What is a Voluntary Disclosure Agreement and Why Use It?

A voluntary disclosure agreement (VDA) is a formal program offered by US states that lets businesses come forward and resolve unpaid taxes before the state finds them first. In exchange, the state typically limits how far back it can look into a business’s books and waives penalties on the taxes owed.

If your business has been growing fast and you've recently learned you owe sales tax or income tax in states where you haven't been filing, a VDA is often the smartest first move. It puts you in control of the process instead of waiting for an audit notice to find you.

This guide explains when a VDA makes sense, how the process works, who qualifies, and what global teams should know about similar disclosure programs in other countries.

When a Voluntary Disclosure Agreement Becomes Necessary

Common Triggers for Noncompliance

Noncompliance usually isn't intentional. It tends to happen when a business grows faster than its tax processes can keep up. Common triggers include:

• Rapid expansion into new states without realizing sales volume creates tax obligations
• Economic nexus: Since the 2018 South Dakota v. Wayfair Supreme Court decision, selling more than $100,000 or completing 200 transactions in a state can create a tax obligation even without a physical office there. (Note that amounts vary by state)
• Unfiled returns in states where you've been making sales for years
• Unpaid sales tax or use tax that was never collected from customers
• Acquisitions: Buying a business that had its own unresolved tax obligations

These situations are more common than most people realize. 

Tax Types Commonly Covered

VDAs most commonly cover sales tax and use tax. Many states also use the VDA process for income tax, franchise tax, and some local taxes. The Multistate Tax Commission (MTC), which coordinates voluntary disclosure across member states, specifically handles sales and use tax and income and franchise tax through its National Nexus Program.

What a VDA Actually Does for the Taxpayer

What is a voluntary disclosure agreement (VDA)?

A voluntary disclosure agreement is a contract between a taxpayer and a state's department of revenue. The taxpayer agrees to register, file back returns, and pay the tax owed for a defined number of prior years. In return, the state agrees to limit the look-back period and waive penalties.

VDAs are a US state tax concept. They are not the same as the IRS offshore voluntary disclosure program, which is a federal process with its own rules.

Key Benefits of a VDA Program

The main benefits are financial and procedural:

• Penalty waiver: Most states waive all penalties on taxes paid during the VDA process
• Limited look-back period: states typically agree to look back only three to four years, even if you've owed tax for much longer
• Reduced audit risk: VDA audits are generally limited to confirming the liability you've already calculated, rather than hunting for new ones
• Controlled process: You approach the state on your own terms, anonymously in most cases, before any enforcement action begins
• Clean slate: After completing the VDA, prior periods are closed and you can focus on staying current

For example, if a business had economic nexus in a state for eight years but enters a VDA with a three-year look-back period, it only pays tax on the most recent three years rather than all eight.

Limits and Tradeoffs of VDA Programs

A VDA reduces costs but does not eliminate them entirely. Interest is due on unpaid tax obligations incurred during the look-back period unless expressly waived by the state. Some states waive interest partially or in full, but most do not. There is also the compliance burden going forward. Once you sign a VDA, you are required to register and file returns in that state on an ongoing basis.

Who Qualifies for a VDA and Who Does Not

Typical VDA Eligibility Criteria

To qualify for most state VDA programs, a business generally must:

• Not have had prior contact from the state about the tax type being disclosed. This includes receiving an audit notice, nexus questionnaire, or even a general inquiry from the Department of Revenue.
• Come forward voluntarily before any enforcement action begins
• Commit to ongoing compliance - this means you register and continue to file and pay taxes going forward

The types of businesses that most often benefit from VDAs include e-commerce companies, digital product sellers, manufacturers, distributors, and service businesses with multi-state customers. In short, any company with sales in multiple states and unfiled returns is a potential candidate.

VDAs are especially beneficial for out-of-state entities seeking to properly register with a state and ensure ongoing tax compliance.

Common Disqualifiers

Not every business will be eligible. Common reasons a state will reject a VDA application include:

• The state has already contacted you about the tax type
• You have already filed returns or paid tax in the state (which counts as "prior contact")
• There is an active audit underway
• The estimated tax due is very small
• Incomplete or inaccurate disclosure during the application process

If any of these apply, there may still be options, but a standard VDA won't be available.

How the VDA Process Works Step-by-Step

Think you could benefit from a VDA? Here’s what you need to know.

Initial Review and Anonymous Contact

The first step is understanding your exposure. A tax professional or advisor will review your sales data to estimate how much tax you may owe, in which states, and for which years. Many practitioners recommend looking back to at least 2017 to cover the period since the South Dakota v. Wayfair ruling.

In most states, you can approach the department of revenue anonymously through a third-party representative. An applicant is known to that state only by its voluntary disclosure case number until a VDA is signed. This means you can test the waters without revealing your company name until both sides agree on terms.

Application and Negotiation 

Once you decide to proceed, your representative submits a voluntary disclosure application. This typically includes:

• A description of your business activities in the state
• The tax types you are disclosing
• An estimate of the tax owed by year
• A proposed look-back period

The state reviews the application and may negotiate the look-back period, waiver terms, and payment structure. This back-and-forth typically takes three to six months for a formal VDA, compared to two to four weeks for a simpler backdated registration process.

Filing Returns and Paying Tax Due

Once terms are agreed, you register with the state, file the back returns, and pay the tax and interest owed. After payment, the state signs the agreement, and the process is complete. Most programs limit the look-back period to three or four years, although this can extend in certain states or under specific circumstances. 

