Introduction

If the thought of a state tax auditor digging into your books keeps you up at night, you’re not alone. Many business owners underestimate how quickly sales tax liabilities can spiral out of control. One missed filing here, a forgotten state registration there, and suddenly you’re staring down years of uncollected tax, mounting interest, and crushing penalties.

But here’s the good news. There’s a legal, proven way to fix past mistakes without losing your business in the process. It’s called a Voluntary Disclosure Agreement (VDA). Think of it like a lifeline states throw to businesses that want to come clean before being caught. Done right, it can save you thousands of dollars and even protect your company’s future.

So, what exactly is a VDA, and how can it help your business? Let’s break it down step by step.

Understanding Sales Tax Liabilities

Before we dive into voluntary disclosure agreements, let’s talk about how businesses end up with tax liabilities in the first place.

• Nexus traps – States expect you to collect sales tax once you establish nexus, either physical or economic. A warehouse, an employee, or even a certain level of sales can trigger it.

• Missed filings – Maybe you registered but didn’t keep up with monthly or quarterly filings. Those blank returns still add up.

• Uncollected tax – Selling online? Many e-commerce sellers forgot to charge tax in states where they had obligations. Unfortunately, states don’t let that slide.

The problem is these liabilities don’t just sit there quietly. They snowball. Penalties and interest pile up month after month. And if an auditor shows up before you address it, you could be on the hook for the entire unpaid history.

What is a Voluntary Disclosure Agreement (VDA)?

A Voluntary Disclosure Agreement is a deal between your business and a state tax authority. In exchange for you stepping forward voluntarily, the state agrees to limit how far back it looks into your sales tax history.

Think of it as a reset button. Instead of facing unlimited exposure, you get a fresh start with defined terms. Typically, states forgive penalties and reduce the interest owed.

So why would a state offer this? Simple. States want compliance. They’d rather you pay something than nothing. By offering a carrot instead of a stick, they encourage businesses to come forward voluntarily.

How a Voluntary Disclosure Agreement Works

Every state’s VDA program looks a little different, but the process generally follows a similar path:

1. Anonymous Application – A tax professional often applies on your behalf without revealing your company’s identity at first. This keeps your risk low.

2. State Negotiation – The state outlines terms like the lookback period and penalty waivers.

3. Formal Agreement – Once accepted, your identity is revealed, and the agreement is signed.

4. Filing and Payment – You file the agreed-upon back returns and pay the tax plus reduced interest.

5. Ongoing Compliance – Moving forward, you stay registered and compliant.

Most states limit the lookback period to 3–4 years under a VDA. Without one, you could be liable for 7–10 years, or even indefinitely. That’s a massive difference.

Compare it to doing nothing. Waiting for an audit means zero control. You’ll likely face maximum penalties and no limit on exposure.

Benefits of a Voluntary Disclosure Agreement

The advantages of pursuing a VDA are huge:

• Penalty relief – Most states wipe out penalties completely. That alone can save 25–50% of what you’d otherwise owe.

• Reduced interest – Many states cut interest or agree not to pile on more.

• Limited lookback – Instead of facing 10 years of tax, you may only owe 3.

• Audit protection – Once you settle under a VDA, states generally won’t audit you for prior periods.

• Peace of mind – No more waiting for that dreaded audit letter.

Imagine owing $250,000 in potential exposure, but under a VDA, it gets cut to $60,000. That’s the kind of relief we’re talking about.

Risks of Ignoring Sales Tax Liabilities

Now let’s flip the coin. What happens if you don’t address liabilities?

• Audit exposure – Audits are costly, time-consuming, and stressful.

• Compounding interest and penalties – What starts as $20,000 today could balloon to six figures in just a few years.

• Personal liability – In many states, owners and officers can be held personally responsible for unpaid sales tax. Yes, that means your personal assets are at risk.

• Reputation damage – Tax liens and legal disputes can hurt your ability to do business.

Doing nothing isn’t really an option. It’s like ignoring a leaking roof. The longer you wait, the bigger the damage.

When Should a Business Consider a Voluntary Disclosure Agreement?

Timing is everything. You should consider a VDA if:

• You’ve just discovered you had nexus in a state for years but never registered.

• You’re preparing for a merger, acquisition, or funding round. Investors demand clean books.

• You received a nexus questionnaire from a state.

• You want to avoid the stress of “what if” before an audit notice arrives.

Case Example: An e-commerce company realized it had economic nexus in 12 states but had never collected sales tax. A VDA reduced its lookback to 3 years and saved the business over $400,000 in penalties.

Challenges with Voluntary Disclosure Agreements

Sounds perfect, right? But let’s be honest. VDAs come with their own challenges:

• Complex rules – Every state has unique requirements.

• Multi-state headaches – If you owe in multiple states, filings get tricky.

• Timing issues – Once a state contacts you, you may lose the chance for a VDA.

• DIY danger – Trying to navigate this yourself can backfire. Mistakes can reveal your liability without securing protections.

This is why professional guidance is key.

Why Professional Guidance is Critical

Handling a VDA is not a simple paperwork exercise. It requires strategy.

A tax professional:

• Keeps your identity protected during negotiations.

• Knows how to secure the best terms.

• Coordinates filings across multiple states.

• Ensures you stay compliant moving forward.

At My Sales Tax Firm, we’ve helped countless businesses clean up past liabilities through VDAs. From small startups to nationwide sellers, we make the process less stressful and more cost-effective.

Voluntary Disclosure Agreement vs Other Compliance Options

You might be wondering, “Why not just register late?” Here’s why:

• Late registration – You could face full penalties and unlimited lookback.

• Waiting for an audit – The worst option. Zero control, maximum exposure.

• Amnesty programs – Sometimes available, but rare and often less favorable than VDAs.

The bottom line: VDAs usually offer the best balance of forgiveness and finality.

Steps to Get Started with a VDA

If you think a VDA makes sense for your business, here’s how to move forward:

1. Assess your exposure – Where do you have nexus? How much liability?

2. Prioritize states – Focus on high-risk states first.

3. File anonymously – Use a professional to protect your identity.

4. Negotiate terms – Agree on lookback and penalty relief.

5. File and pay – Clean up past liabilities.

6. Stay compliant – Keep up with filings going forward.

It’s a process, but one that pays off in peace of mind and financial savings.

Conclusion

Sales tax liabilities don’t disappear on their own. In fact, they grow bigger the longer you ignore them. But a Voluntary Disclosure Agreement offers a path out. With reduced penalties, limited lookback periods, and protection from audits, it can be the difference between staying in business and shutting your doors.

The key takeaway? Don’t wait for the auditor’s knock. If you suspect past exposure, act now. And don’t go it alone.

Need help making sense of your obligations? Talk to the experts at My Sales Tax Firm for a free consultation today.