It’s surprisingly easy for a business to fall behind on state tax obligations. You might expand into a new state without realizing the sales tax rules are different, or overlook filing requirements because it’s an overwhelming process. In a situation like this, a Voluntary Disclosure Agreement (VDA) program is what protects you from the risk of a state audit.
Voluntary disclosure agreements provide businesses with an opportunity to acknowledge these mistakes before the state becomes aware of them. In return for that honesty, many states will reduce penalties, limit the scope of their investigations, or provide businesses with a clean slate to move forward.
At Victory Tax Lawyers, we’ve guided businesses through voluntary disclosure agreements. Contact us today to explore your tax relief options.
In this post, we’ll break down what a Voluntary Disclosure Agreement is, why states offer them, the benefits you could gain, and how the right legal guidance can turn a stressful tax problem into a manageable solution.
What Is a Voluntary Disclosure Agreement?
A Voluntary Disclosure Agreement (VDA) is a legal agreement between a taxpayer (often a business) and a state tax authority that provides a way to come forward about unpaid or unreported taxes. Instead of waiting for the state to uncover the issue through an audit, the taxpayer discloses the past non-compliance voluntarily.
The primary purpose of a voluntary disclosure program is to encourage businesses to disclose prior non-compliance. If a business steps forward voluntarily, most states are willing to make the process less painful. Instead of facing full penalties and an open-ended lookback period, the state may offer better terms, sometimes cutting off how far back they’ll review and often waiving large portions of penalties and interest.
Benefits of a Voluntary Disclosure Agreement
A Voluntary Disclosure Agreement (VDA) can be the difference between quietly fixing a tax problem and years of unpaid taxes turning into crushing potential tax liabilities. Certain benefits make it worthwhile. They include:
- Reduced financial penalties: One of the biggest draws of voluntary disclosure programs is the possibility of penalty waivers. When you come forward on your own, most states will cut back or even waive the extra charges that usually pile up with unpaid taxes.
- Limited exposure to audits or investigations: A VDA generally limits how far back the state will look, which means you avoid years of open records being scrutinized.
- Demonstrates good faith and compliance with authorities: Voluntary disclosure demonstrates good faith. Tax authorities often respond more favorably when they see you taking compliance seriously.
- Preserves business reputation: Handling unpaid sales tax liability privately through an agreement is far better than being chased with notices, liens, or public disputes.
Pros and Cons of Voluntary Disclosure Agreements
Voluntary Disclosure Agreements (VDAs) can be a powerful tool for businesses with unreported or unpaid taxes, but like any legal option, they come with both upsides and trade-offs. Understanding both sides helps you make an informed decision before moving forward.
On the positive side, a VDA offers something that few other compliance options can: control. When you come forward voluntarily, you often avoid the steep penalties and interest that usually accompany unpaid taxes. Most states would reduce and, in some cases, even waive penalties when you enter a VDA in good faith.
The peace of mind that follows is another advantage. Once the agreement is in place, many business owners find they can finally stop worrying about hidden liabilities surfacing years later. That sense of relief alone makes it worth it. Moreover, VDAs create a clear resolution with defined terms, so you are not left guessing what the state might decide in an audit.
Still, a VDA isn’t without its challenges. Even with penalty reductions, you’ll still need to pay the actual taxes owed. For some businesses, that lump sum can feel heavy. Additionally, participation requires full transparency. You’ll need to disclose all relevant tax liabilities. If you’ve been inconsistent with records or hoping to keep certain issues under the radar, this level of transparency can feel risky.
Voluntary Disclosure Agreements often have different outcomes depending on the business, but the impact is always significant. The outcome is shaped by several factors, including the industry, the type of taxes involved, and how proactive the taxpayer is in seeking help, but the impact is always significant.
Take, for instance, an e-commerce retailer that had grown quickly and was selling nationwide. In the process, they unintentionally triggered sales tax nexus in multiple states. Without a disclosure, they were staring at nearly six years of exposure. By entering into VDAs with two of those states, they secured a much shorter look-back period of just three years. The penalties that might have crippled their operations were waived. This allowed them to pay back taxes while preserving enough capital to reinvest in inventory and keep their growth on track.
In another case, a regional restaurant chain faced a different challenge. The business had overlooked sales tax obligations tied to delivery app orders. This mistake could have led to a costly audit and severe penalties. But by choosing to pursue a VDA, the owners not only reduced the interest owed but also avoided the harsher enforcement actions that could have followed. The payment required was not insignificant, but it brought closure, ensured compliance, and protected the chain’s reputation in the market.
Who Can Apply for a VDA?
Voluntary Disclosure Agreements are most often used by businesses that realize they’ve fallen behind on their tax obligations. Maybe a company started selling into new states but didn’t realize it created a sales tax nexus. Or perhaps it has been collecting sales tax correctly but failed to remit everything on time. In other cases, the business simply wasn’t aware that local tax laws or state tax laws even applied to them until it was too late. For situations like these, a VDA offers a way to come forward before the tax authorities come knocking.
Large corporations with operations in several states often rely on VDAs as well. Expanding across borders brings growth, but it also multiplies the chances of missing filings, miscalculating taxable sales, or overlooking use tax rules. A disclosure agreement can help them clean up those mistakes in one structured process instead of battling audits in multiple states.
It’s not only businesses that qualify, though. Individuals can sometimes apply if they have unreported income or an outstanding tax liability tied to complex financial activities. Some industries are hit harder than others. E-commerce retailers, manufacturers, and financial firms are common examples, and many only discover their sales tax exposure after consulting with sales tax experts who understand the nuances of state tax laws. But in truth, almost any taxpayer with unresolved or potential tax liabilities could benefit.
