulting in assessment of gross receipts tax under meals and rooms or an assessment of the withholding liability.

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.

March 8, 2019

Exempting Meals

An audit of a business revealed sales of meals that were filed as exempt where the records to support the meal exemptions were not maintained. When exempting sales to schools, qualifying government entities or municipalities or other qualifying exempt organizations you must maintain records to document the entity that paid for the purchase. The Law requires that businesses maintain records for three years.

When exempting meals, you must maintain documentation that shows the entity itself paid for the meal. Individuals representing themselves as members, employees or representatives of exempt entities, such as schools, qualifying government entities or municipalities, are not eligible for the exemption when they purchase meals. A payment from the entity itself is good documentation that the entity paid for the meal.

For more information see:

Read more tips & news


NOTABLE CASES

December 12, 2019

Fraudulent Failure to Pay

During a recent tax audit, it was found that the owner of a business collected 36% more tax than was remitted to the department. Trust taxes are collected from customers on behalf of the state and are to be remitted to the tax department appropriately. During this audit it was further found that the under-reporting of taxes was fraudulent. Under statute 32 V.S.A. §3202(b)(5), the department is exercising its authority to pursue fraud penalties for these types of situations. Fraud penalties are equivalent to 100% of the tax due.

July 1, 2019

Short-Term Rental

Recent tax audits identified unreported income tax as well as unreported meals and rooms tax from individuals that provide short-term rentals. A short-term rental is a property that you own or control that you rent out for short periods of time. Income earned from the rent is subject to income tax and the rent charged to the lodger is subject to the Vermont meals and rooms tax.

Income Tax

Vermont tax law requires that individuals report the income earned from the short-term rentals. When you file your Vermont Income Tax Return, you will need to ensure the following entries include the income you earned from the short-term rental:

  • adjusted gross income and
  • taxable income (inclusive of the rental income) from your federal income tax return, found on Form 1040, Schedule E.

Meals and Room Tax

Sleeping accommodations offered to the public for a consideration on premises operated by a private person, entity, institution, or organization are subject to the Vermont Meals and Rooms Tax if those rentals total fifteen (15) or more days in any one calendar year.

The following are a few examples of the types of lodging rented or owned by the host which fall under the provisions of the law:

  • A house or room(s) in a house
  • Cabin, cottage, condominium, ski lodge
  • Barn, bunkhouse, tree house, camper, tent

You are personally responsible for registering for a Meals and Rooms tax account with the Vermont Department of taxes and charging your guests the 9% Vermont meals and rooms tax for the rent accommodation. Learn more about how to register for an account. In addition, if you are providing meals to your guests and billing them separately, those meals are also subject to the tax.

Please note: If you rent your room or other type of lodging to the same person for thirty (30) or more consecutive days, the person is then considered to be a permanent resident, and different rules apply. In addition to the state taxes, you may also be required to collect and remit a local option tax imposed by some Vermont municipalities. Please check with your town/municipality.

See more Notable Cases


CURRENT WORK

Real Estate

The Compliance Division has recently invested resources in reviewing capital gains on real estate transactions. We are using information from multiple state and federal data sources to ensure that sales are reported correctly and that the proper amount of tax is paid to Vermont.

Taxpayers and preparers should note that almost all real estate sales, including many primary residence sales, are subject to reporting for capital gain.  Most primary residence sales will not have a capital gain tax liability due to IRS exclusion amounts. However, if you receive a 1099-S for any sale, you must account for the transaction on your income tax return and schedules. Primary home sales will generally be reported directly on federal Schedule D – “Capital Gains and Losses,” while investment property sales should flow through federal Form 4797 – “Sale of Business Property.” Review the resources listed below or consult with your tax professional for further information.

Properly completing all required forms and schedules will dramatically reduce the possibility of the Department contacting you to confirm or clarify transactions. Taxpayers should keep records about all their properties (including primary home) for 3 years after the sale of that property.

1099K Data

Businesses should be aware that the Vermont Department of Tax receives Federal 1099K merchant information. This information allows the department to run discovery programs to ensure that businesses are remitting the proper amount of tax. The discovery program compares your credit card sales (adjusting for taxes and tips) to your filed meals and rooms tax (MRT) and/or sales tax (SUT) returns. Businesses who fail to report their sales, based on our analysis of this data, may be flagged for audit. To avoid this, always ensure that you have reported all of your sales and that you have remitted all of the taxes you have collected.

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 Vermont Department of Tax regularly conducts the following four Personal Income Tax (PIT) discoveries:

  • 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 2020, we plan to release the following PIT discoveries:

Program tax year Expect Release 
Time Frame
CP2000 2016 January 2020
Discrepancy 2016 April 2020
CP2000 2017 April 2020
IRMF 2017 May 2020
IRM/IRTF 2017 June 2020
Discrepancy 2017 July 2020
CP2000 2018 August 2020
IRMF 2018 August 2020
IRM/IRTF 2018 2018 September 2020
Discrepancy 2018 October 2020

Back to top ↑

Compliance Corner Archive