A voluntary disclosure agreement is a contract you initiate with a state or federal tax authority to resolve unpaid taxes before the government finds you: you pay the back tax and interest for a defined look-back period, and in exchange the agency waives penalties and agrees not to reach further back in time. For businesses that have been selling into states where they never registered, or individuals with unreported income the IRS hasn’t yet flagged, a VDA is usually the cheapest way to get right with the tax authority. Penalty waivers alone can cut a liability by a quarter to a half.
Who Qualifies for a VDA
The rule that governs almost every program is simple: you have to come forward first. If the state has already contacted you about the specific tax at issue, whether through an audit notice or a letter asking about your obligations, you are generally disqualified for that tax in that state.1The Tax Adviser. State Voluntary Disclosure Programs: A Practice Guide Being already registered for the tax also disqualifies you, because registration means you acknowledged the obligation.
Nexus questionnaires occupy a middle ground. Some states treat receiving one as prior contact that closes the door; others do not.1The Tax Adviser. State Voluntary Disclosure Programs: A Practice Guide If one arrives in the mail, talk to a tax professional quickly, because both responding and ignoring it can affect your options.
The IRS applies the same core principle to its federal program. A voluntary disclosure must arrive before the IRS has started a civil examination or criminal investigation, and before it has received third-party information flagging your noncompliance.2Internal Revenue Service. IRS Criminal Investigation Voluntary Disclosure Practice Anyone already under criminal investigation or facing fraud charges is excluded outright.
What You Save
The biggest number in most VDAs is the look-back cap. Without an agreement, a state can, in principle, reach back to the day you first had nexus, which for some businesses means a decade of accumulated liability. A VDA typically limits that to three or four years of prior complete filing periods.3Multistate Tax Commission. Lookback Periods for States Participating in National Nexus Program
Specific windows vary. Most participating states use a 36-month look-back for sales and use tax. Arizona, Kentucky, Maryland, Michigan, Missouri, Texas, and Washington use 48 months. Iowa goes to 60.3Multistate Tax Commission. Lookback Periods for States Participating in National Nexus Program The current incomplete filing period is generally included on top of the stated months.
Penalty waiver is the second saving. State penalties for failing to file or pay commonly run from 10% to 50% of the underlying tax, with 25% a typical cap. A VDA waives them entirely for the covered periods.4Multistate Tax Commission. Multistate Voluntary Disclosure Program On $200,000 of back sales tax, that alone can be worth $50,000 to $100,000.
Interest is the cost you cannot escape. Nearly every program requires statutory interest on the unpaid tax across the look-back period.4Multistate Tax Commission. Multistate Voluntary Disclosure Program State interest rates on delinquent taxes generally sit between 7% and 14% annually. A handful of states reduce or waive interest as part of their terms, but treat that as the exception.
How the Application Stays Anonymous
Most state VDA programs let you start without revealing who you are. An attorney or accountant contacts the state on your behalf, describes the business activity and estimated liability, and negotiates terms while you remain unidentified. The state issues a draft agreement, and you disclose your name and taxpayer identification number only when both sides are ready to sign.
That structure matters. If negotiations break down, the state does not know who you are and cannot use what you shared against you. It is the difference between exploring a settlement and handing the state a target.
If You Owe Taxes in Several States
You do not have to negotiate with each state separately. The Multistate Tax Commission runs a centralized program that lets you file one application covering every participating state where you have exposure.4Multistate Tax Commission. Multistate Voluntary Disclosure Program Roughly 40 states and the District of Columbia participate through the MTC’s National Nexus Program.5Multistate Tax Commission. Member States
MTC staff functions as a clearinghouse: they review the application, coordinate with each state, and keep your identity confidential until agreements are ready for signature.6Multistate Tax Commission. Multistate Voluntary Disclosure Program Procedures Each state still sets its own look-back and terms, but you are not juggling dozens of separate conversations.
