Voluntary Disclosure Agreements Explained

What Is a VDA?

A Voluntary Disclosure Agreement is a formal arrangement between a taxpayer and a state taxing authority in which the taxpayer self-discloses previously unreported tax liability in exchange for defined benefits, most commonly a limited lookback period and waiver of penalties.

VDAs are available in nearly every state and are typically administered through the Department of Revenue. The Multistate Tax Commission (MTC) also operates a multistate VDA program that allows businesses to approach multiple states simultaneously through a single application.

Key Benefits of a VDA

• Limited Lookback Period
  States typically limit the lookback to 3–4 years under a VDA, compared to the full statute of limitations (or longer if returns were never filed). For businesses with years of unregistered exposure, this is often the most valuable benefit.
• Penalty Waiver
  Most states waive all penalties under a VDA. Failure-to-file,, failure to pay, and negligence penalties. You still owe the underlying tax and interest, but the penalty load which can add 25–50% to the liability) is eliminated.
• Anonymous Pre-Filing
  Most states allow taxpayers to approach them anonymously through a representative before committing to the disclosure. This lets you calculate approximate liability and negotiate terms before revealing your identity.
• No Audit Exposure for Disclosed Periods
  Once a VDA is executed and the taxpayer files and pays per the agreement, the disclosed periods are typically closed to further audit. This provides certainty going forward.

When a VDA Makes Sense

A VDA is typically the right move when: (1) your business has nexus in states where you haven't registered or collected, (2) you haven't yet been contacted by those states, and (3) the potential exposure from uncapped lookback periods and penalties is significant enough that managing it proactively is better than waiting.

The VDA Process

• 1.Identify states where you have unregistered nexus exposure
• 2.Calculate approximate liability for each state over the relevant lookback period
• 3.Approach the state (anonymously via representative) and negotiate terms
• 4.Execute the VDA agreement upon agreeing to terms
• 5.File returns and remit payment for all covered periods
• 6.Register for ongoing compliance in each state

The MTC Multistate VDA Program

For businesses with exposure in multiple states, the Multistate Tax Commission offers a program that allows a single application to cover participating states simultaneously. Not all states participate, and the terms are not always as favorable as individual state programs. For businesses needing to resolve exposure across many jurisdictions quickly, it can be an efficient starting point.