Voluntary Disclosure Agreements
Most people first hear the term “voluntary disclosure” at an uncomfortable moment: when they’ve just realized the company probably owes sales tax in states where it never registered, and the number could go back years. It feels like the start of a problem. More often, it’s the start of the way out.
A voluntary disclosure agreement is the tool that lets you fix this on your own terms instead of the state’s. As we often tell clients, it puts you on offense with the state, rather than on defense waiting for an audit notice to arrive. And the savings from coming forward early are usually much larger than people expect.
What is a VDA?
A voluntary disclosure agreement, or VDA, is a negotiated deal between your company and a state’s Department of Revenue. You come forward about sales tax you should have been collecting but weren’t, you agree to pay what’s owed for a defined recent period, and in exchange the state limits how far back it can reach and waives the penalties it would otherwise charge.
The key word is voluntary. You’re approaching the state before it finds you, and that timing is the entire reason the deal works in your favor. States run enforcement divisions whose job is to find unregistered companies. A VDA is the state’s standing offer to let you come in on your own first, because it would rather have you filing correctly going forward than spend resources chasing you.
How a Voluntary Disclosure Works
Monika and Bill explain voluntary disclosure agreements: how coming forward to a state can limit how far back it reaches and waive the penalties on unpaid tax. The practical way to fix back taxes before an audit finds them.
What is an XYZ Letter?
When a company comes forward on sales tax it didn’t collect, one way to lower the bill is to show that some of its customers already paid the tax themselves. An XYZ letter is how that’s confirmed: a short request to those customers asking them to verify what they remitted on their end. Where they did, that piece of the exposure comes off the table. It’s less a standalone service than one of the tools we use inside a voluntary disclosure to bring the final number down.
Related Ways We Help
- Whether you have historical nexus exposure in the first place - Learn More
- Exposure that surfaced during an audit or state notice - Learn More
- Back taxes found during a sale or fundraise - Learn More
- Remote employees creating obligations in new states - Learn More
Coming Forward Saves Real Money
A VDA creates savings in two ways, and the first one is where the big numbers live.
The first is the limited look-back. Without a VDA, if a state audits you, it can go all the way back to the day you first created nexus there, which for some companies is many years and a very large bill. A VDA caps that look-back, usually at three or four years. Everything older simply falls away.
The math is worth seeing. Say your obligation in a state actually started in 2019 (perhaps when your sales there crossed the economic nexus threshold most states adopted after the Wayfair decision) and by early 2026 you’ve built up six or seven years of unpaid tax, plus penalties and interest stacking on each year. Enter a VDA, and you may only have to resolve 2023 through 2025. The earlier years are eliminated entirely. We’ve had many clients save significant amounts ($250,000, $500,000 even more than $1 million) this way, simply by cutting off years of exposure that would otherwise have been owed in full.
The second is penalties. States generally waive the penalties on the tax you do owe as part of the agreement. You still pay the underlying tax (the state isn’t giving that up, and it shouldn’t, since you were supposed to collect it) but you avoid the penalties that pile on top of it.
There’s also a quieter benefit that matters to a lot of companies: for much of the process, you can usually stay anonymous. In most states, we can approach a state on your behalf and work out the terms before your company’s name is ever on the table, which gives you room to get your house in order without exposure in the meantime.
Waiting Rarely Pays Off
It’s tempting to wait and hope a state never notices. The problem is the way sales tax works. It’s a pass-through tax: you’re meant to collect it from your customer and remit it, acting as a collection agent for the state. When you don’t collect it, the state doesn’t go track down each of your customers later. It comes to you. What should have been your customer’s cost is now coming straight out of your company’s pocket, and every month of delay adds another month that can’t be collected from anyone but you.
That’s the real case for coming forward: the liability doesn’t age well, and the longer it sits, the more of it lands on the company rather than the customers who should have paid it.
The Work We Actually Do
We generally don’t start with the VDA. We start by figuring out whether you need one, and where. Sometimes there are other paths to remediation.
The first step is usually a nexus and taxability review: determining which states you actually have obligations in, when those obligations began, and whether your products are even taxable in each place. Often that review changes the picture:some states turn out to be more material than others, and a product you assumed was taxable or exempt everywhere isn’t. Only then do we know where a VDA makes sense, because a VDA isn’t a one-size-fits-all answer. It depends on your facts, your exposure, and your company’s risk tolerance.
From there, we handle the negotiation. We’ve worked with the voluntary disclosure teams at states across the country for years, and we manage the disclosures, the lookback terms, the documentation, and the filings so you end up compliant going forward without the process taking over your finance team’s life.
Success Story
A Liability that Became Manageable
One of the clearest examples was a company that turned out to be an acquisition target. During the deal, the buyer surfaced an outstanding sales tax liability spread across many states that no one had ever fully examined. We sized the exposure, came clean with each state, and ended up handling twenty separate VDAs as a single coordinated project, getting the company compliant and saving several hundred thousand dollars in taxes and penalties along the way. The deal moved forward, and the client was very pleased.
Questions Companies Commonly Ask
It’s a negotiated agreement where you voluntarily come forward to a state about back sales tax, and in return the state limits how many years it looks back and waives the penalties.
In most states, a VDA limits the look-back to three or four years, regardless of how much longer the obligation has technically existed. For a company with six or seven years of exposure, that difference is usually where the savings come from.
Usually not, for much of the process. These disclosures can often be initiated anonymously, with your identity disclosed only once terms are essentially agreed, which lets you understand the situation before committing.
Almost never. Because sales tax is a pass-through tax and if you missed collecting it at the time of sale, the unpaid amount comes out of your pocket rather than your customers’, and it grows with every period that passes. Coming forward caps the exposure; waiting lets it compound, and an audit removes the option of the limited look-back and penalty relief entirely.
Let’s Find Out Where You Actually Stand
Most companies come to us unsure how big the issue is, or whether they have one at all. That’s the right place to start. A first conversation, followed by a focused nexus and taxability review, usually turns an open-ended worry into a clear and surprisingly manageable picture, and from there, a VDA is often the part that brings the most relief.
