Voluntary Disclosure Agreements: A Smart, Cost‑Saving Strategy for Resolving Hidden State Tax Liabilities
As businesses expand across state lines—through ecommerce, remote employees, new markets, or acquisitions—they often trigger tax obligations in states where they haven’t registered or filed. These unnoticed liabilities can quietly accumulate for years, exposing companies to back taxes, penalties, interest, and the risk of a costly audit.
A Voluntary Disclosure Agreement (VDA) is one of the most effective tools available to resolve these issues before a state discovers them.
What Is a Voluntary Disclosure Agreement (VDA)?
A VDA is a formal program offered by most states that allows taxpayers to voluntarily come forward and resolve past tax liabilities in exchange for significant benefits, including reduced lookback periods and penalty waivers.
States offer VDAs because voluntary compliance is far more efficient than enforcement. Taxpayers benefit because they can clean up historical exposure on far more favorable terms.
Benefits of a VDA
1. Limited Lookback Period
Without a VDA, states can assess taxes going back to when the taxpayer established nexus in the state if no returns were filed.
With a VDA, the lookback is typically 3–5 years, dramatically reducing exposure.
2. Penalty Waiver
Most states waive all penalties, including:
Late filing
Late payment
Failure to register
Negligence or non‑filing penalties
This alone can save tens of thousands of dollars.
3. Reduced Interest (in some states)
While interest is usually required, some states reduce or cap interest for VDA participants.
4. Anonymous Negotiation
Many states allow taxpayers to begin the VDA process anonymously through a representative, protecting the business’s identity until terms are agreed upon.
5. Clean Slate Going Forward
Once the agreement is executed, the taxpayer resolves the limited lookback period and brings all required past filings current. From there, they can move forward with confidence, knowing the state cannot assess taxes for years outside the VDA window. In short, a VDA gives the taxpayer a clean slate without the fear of the state going back indefinitely.
General Requirements to Qualify for a VDA
While each state has its own rules, most VDA programs require that the taxpayer:
Not be under audit or review for the tax types involved
Not have been contacted by the state regarding tax compliance or nexus
Not be intentionally evading taxes or misrepresenting liabilities
Not have previously filed returns for the tax types or periods being disclosed
These requirements reflect the core principle behind every VDA: The disclosure must be voluntary and initiated before the state finds you.
Side‑by‑Side Comparison: Liability With vs. Without a VDA
Facts: A business should have been filing Tennessee sales tax since 1/1/2021. However, it has not charged Tennessee sales tax at all and has annual Tennessee sales of $200,000. For simplicity, assume the average combined Tennessee sales tax rate is 9.55%, the penalty rate is 25%, and interest is 8%. The period of exposure is 2021–2025 (five years). Tennessee has a three‑year (36‑month) lookback period.
| Category | Without VDA (2021–2025) | With VDA (3-Year Lookback) |
|---|---|---|
| Annual TN Sales | $200,000 | $200,000 |
| Tax Rate (Avg. 9.55%) | 9.55% | 9.55% |
| Taxable Years | 5 years | 3 years |
| Total Tax Owed | $95,500 | $57,300 |
| Penalties | $23,875 | $0 (waived) |
| Interest | $15,280 | $4,584 |
| Total Liability | $134,655 | $61,884 |
| Total Savings | — | $72,771 saved |
| % Reduction | — | 54% lower liability |