[Originally published April 6, 2021. Updated April 2025]

When it comes to business taxes, compliance is absolutely essential. That said, mistakes happen. When they do, it’s often better for your business to be up front about those potential tax liabilities than keeping silent and hoping for the best. In this blog, we’re weighing the pros and cons of voluntary disclosure agreements (VDAs) and why a business might want to enter into such an agreement with a state.

Here’s what you can discover:

Article Index

  1. What Is a Voluntary Disclosure Agreement? Understand the basics of VDAs, how they work, and why they matter in the state tax compliance landscape.
  2. Why Should You Come Forward? Learn the advantages of voluntarily disclosing tax liabilities, from penalty abatements to limited lookback periods.
  3. Potential Drawbacks of VDAs. Explore the potential downsides, including audit risks and the ripple effect of multi-state exposure.
  4. Understanding the VDA Process. A step-by-step breakdown of how VDAs typically unfold—from anonymous outreach to formal agreement and compliance.
  5. State-Specific Programs and Variations. Not all VDA programs are created equal. Find out how rules and benefits differ across states like Virginia, California, and Florida.
  6. Case Studies and Real-World Examples. See how other businesses—domestic and international—have used VDAs to avoid major penalties and get back on track.
  7. Digital Filing and the Role of Consultants. Discover how filing requirements are evolving and why working with a seasoned consultant can make all the difference.

Would you like more information? Let’s talk. Reach out to us at info@milesconsultinggroup.com.

1. What Is a Voluntary Disclosure Agreement?

Simply put, entering into voluntary disclosure agreements is about companies identifying their potential state tax exposure (sales tax, income tax, or both) and coming forward voluntarily to pay any outstanding liabilities before the state identifies the company as part of an audit or other outreach effort. A VDA is a formal arrangement between a taxpayer and a state’s tax authority that allows the taxpayer to voluntarily disclose prior tax liabilities in exchange for certain benefits. The structure typically includes an agreed-upon lookback period, penalty abatement, and sometimes interest reduction. These agreements are mutually beneficial: taxpayers gain a predictable and less punitive resolution, while states are able to recover revenue more efficiently without expending resources on audits or enforcement.

As states are becoming more aggressive in their pursuit of out-of-state taxpayers, it’s becoming a bit of an inevitability that businesses with tax liabilities will be found eventually.

It’s also important to consider that states have the benefit of technology on their side, making it faster and easier than ever to match records and search for inconsistencies. If they find something, you’ll quickly receive a notice and lose your ability to file a VDA. This is a key reason for being proactive about outstanding tax liabilities.

2. Why Should You Come Forward?

In considering whether to come forward proactively, a company may wonder what the benefits of doing so are and why they shouldn’t just wait and hope they’re looked over.

Comprehensive Benefits of VDAs:

Here are some of the advantages of doing a VDA:

  • Limited lookback period – Many companies engage in a VDA because it limits the lookback period to three or four years. This can significantly reduce financial liability if a company has created nexus many years ago and has failed to collect and remit sales tax, or hasn’t filed income tax returns. For instance, Virginia’s VDA program requires a three-year lookback and waives penalties for eligible taxpayers, making it more manageable for companies to settle liabilities without facing decades of back taxes.
  • Penalty abatement or reduction – Generally, all states that have a VDA program will waive penalties for companies that come forward voluntarily. This is important because penalties can often amount to 25% or more of the overall tax liabilities.
  • Reduction or elimination of interest – In addition to penalty abatement, many states offer the added benefit of interest reductions, which can further reduce the overall financial impact on a business. Several states also waive or reduce interest, including Texas and New York, which has a lower statutory rate for companies in voluntary disclosure, versus a more punitive rate if they discover the company first.
  • Anonymity during the process – Most states will allow companies to remain anonymous through at least some of the process. This is beneficial because we can explain the client’s entire situation and determine if the state will accept the proposal before revealing the company name. A few states require the company to disclose its name up front, but most still have a period of time where the company can be “protected” insofar as getting credit for coming forward even before they must identify the company name.
  • Being on offense vs defense with the state – As in sports and life, it is generally better to be on the offense than defense. It’s similar when dealing with states. If a state selects a company for audit, there is generally a very specific audit plan, with a number of documents requested during the process. If some of these are not satisfactory, the auditor can use his or her discretion to disallow credits or exemptions. However, if a company comes forward with tax liabilities voluntarily, there is generally not a detailed audit of their records. (It’s important to note that states reserve the right to audit VDAs, but it’s not often that they do.) In short, coming forward voluntarily simplifies the process as far as backup documentation and allows you to move forward on your terms.

