Credit Unions Blast New Washington State Tax on Bank Deals

The penalty exposure can be steep: the IRS late-filing penalty can reach 25% of the unpaid tax, and the late-payment penalty can reach another 25% (tax year 2026 returns filed in 2027). For deal teams working on credit unions and bank deals, this matters because Washington’s new Washington state tax treatment can shift cash needs, timing, and reporting. A missed payment at the state level can also cascade into federal underpayment problems.

Washington’s Department of Revenue (DOR) issued a notice in late January 2026 that asserts a new B&O (business and occupation) tax treatment for certain credit union acquisitions of banks. At a high level, it imposes a 1.2% B&O tax on gross receipts tied to covered bank acquisitions by Washington-chartered credit unions, based on whether the transaction is submitted for regulatory approval after a 2026 cutoff. The exact notice date, cutoff date, and the 1.2% rate are summarized in the accompanying tool.

What this is (plain English): Washington’s B&O is a gross receipts tax. It is not an income tax. That means it generally taxes money coming in, without regard to profit. That difference drives why deal pricing and “bank deals” modeling may change, even when a transaction still looks profitable on an income statement.

⚠️ Warning: A gross-receipts tax can apply even when a transaction has high one-time costs. Those costs may not reduce the tax base.

Scope and mechanics: what gets taxed, and why costs may not help

Washington’s approach frames the tax base as gross receipts from bank acquisitions for covered transactions. In a gross-receipts regime, the state is not asking “what was your profit?” It is asking “what receipts are attributable to the taxed activity?”

That matters because Washington’s B&O structure generally does not work like a net-income tax. The notice positions the tax as applying without deductions for items that commonly drive deal economics, including:

• Labor and professional fees (legal, accounting, investment banking)
• Materials and systems conversion costs
• Transaction costs, integration costs, and financing-related expenses

In other words, even if a covered acquisition triggers large one-time expenses, the B&O base may not fall. This can change how “bank deals” are priced, and it can change the timing of cash outflows after closing.

The tool also summarizes the exact 1.2% rate and the effective/cutoff timing for regulatory submissions.

Exemptions and applicability: who may be out, and how “submitted for approval” matters

The notice describes several key exemptions. In broad terms, the rule does not apply to:

• Federally chartered credit unions
• Credit unions organized under other states’ laws
• Certain Washington-chartered credit unions with transactions submitted before the cutoff (a grandfathering concept)

This is where deal structuring and compliance workflow matter. Many transactions have multiple entities involved (holding companies, merger subs, or affiliates). The DOR’s focus on who the applicant is for regulatory submission purposes can become central.

Practical questions to document early include:

• Which legal entity is the acquirer on the application?
• What charter type applies at signing versus closing?
• Does the submission date fall before or after the cutoff?

These are also common friction points in diligence, because they affect pricing and board materials. They can also affect whether “bank deals” are marketed differently, or whether buyers reconsider charter options.

Context: why Washington acted, and what deal volumes showed

Washington’s move followed a visible rise in credit union-bank acquisitions. Nationwide, 22 such deals were announced in 2024 (a record), and 16 were announced in 2025. Of the 2024 total, 6 were tied to Washington.

The stated policy rationale focuses on competitive dynamics. Credit unions’ tax status can permit higher bids than taxable banks. States may also scrutinize these transactions to protect the tax base and address perceived competitive neutrality.

Tariffs are not the driver here, but they can amplify planning stress. If tariffs raise integration costs (equipment and technology imports), a gross-receipts tax still applies to receipts, not margins.

Stakeholder reactions: what the arguments mean for planning and misclassification risk

Credit union advocates argue the rule may push Washington-chartered credit unions toward charter changes or different transaction paths. Banks and industry groups frame the rule as protecting revenue and creating a “level playing field.”

For planners, the most concrete implication is classification risk. If a transaction is treated as exempt when it is covered (or vice versa), filings and payments can be wrong from day one.

That can create penalty exposure in two places:

1. Washington: state-level penalties and interest can apply for late or incorrect B&O reporting (confirm exact amounts with Washington DOR guidance).
2. Federal: deal-related cash flows can trigger underpayment issues, and the IRS penalty regime is formula-driven.

Federal penalty math you can’t ignore (tax year 2026 returns filed in 2027)

Even though this is a Washington-specific rule, federal penalties often show up when cash planning fails.

IRS late filing and late payment (Form 1040 / 1120 series)

IRS guidance on these penalties appears in IRS instructions and general IRS penalty pages, and is reflected in rules under IRC §6651. See the IRS penalties overview and international tax guidance for cross-border filers.

Penalty calculation examples (assume $100,000 unpaid federal tax):

Notes:

• When both apply in the same month, the FTF portion is reduced by the FTP portion.
• Interest generally accrues as well.

Accuracy-related penalty (often missed in deal years)

If a position leads to an underpayment and does not meet IRS standards, the IRS can assess a 20% accuracy-related penalty under IRC §6662. This often comes up when income is mischaracterized, or when filings are incomplete. IRS Publication 519 is a helpful baseline for residency and filing status in cross-border fact patterns: Pub 519.

Reasonable cause, and voluntary disclosure options

Reasonable cause can reduce or eliminate certain IRS penalties when you show ordinary business care and prudence, but still could not comply. Common supporting items include written advice, documented reliance on qualified professionals, and proof of timely information requests.

If errors are already in play, consider:

• Corrected returns and prompt payment to limit ongoing penalties and interest.
• IRS voluntary disclosure pathways for serious noncompliance (facts matter). See IRS forms and publications for the relevant amendment forms and instructions.
• For Washington, many taxpayers explore a voluntary disclosure agreement (VDA) approach through the state when exposure spans periods. Confirm availability and terms with Washington DOR and counsel.

Steps to avoid or reduce penalties (deal workflow checklist)

• Build a memo early on whether the transaction is covered, based on charter type and submission timing.
• Assign ownership for a gross-receipts workpaper and supporting documentation.
• Model cash needs for the 1.2% B&O cost and align payment timing.
• Coordinate tax, legal, and finance so the “applicant entity” is consistent across filings.
• For immigrant and visa-holder executives with transaction bonuses, confirm withholding, residency status, and reporting. Pub 519 often drives the filing posture.

📅 Deadline Alert: For federal returns, most individuals file by April 15, 2027 for tax year 2026, with extensions typically to October 15, 2027. Late payment can still trigger penalties.

Action items now: confirm whether your “bank deals” pipeline includes covered Washington submissions, add B&O exposure to pricing, and run penalty scenarios if cash timing is tight. For complex structures, cross-border owners, or charter changes, get written advice from a CPA or tax attorney before filing positions are locked.

⚠️ Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax situations vary based on individual circumstances. Consult a qualified tax professional or CPA for guidance specific to your situation.