Key takeaways
- VDAs help reduce past tax liabilities: Voluntary disclosure agreements allow businesses to resolve unreported sales tax obligations while minimizing penalties and interest.
- Timing is essential: Businesses must apply before receiving a nexus letter—once contacted by the state, they’re no longer eligible.
- Smart use saves clients money: When managed correctly, VDAs shorten audit lookback periods and can save clients more than the cost of filing.
In short: A voluntary disclosure agreement (VDA) lets a business come forward to a state about unpaid sales and use tax. It can cut back interest and penalties and limit the lookback period to three or four years. The business must come forward before the state sends a nexus letter.
Voluntary disclosure agreements can benefit your clients if you know when and how to use them.
Voluntary disclosure agreements (VDAs) can be a very powerful tool for accountants and firms. Used correctly, they can help reduce sales tax exposure from past periods. Accountants and tax advisors who want to give their clients an edge should learn when and how to use VDAs.
What Exactly Is a VDA?
A voluntary disclosure agreement (VDA) is a legal agreement between a state revenue agency and a company that has not met its sales and use tax duties. A company that does business in a state without telling that state is breaking nexus rules.
A VDA lets a business come forward on its own and disclose that it has been operating in a state without telling that state. CPAs and advisors can then agree with the state on what their client owes. This helps the client avoid costly interest and penalties in the future.
Timing is crucial with VDAs. For the disclosure to work, the taxpayer must come forward first. If the state has already sent a nexus letter to a business, that business can no longer use voluntary disclosure as a loophole.
When Should You File a VDA For a Client?
You should file a VDA when a client has delinquent sales taxes or is based in a state with larger liabilities. As businesses grow across more states, unmet filing duties can build up into material tax exposure.
LumaTax makes filing a VDA easier than ever. Our technology shows the exact date a company should have registered in each taxing jurisdiction. It also shows the size of the exposure, and whether it is large enough to justify voluntary disclosure.
What’s the Next Step?
The next step is for an accountant to send a letter to the state on behalf of an anonymous taxpayer. This is how the process always starts, in every jurisdiction.
The VDA process differs from state to state, and it can be cumbersome. In practice, a VDA could take two to twelve months to complete, depending on the state and how complex the case is.
Accountants and advisors should state that they are representing their client anonymously (where available), but in good faith. They then complete the state's voluntary disclosure form. The form gives the type of business and some basic background, without naming the company.
Never release a business's name until both sides have signed an agreement with the state confirming the process will go ahead.
What are the steps in a typical VDA?
- Review exposure: Work out where and when the client created nexus, and estimate the tax owed in each state.
- Choose the states: Decide where a VDA makes sense and where simply registering is enough.
- Submit anonymously: Send the state's voluntary disclosure form without naming the client.
- Agree terms: Confirm the lookback period, penalty relief and payment terms, then sign the agreement.
- File and pay: File the back returns and pay the tax and any interest due.
- Stay compliant: Register and file on time from then on.
How Will Your Client Benefit?
Clients who qualify for a VDA could benefit in many ways. In some cases, a VDA could free them from back interest and penalties. That's because most states offer some kind of relief on interest and penalties.
A VDA also sets a firm limit on how far back a state can audit a business. This "lookback period" is generally three or four years. As long as there is no lying or fraud during the voluntary disclosure, the state cannot go back further. This is a huge benefit.
If the VDA is warranted, it could save a company more money than it will pay an accountant to file it.
Can you file one VDA for several states?
Yes, in some cases. The Multistate Tax Commission runs a Multistate Voluntary Disclosure Program. It lets a taxpayer with possible liability in several member states settle through one coordinated process.
The Commission keeps the applicant's identity confidential until a VDA is signed. States waive penalties for the lookback period, but interest is still due unless a state waives it. Prior contact with a state about the tax type, such as filing a return, disqualifies the taxpayer. See the Multistate Tax Commission for details.
In the right circumstances, VDAs can be a great tool for CPAs and firms to limit costly penalties for their clients. With LumaTax solution, we aim to make filing a VDA easy and more efficient for accountants, tax advisors, and their clients. Our cutting edge tools automate the complex process of determining sales tax compliance, making a VDA an approachable option for more taxpayers.
Accounting firms can also join the Taxually partner program.
How Taxually handles this
Taxually’s LumaTax runs a nexus analysis on your sales, helps you register in the states where you must collect, and prepares and files multi-state sales tax returns, including Canadian GST/HST. LumaTax is currently available to enterprises and accounting firms. For the full workflow, read how to automate US sales tax filing in every state.
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Frequently asked questions
What is a Voluntary Disclosure Agreement (VDA)?
A VDA is a legal agreement between a business and a state tax authority that allows companies to voluntarily disclose past sales tax liabilities. In exchange, states typically reduce or waive penalties and limit how far back they can audit.
When should a business consider filing a VDA?
Businesses expanding into multiple states or discovering unfulfilled sales tax obligations should consider a VDA to resolve exposure before being contacted by a state. Timing is key — once a nexus letter is issued, eligibility is lost.
How long does the VDA process take?
The timeline varies by state but generally takes between two and twelve months. The process begins with an anonymous letter from the accountant or advisor on behalf of the client.
What are the main benefits of a VDA?
VDAs can eliminate or reduce penalties and interest, establish a limited “lookback period” (typically three to four years), and prevent future audits from covering earlier periods.
How can accountants simplify the VDA process?
Using automation tools like LumaTax helps identify when and where nexus occurred, determine exposure levels, and streamline filing — saving time while ensuring compliance accuracy.
