If you’re a business owner or financial officer managing multi-state operations, you’ve likely heard whispers about something called a VDA. Maybe your accountant mentioned it, or you stumbled across the term while researching tax compliance strategies. But what is a VDA (Voluntary Disclosure Agreement) exactly, and is it something your business actually needs?
For companies navigating complex state tax obligations, especially sales tax or franchise tax, understanding how a VDA works could be the difference between a manageable solution and facing unexpected penalties, back taxes, or even audits.
This guide will break down the essentials: what a Voluntary Disclosure Agreement is, how it works, when it makes sense to pursue one, and the potential risks of ignoring past tax exposure.
What Is a VDA (Voluntary Disclosure Agreement)?
A Voluntary Disclosure Agreement (VDA) is a formal program offered by many U.S. states that allows businesses to come forward proactively to resolve past tax liabilities, typically for sales tax, use tax, income tax, or franchise tax, without facing the full extent of penalties or legal consequences.
In simple terms, if your business has been operating in a state and failed to collect or remit taxes properly, a VDA gives you a chance to “come clean” on favorable terms.
States offer VDAs to encourage compliance, giving businesses incentives like:
- Waiver or reduction of penalties
- Limited lookback periods (often 3-4 years instead of being liable for taxes indefinitely)
- Avoidance of criminal prosecution
- Protection from audits for disclosed periods
The key point is that participation must be voluntary. If a state tax authority contacts you first, through an audit notice or inquiry, you are no longer eligible for a VDA.
Why Do States Offer Voluntary Disclosure Agreements?
States understand that tax compliance, especially across multiple jurisdictions, can be complicated. Businesses may unknowingly create nexus, a tax presence, by having remote employees, inventory in warehouses, or making a certain volume of sales in a state.
Rather than chase every non-compliant business, states use VDAs as a practical tool to boost voluntary compliance and increase tax collections without resorting to aggressive enforcement.
For businesses, this creates a valuable opportunity to mitigate risk while resolving historical liabilities.
When Does a Business Need a VDA?
Not every company needs a VDA, but if you recognize any of these scenarios, it’s worth considering:
1. Uncollected Sales Tax
If your business has been selling products or services into a state where you triggered nexus but failed to register, collect, or remit sales tax, a VDA can help address this exposure before the state discovers it.
2. Past-Due Franchise or Income Taxes
If you have operated in a state without filing income or franchise tax returns despite having a taxable presence, a VDA offers a way to limit penalties and settle past obligations.
3. E-commerce and Marketplace Sellers
Post Wayfair decision, economic nexus thresholds have made remote sellers liable for sales tax in many states. If your business exceeded thresholds but did not comply, you could benefit from voluntary disclosure.
4. Mergers and Acquisitions
If you’re buying or selling a company, undisclosed tax liabilities can derail deals. A VDA can clear up prior exposures and make a business more attractive to potential buyers.
5. Remote Workforce
Hiring employees in states where you weren’t previously registered can create a nexus. If payroll or other tax filings were missed, a VDA may be necessary.
How Does the VDA Process Work?
While each state has its own procedures, the typical VDA process includes the following steps:
Step 1: Anonymous Inquiry (Optional)
Many states allow businesses to engage anonymously through a representative (like a tax advisor) to determine eligibility before disclosing their identity.
Step 2: Application Submission
You submit a formal request outlining the taxes involved, the period of non-compliance, and a commitment to future compliance.
Step 3: Negotiation of Terms
The state reviews your disclosure, confirms eligibility, and agrees to terms such as:
- Lookback period (usually 3-4 years)
- Penalty waivers
- Interest obligations (typically still required)
Step 4: Payment and Registration
You file the required returns for the agreed period, pay the outstanding taxes plus interest, and register moving forward.
Step 5: Final Agreement
Once all obligations are met, the state signs off on the agreement, and you are shielded from further action related to those disclosed periods.
Benefits of a Voluntary Disclosure Agreement
Pursuing a VDA offers significant advantages for businesses facing unreported tax liabilities:
- Reduced Financial Impact
States typically waive penalties, which can be substantial. - Limited Lookback Period
Without a VDA, states could assess taxes going back indefinitely. With a VDA, liability is capped. - Avoidance of Audits and Legal Action
Once a VDA is complete, states generally agree not to audit disclosed periods. - Preserve Business Reputation
Voluntarily addressing compliance issues demonstrates good faith, which can be critical in transactions or partnerships.
Risks of Ignoring Past Tax Exposure
Some businesses adopt a “wait and see” approach, hoping to stay under the radar. This strategy is risky for several reasons:
- States Share Information
Increasing collaboration between state tax authorities and improved data tracking makes non-compliance easier to detect. - Penalties and Interest Accumulate
If caught, you face full penalties, interest, and an unlimited lookback period. - Triggering an Audit
Once audited, VDAs are no longer an option. - Impact on Business Deals
Undisclosed liabilities can lead to failed mergers, acquisitions, or financing issues.
Proactive disclosure through a VDA is almost always better than reactive damage control.
Common Misconceptions About VDAs
“My business is too small to worry about this.”
Size does not exempt you from tax obligations. Nexus laws apply regardless of company size.
“If I register now, the state won’t look back.”
Registering without addressing past liabilities can trigger audits. States often review prior periods once a new registration is filed.
“I only sell online, so I’m safe.”
Economic nexus laws mean that even remote sellers are liable once they cross certain thresholds.
Is a VDA Right for Your Business?
If you suspect your business has exposure due to unfiled taxes or unregistered operations in any state, a VDA could be the safest and most cost-effective path to compliance.
The key is timing. Once a state contacts you, the window of opportunity closes. Early action protects your business from escalating risks.
How Commenda Can Help
Navigating multi-state tax compliance is complex, especially for growing businesses operating across borders or online platforms. Identifying where you have nexus, assessing exposure, and managing VDA filings requires expertise and precision.
Commenda simplifies this process. Our platform and team of experts help businesses:
- Identify hidden nexus risks
- Evaluate if a voluntary disclosure agreement is appropriate
- Manage VDA submissions across multiple states
- Stay compliant moving forward with automated tracking and alerts
If you’re unsure whether your business needs a VDA or how to start the process, speak with a Commenda expert today. We’ll help you turn potential tax risks into a resolved issue, before it becomes a problem.
Frequently Asked Questions
Are VDAs available in every state?
Most states offer some form of VDA, but terms and taxes covered vary. Some states also participate in multi-state disclosure programs.
Can I handle a VDA myself?
While possible, it is highly recommended to work with a tax advisor experienced in voluntary disclosures to negotiate favorable terms and maintain anonymity during the initial stages.
Does a VDA cover all types of taxes?
Typically, VDAs apply to sales tax, use tax, income tax, and franchise tax. Employment taxes are generally handled separately.