How a Voluntary Disclosure Agreement Works
The process of entering into a Voluntary Disclosure Agreement is not complicated. It only requires careful attention at every step.
Step 1 – Identify and Assess the Issue
The first step is looking inward. Review past transactions, filings, and compliance activities to spot where things may have gone wrong. That means uncovering unpaid sales taxes, uncollected use taxes, or inconsistencies in how taxable sales were reported. Many companies conduct an internal audit at this stage so they can clearly measure the scope of their exposure before approaching the state.
Step 2 – Prepare the Voluntary Disclosure
Once the gaps are clear, the disclosure itself has to be carefully drafted. This isn’t a place for guesswork. The statement should lay out all relevant facts, dates, and supporting documents in a way that demonstrates transparency. Being honest and thorough at this stage often makes the difference between securing relief and facing a harder negotiation.
Step 3 – Submit and Negotiate with Authorities
After preparing your disclosure, send it to the appropriate state tax authority. This usually means following specific submission guidelines and including every required form or supporting document. Once received, the state may open a discussion around the terms, such as whether penalties can be reduced, interest waived, or how far back they’ll review your records. This stage is less about confrontation and more about reaching common ground so both sides can move forward.
Step 4 – Execute the Agreement and Ensure Future Compliance
When both parties agree on the terms, the disclosure becomes a formal written agreement. Signing it settles the outstanding issues and gives you clarity on what’s owed. From there, it’s important to keep thorough records of the agreement and strengthen your compliance practices, like better bookkeeping, internal checks, or ongoing professional guidance. This ensures you don’t face the same problems down the road.
Potential Disqualification for Voluntary Disclosure Programs
Not every business or taxpayer will qualify for a voluntary disclosure agreement, and certain missteps can quickly take you out of the running. For example, if the state has already contacted you about an audit or investigation, you typically can’t apply. The following actions can disqualify you for a voluntary disclosure agreement:
- Submitting incomplete or misleading information
- Failing to disclose all relevant tax types
- Waiting too long to come forward.
The consequences of disqualification go far beyond a simple rejection. In many cases, it puts you back at square one. This fully exposes you to audits, penalties, and interest on unpaid taxes. Worse still, it can leave a paper trail that may make your next filings subject to closer scrutiny.
To avoid these pitfalls, it’s important to act before the state initiates contact. Provide accurate and thorough disclosures, and seek professional guidance if you’re unsure about what to include. Getting the process right the first time not only protects your eligibility but also gives you the best chance of securing favorable terms.
How to Maximize the Benefits of a VDA in California
Securing a Voluntary Disclosure Agreement is only the first step. How you manage it afterward determines whether it truly protects your business. The most important habit is keeping meticulous records. California’s tax authorities expect detailed documentation of your sales and use tax. So, if your recordkeeping is sloppy, it can undermine sales tax compliance and expose you to renewed audits down the line.
Equally critical is having the right legal guidance during the process. A seasoned tax attorney can help you structure disclosures, negotiate reduced penalties, and prevent you from making costly mistakes. Many businesses underestimate how complex a California VDA negotiation can be until they’re already in too deep.
Finally, think beyond the agreement itself. Build internal systems that ensure you remain in good standing long after the ink dries on your VDA. Engage regular compliance checks and stronger accounting practices.
Ultimately, if you want to maximize the benefits of a California VDA and protect your business from any future risks, hiring an experienced tax lawyer is the smartest move. An experienced tax attorney can help you identify the most valuable options during negotiations, so you don’t settle for less favorable terms. At Victory Tax Lawyers, we help businesses resolve past tax liabilities and move forward with confidence.
Reduce Penalties and Risks Through a VDA
Voluntary disclosure agreements give businesses a chance to fix past tax mistakes before they turn into bigger problems. So, if you act early, you can limit penalties, reduce audit risks, and demonstrate good faith to tax authorities.
Victory Tax Lawyers have guided hundreds of businesses through the VDA process. To take control of your situation, contact us or stop by the office today for an in-person meeting with our experts.
FAQ
When businesses first hear about voluntary disclosure agreements, they often have a lot of questions. Below, we’ve covered some of the most common ones to help you better understand how these agreements work and what they mean for your tax obligations.
What Is the Purpose of a VDA?
A voluntary disclosure agreement gives businesses or individuals the chance to come forward and correct past tax mistakes before a state tax authority discovers them. The main purpose is to reduce penalties, limit how far back the state looks, and show good faith compliance.
What Is an Example of a Voluntary Disclosure?
A common example is a company that recently discovered it should have been collecting sales tax in another state because of economic nexus rules. By entering into a VDA, the company can disclose those past liabilities, pay what’s owed, and avoid heavy penalties or an extended audit.
What Are the Disadvantages of Voluntary Disclosure?
While a VDA can save money and reduce risks, it’s not without trade-offs. Businesses must fully disclose past liabilities, which can sometimes be a large amount due at once. In addition, once a disclosure is made, there’s no turning back; you’re committing to compliance going forward.
What Is the VDA Process for Taxes?
The process generally involves four steps. It includes reviewing your records to identify exposure, preparing a disclosure statement, submitting it to the tax authority, and negotiating terms such as reduced penalties or limited look-back periods. With proper documentation and often with the help of a tax attorney, most businesses can reach an agreement that brings them into compliance while protecting against future audits.