State-Level Differences That Impact the VDA Process

Why VDA Programs Vary by State

Each state sets its own rules. The look-back period, whether anonymity is allowed, which tax types are covered, and how penalties are handled all differ from state to state. Some states, like California and Connecticut, administer VDAs through statute, which means the rules are fixed by law with less room to negotiate. Others, like Maryland and New York, administer VDAs administratively, which gives tax authorities more flexibility to tailor the agreement.

Voluntary Disclosure Agreement (VDA) Terms by State

Note that the Multistate Tax Commission (MTC) coordinates voluntary disclosures in 39 member states. Other states may not be forthcoming with their VDA terms. Consult a sales tax expert before applying for voluntary disclosure. 

Alternatives to a Voluntary Disclosure Agreement

Other Ways to Resolve Tax Liability

There are a few other paths a business can take when dealing with historical noncompliance:

• Amnesty programs: Some states periodically offer limited-time amnesty windows that waive both penalties and interest. These are rare and unpredictable, but worth watching for.
• Backdating registration: Instead of a formal VDA, a business can simply register with a state and backdate the start date to when nexus was first created. This is faster (two to four weeks versus three to six months) but usually does not include a penalty waiver.
• Direct registration with back filing: For businesses with minimal exposure, simply registering and filing past-due returns may be enough.

When a VDA is the Better Option

A VDA is typically the best route when:

• Your exposure spans multiple years
• The unpaid tax amount is significant
• You want to avoid penalties and limit audit risk
• You want a clean, documented resolution that closes prior periods

Backdating registration costs less and moves faster, but you are more likely to face penalties. If your liability is small or limited to just one or two years, backdating may be more practical. Speak with a sales tax professional to weigh your options.

How Voluntary Disclosure Works Outside the US

Global Equivalents of VDA Programs

The voluntary disclosure agreement is a US state tax concept. But other countries have their own processes for resolving historical indirect tax liability. They are not called VDAs, and they work differently, but the underlying idea is similar. Businesses typically come forward, pay what you owe, and reduce penalties in the process. 

Key Regional Differences

European Union

The EU does not have a single VDA process. If your business has historical VAT liability in EU countries and wants to use the One Stop Shop (OSS) for future filings, you cannot simply enroll. The EU requires businesses to register in each relevant EU country, pay any back taxes owed, and deregister before they can register for the OSS. 

This means resolving historical exposure is a country-by-country process. Each EU member state has its own rules, timelines, and penalty structures. There are alternative routes to tax disclosure outside of registering in each member state, but it’s advised to speak with a tax expert before proceeding.

United Kingdom

HMRC has a straightforward process for voluntary disclosure. Businesses declare their historical nexus trigger date, calculate the back taxes owed, and settle in a single disclosure. Making a full voluntary disclosure in the UK before HMRC contacts you typically results in lower penalties than if HMRC had started the investigation first. 

For VAT specifically, errors above £2,000 must be disclosed using a separate VAT form. HMRC uses a Digital Disclosure Service for most other tax types, and provides 90 days to submit a full disclosure after notifying HMRC of your intent.

Canada 

The Canada Revenue Agency (CRA) runs a formal Voluntary Disclosures Program (VDP) for GST/HST and other indirect taxes. The enhanced VDP program took effect for applications received on or after October 1, 2025, offering expanded eligibility and greater interest relief than the previous program. 

Applications are now categorized as either "unprompted" or "prompted," with both categories eligible for relief under the new rules. The look-back period for GST/HST applications generally covers the most recent four years of documentation.

India

India does not have a formal VDA program for GST. However, businesses can file Form DRC-03 on the GST portal to make a voluntary payment before a show cause notice (SCN) is issued. This can reduce penalties significantly — paying before an SCN can cap penalties at 15% of tax owed, compared to up to 100% if the matter goes to a formal order. Interest at 18% per annum still applies. Businesses may also contact the GST authority directly, and voluntary disclosure is recognized as a mitigating factor when penalties are assessed.

How Sphere Helps Manage VDA and Ongoing Compliance

End-to-End Disclosure Support

Sphere helps businesses navigate voluntary disclosure across both the US and international jurisdictions. Sphere's US sales and use tax (SALT) experts and international VAT specialists work together to calculate your historical liability, manage registration, and support filing across jurisdictions.

Rather than piecing together separate solutions for domestic and international exposure, Sphere handles both. That includes generating historical liability calculations, submitting registrations, and where compliant, including historical liability in the first return. This is especially valuable for businesses with exposure across multiple US states and international markets at the same time.

Staying Compliant After the VDA Process

Completing a VDA is not the finish line. Once you are registered in a new state or jurisdiction, you need to file returns on time, every time. Sphere monitors your nexus thresholds in real time and alerts you when you are approaching a new obligation. After a VDA, Sphere handles ongoing tax returns, reporting, and compliance monitoring so that a solved problem stays solved.

Ready to resolve historical tax liability and stay compliant across states?

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Fix Tax Exposure Before It Turns Into a Bigger Problem

A voluntary disclosure agreement reduces tax liability, limits the look-back period, and gives your business a controlled way to resolve noncompliance before the state finds you. Waiting is rarely the better option. State tax authorities are actively tracking remote sellers, and anecdotal evidence from tax professionals suggests they are focusing audit resources on businesses with large, unexplained revenue from out-of-state buyers.

The earlier you act, the more options you have. A formal VDA can take three to six months, so starting the process now means you are not scrambling if an audit notice arrives. And once the VDA is complete, Sphere keeps you compliant going forward.