3. Potential Drawbacks of VDAs:

While VDAs offer many benefits, it’s important to consider potential drawbacks as well. These may include:

  • Unintended audits – Although rare, some states may decide to audit submitted information, especially if there are discrepancies or insufficient documentation.
  • Unanticipated tax liabilities – A business may discover that its actual tax exposure is greater than originally anticipated once the numbers are calculated. Other unreported taxes (e.g., income, payroll, property, etc.) may arise while the state is conducting its review of the VDA application.
  • Information sharing between states – Some states participate in information-sharing agreements. Once a VDA is completed in one state, others may take notice and prompt similar inquiries or compliance obligations.

4. Understanding the VDA Process:

The process of entering into a VDA typically includes the following steps:

  1. Eligibility assessment – The taxpayer must not have been previously contacted by the state regarding the specific tax liability in question. Once contacted, eligibility for a VDA is usually off the table.
  2. Preliminary anonymous disclosure – A representative (usually a consultant) submits an anonymous proposal to the state outlining the taxpayer’s situation and liabilities.
  3. State acceptance – The state reviews the proposal and determines if the taxpayer is eligible.
  4. Formal agreement – The taxpayer reveals their identity and signs a VDA outlining the agreed-upon lookback period and terms.
  5. Filing and payment – The business files the necessary past-due returns or worksheets and pays the agreed-upon taxes.
  6. Ongoing compliance – The business continues to file and remit taxes going forward, in line with state regulations.
    The timeline for a VDA can range from several weeks to a few months depending on the state and complexity of the situation.

5. State-Specific Programs and Variations:

Not all VDA programs are the same. Each state sets its own terms. For example, Virginia offers a standard three-year lookback, requires timely registration post-agreement, and waives penalties for qualifying applicants. In contrast, California may have stricter documentation requirements, and Florida does not offer interest waivers. Understanding these variations is key to determining the potential advantages in each jurisdiction.

6. Case Studies and Real-World Examples:

VDAs are nothing new, but we have seen an increase in them over the last few years. Part of this can be attributed to increased state tax responsibilities due to the Wayfair decision. As a result, companies are finding that they need to determine whether they may previously have had enough physical presence to create nexus. If so, the company needs to determine how far back the exposure goes.

Even three years later, many companies are still discovering this potential landmine and, as a result, turning to VDAs to get compliant. This is also true for international companies. For example, we recently helped three consumer product companies with international affiliations remediate their U.S. liabilities relative to sales tax. One client discovered that their U.S. sales activities—though mostly through online marketplaces—had triggered nexus in multiple states. With our help, they entered into VDAs in five states, limiting their lookback periods and avoiding over $150,000 in penalties.

Another reason why Wayfair has drawn attention to the area of non-compliance and the need to go the voluntary disclosure route is the flurry of new rules for marketplace facilitators. As we’ve described in previous blogs, marketplace facilitators (such as Amazon, Etsy, etc.) are now responsible for collecting the sales tax on sales made by sellers through their marketplaces. So, often sellers believe they are relieved of the duty to collect tax. They are – but only on the marketplace. Depending on their other sales channels (for instance, direct to consumer from their own website), they often still have to collect some sales tax. Many times, companies don’t even realize they may have a problem.

7. Digital Filing and the Role of Consultants:

One of the benefits of doing VDAs has historically been that companies could easily work with an assigned VDA representative at the state and file the various paperwork (registrations, returns, sales schedules, etc.) directly with that representative.
Generally, states didn’t require electronic filings until after the VDA process was complete. While we still work with these representatives in most states, more states are requiring at least some registration to be completed online. For a variety of reasons, this can be somewhat challenging, which is why working with a tax partner like Miles Consulting Group can be beneficial.
By their nature, voluntary disclosures lend themselves to some assistance from a consultant. If a company wants to remain anonymous, they must use a third party to assist. Also, because each state has different lookback periods, different rules for reporting, and sometimes specific nuances in how to finalize the paperwork, it helps to have someone on your side with a little experience in the process.

That said, it’s important to choose a partner that will consider your particular situation and help you determine if a VDA is the best way forward for your business. Maybe you don’t need the formality of a VDA and simply registering and back-filing returns is sufficient.

Why Work With Miles Consulting Group?

At Miles Consulting Group, we generally recommend VDAs for larger liability states and we always work with our clients to consider not only the sales tax ramifications of a VDA, but also how it might impact income tax or gross receipts tax filing requirements, which not all firms consider.

Our goal is to find the most advantageous answer for your business and build a comprehensive road map that will lead you to tax compliance.

Our consultants have dealt with VDAs in states all across the country and we know the ins and outs of the various nuances. Contact us today to see if we can assist with your overall state tax analysis and whether VDAs might be the best course of action to remedy any unreported liabilities!

Book a consultation, drop us a line, or send us an email at info@milesconsultinggroup.com.

Marketplace Facilitators VDA voluntary disclosure agreement