One threshold to know: the MTC will not process an application if your good-faith estimate of tax owed to a particular state is less than $500. Below that, you are better off registering and paying the state directly when you file the first return.4Multistate Tax Commission. Multistate Voluntary Disclosure Program
The Federal IRS Voluntary Disclosure Practice
The IRS runs its own program through the Criminal Investigation division, aimed at taxpayers with serious federal exposure: unreported income, offshore accounts, unfiled returns. The stakes here differ from state sales tax, because this program is built for people who face potential criminal prosecution for willful evasion.
The process runs on Form 14457 in two stages. You submit a preclearance request by fax, and Criminal Investigation reviews eligibility. Preclearance does not guarantee acceptance. If cleared, you have 45 days to submit the full application electronically, with one 45-day extension available only by written request.2Internal Revenue Service. IRS Criminal Investigation Voluntary Disclosure Practice
The disclosure period generally covers six years of delinquent or amended returns.7Internal Revenue Service. IRS Seeks Public Comment on Voluntary Disclosure Practice Proposal Unlike state programs, the IRS does not waive all penalties. It replaces the 75% civil fraud penalty with a 20% accuracy-related penalty on each tax year.2Internal Revenue Service. IRS Criminal Investigation Voluntary Disclosure Practice On $100,000 of unpaid tax, that swap saves $55,000. The program also shields compliant participants from criminal prosecution recommendations.
Participants must cooperate fully once accepted, including signing a statement acknowledging their willful failure to comply. The IRS can rescind conditional approval and pursue full civil and criminal penalties if you break the program’s terms.7Internal Revenue Service. IRS Seeks Public Comment on Voluntary Disclosure Practice Proposal
What to Gather Before You File
The most important number is your nexus start date in each state: the point when you first crossed the threshold that triggered a tax obligation. Everything else flows from that, because it sets the years you need to address.
For each state, categorize the taxes involved, whether sales and use tax, corporate income tax, or another type. Then estimate the liability for each filing period inside the look-back window. In practice, this is a spreadsheet showing taxable sales by period, the applicable rate, and the tax owed. States expect this detail, not a rough guess. Tax you collected from customers but never remitted has to be disclosed separately, because it can change the terms you receive.
For the IRS program, prepare all unfiled or amended returns in advance, along with any international information returns and Reports of Foreign Bank and Financial Accounts if they apply. If a representative is filing for you, each individual taxpayer and entity needs a separate Form 2848 (Power of Attorney); the IRS will not accept a combined list on one form.2Internal Revenue Service. IRS Criminal Investigation Voluntary Disclosure Practice
After You Sign
The agreement obligates you to register for the relevant tax accounts in each state, file every future return on time, and pay ongoing liabilities as they come due. These are binding conditions.
Fall out of compliance and the state can void the agreement. Voiding wipes out every benefit at once: penalty waivers disappear, the look-back limitation lifts, and the state can go back and assess the full liability for every year you had nexus, with penalties on top. A manageable settlement becomes an open-ended audit. Staying current on every filing and payment is what protects the deal.
If You Are Already on the State’s Radar
Once a state has contacted you about a tax type, the standard VDA is generally off the table for that tax. You still have options, though narrower ones. Some states offer reduced-penalty arrangements for taxpayers who come forward voluntarily even after contact, with terms less generous than a formal VDA. Others run managed audit programs where the state supervises your self-audit in exchange for partial penalty relief.
At the federal level, taxpayers who no longer qualify for the IRS program because they have been contacted or are under examination face the full penalty structure. The gap between 20% and 75% is wide enough that pursuing every possible path to eligibility is worth the effort.
The practical rule: talk to a tax professional before doing anything else. Filing an amended return or registering in a state without first checking VDA eligibility can permanently close a door on penalty relief you were otherwise entitled to.
VDAs During a Business Acquisition
Buyers acquiring a business through an asset purchase should look hard at unresolved sales tax obligations. Many states impose successor liability, which means the buyer inherits the seller’s unpaid tax debts even in an asset deal. If the seller had nexus in states where it never registered or collected tax, that exposure transfers at closing.
This turns the VDA into a due diligence tool. A buyer who finds multistate exposure can require the seller to enter into VDAs before closing, or negotiate a price reduction to account for the liability. Running the VDA before the deal locks in the limited look-back and penalty waivers, which is far cheaper than inheriting an open-ended liability the state could audit back to inception.