Businesses that discover unpaid sales tax liabilities often seek ways to resolve the issue before state tax authorities initiate an audit. One of the most common methods for addressing prior exposure is a voluntary disclosure agreement.
A voluntary disclosure agreement allows businesses to report previously undisclosed tax liabilities to a state tax authority voluntarily. In exchange, the state may offer certain benefits such as reduced penalties and a limited lookback period.
Understanding how voluntary disclosure agreements work helps businesses resolve compliance issues more efficiently. If you are unfamiliar with sales tax exposure, begin with the guide: How Businesses Create Sales Tax Exposure.
What a Voluntary Disclosure Agreement Is
A voluntary disclosure agreement is a program offered by many state tax authorities that allows businesses to disclose unpaid tax liabilities voluntarily.
These programs are designed to encourage businesses to come forward before tax authorities discover compliance issues through audits.
Businesses that participate in voluntary disclosure programs typically agree to
- Register for sales tax in the state
- File tax returns for prior periods
- Pay unpaid tax liabilities
In return, states may offer certain relief provisions.
Benefits of Voluntary Disclosure Programs
Voluntary disclosure agreements often provide several advantages for businesses resolving prior tax exposure.
Common benefits include:
- Limiting the lookback period for unpaid taxes
- Reducing or eliminating penalties
- Resolving tax liabilities before an audit occurs
For example, a state may limit the review period to three or four years rather than assessing taxes for a longer period. These benefits can significantly reduce the financial impact of compliance issues.
When Businesses Use Voluntary Disclosure
Businesses often use voluntary disclosure programs when they discover that nexus existed in prior periods but sales tax was not collected.
Common situations include:
- Economic nexus thresholds exceeded in previous years
- Inventory stored in other states creating physical nexus
- Remote employees working in different jurisdictions
- Ecommerce sales generating revenue nationwide
When these situations occur, businesses may accumulate tax exposure over time. Businesses can estimate exposure using the sales tax exposure calculator.
The Voluntary Disclosure Process
The voluntary disclosure process typically follows several steps. First the business evaluates its potential tax exposure. Next the business contacts the state’s tax authority or submits a voluntary disclosure application.
The state reviews the application and determines whether the business qualifies for the program. Once accepted, the business registers for sales tax and files tax returns for the agreed lookback period.
Finally the business pays any outstanding tax liabilities. More details about sales tax registration are explained in How to Register for Sales Tax.
When Voluntary Disclosure May Not Be Available
Voluntary disclosure programs usually apply only when the state has not already initiated contact with the business. If the state has already begun an audit or investigation, voluntary disclosure may no longer be available.
Businesses should evaluate potential exposure as soon as possible to determine whether voluntary disclosure programs may apply. More details about audit triggers are explained in How Sales Tax Audits Start.
Why Voluntary Disclosure Matters
Voluntary disclosure agreements allow businesses to resolve compliance issues proactively rather than waiting for enforcement actions. Addressing tax exposure early can reduce financial liabilities and simplify the compliance process moving forward.
Businesses operating across multiple states should monitor nexus obligations regularly to avoid accumulating tax exposure.
Related Sales Tax Resources
If you are evaluating sales tax obligations for your business, you can start with the Economic Nexus Guide and review state requirements in the Economic Nexus by State reference.
Businesses assessing potential liability often begin with a Sales Tax Exposure Analysis or estimate potential exposure using the Sales Tax Exposure Calculator.
If you operate across multiple states, the Economic Nexus Tracker can help monitor when thresholds may be triggered.
Businesses evaluating potential audit risk can review their exposure profile using the Sales Tax Risk Report or generate a detailed Nexus Exposure Report.
You can also understand When Sales Tax Exposure Becomes a Risk and what may happen if exposure is ignored in the What Happens If You Ignore Sales Tax Exposure guide.
FAQs
What is a voluntary disclosure agreement?
A voluntary disclosure agreement allows businesses to report unpaid tax liabilities to a state before an audit occurs.
What are the benefits of voluntary disclosure?
Benefits may include reduced penalties and a limited lookback period for unpaid taxes.
Can businesses use voluntary disclosure after an audit begins?
In most cases voluntary disclosure is available only before the state initiates an audit.
Do voluntary disclosure agreements eliminate taxes owed?
No businesses must still pay unpaid tax balances but penalties may be reduced.
How can businesses determine if they need voluntary disclosure?
Businesses can review historical sales activity and nexus obligations to identify potential exposure.
