State Voluntary Disclosure Programs (VDPs) provide a structured way for individuals and businesses to voluntarily disclose unpaid past state tax liabilities in exchange for reduced penalties and protection from harsh collection or criminal actions. These programs help taxpayers correct mistakes related to sales tax, income tax, payroll tax, or unclaimed property without facing the full financial and legal consequences typically imposed.
How State VDPs Function
A VDP is essentially a confidential agreement between a taxpayer and a state’s revenue department. Taxpayers initiate contact, often anonymously through a tax professional, to explore eligibility and potential terms. Each state sets its own rules, but common features include:
- Look-Back Period Reduction: States typically shorten the look-back period for tax assessments—commonly limiting liability to the past three to five years instead of the maximum allowed (often seven years or more).
- Penalty Waivers: Most states will waive penalties for late payment or non-filing, though interest on unpaid taxes generally still applies. This waiver significantly lowers the financial burden.
- Anonymity and Negotiation: Taxpayers can initially inquire anonymously, allowing them to understand program terms before formally identifying themselves.
- Future Compliance Agreement: Taxpayers must agree to register for and comply with state tax obligations going forward.
Once terms are negotiated and accepted, taxpayers calculate and remit the back taxes and interest due.
Situations Benefiting from a VDP
VDPs are valuable for businesses and individuals who:
- Created tax nexus in a state unknowingly through remote sales or business presence, such as e-commerce sellers obligated to collect sales tax under economic nexus rules. (Explore Nexus.)
- Moved states but did not update payroll withholding and income tax filings.
- Expanded their business presence across multiple states without registering for corporate income or franchise taxes.
- Held unclaimed property that should have been reported and remitted to the state.
Eligibility and Requirements
VDPs are generally available only if the state has not begun an audit or contacted the taxpayer about the specific liabilities. The taxpayer must:
- Voluntarily disclose the tax liabilities before state contact.
- Agree to pay the owed taxes plus interest.
- Commit to ongoing compliance with state tax laws.
- Not have engaged in fraudulent tax evasion—VDPs exclude deliberate fraud cases.
Tips for Successfully Navigating a VDP
- Engage a Tax Specialist: Multistate tax rules and VDP requirements are complex. A tax advisor can help maintain anonymity during initial contact, negotiate terms, and assure accurate tax calculations.
- Understand Your Nexus and Tax Obligations: Determine why you owe taxes in a given state—physical presence, economic nexus, or affiliate nexus—to clarify which taxes apply.
- Prepare Documentation: Collect sales records, payroll data, and financial information for the program’s look-back period to support tax calculations.
- Plan for Payment: Set aside funds for taxes and interest; penalties are usually waived but interest remains.
- Implement Future Compliance Measures: After participating in a VDP, adopt systems to ensure timely tax collection, reporting, and remittance going forward.
| Step in VDP Process | Key Action | Importance |
|---|---|---|
| Initial Inquiry | Contact state, often anonymously through a tax advisor | Helps assess eligibility and negotiate terms without triggering unwanted audits. |
| Negotiation | Agree on look-back period, penalty waivers, and interest | Defines financial obligations and limits risk of significant penalties. |
| Formal Application | Disclose identity and submit formal VDP request | Finalizes agreement and initiates the compliance process. |
| Payment & Compliance | Calculate and pay back taxes plus interest accurately | Fulfills agreement terms; incorrect calculations can invalidate the program benefits. |
| Future Compliance | Register and comply with state tax filings going forward | Ensures ongoing good standing and avoids future penalties or audits. |
Common Misconceptions
- VDPs Are Not Tax Amnesty: Unlike temporary tax amnesty programs, VDPs are ongoing programs aimed at voluntary compliance, with less drastic penalty relief but available year-round.
- Don’t Contact States First Without Guidance: Premature contact may trigger audits and disqualify you from VDP benefits.
- Not All Penalties Are Waived: Some states might impose penalties on failures like registration, so confirm terms before proceeding.
- Be Transparent on Look-Back Period: Underreporting past liability can lead to rejection; honest disclosure is critical.
- Future Compliance Is Mandatory: VDP relief applies only if you continue to comply with state tax laws after disclosure.
Frequently Asked Questions
Can I apply for a VDP if I’m already being audited? Typically no; most states require no prior audit contact related to the disclosed tax type.
What if I don’t know how much tax I owe? Hiring a tax professional can help reconstruct records to accurately estimate your liability.
Do all states offer VDPs for every tax? No, VDP availability and tax types covered vary by state.
How long does it take to complete a VDP? Depending on the state and complexity, it can take from weeks to several months.
Useful Links
- Learn about Sales Tax and how economic nexus can trigger collection responsibilities.
- Explore our guide on Penalty Waivers to understand relief options.
References
- Forbes Finance Council, “Multi-State Voluntary Disclosure Agreements,” October 2023.
- Friedman LLP, “Voluntary Disclosure Programs Can Help Unregistered Taxpayers Minimize Tax Obligations.”
- TaxJar Blog, “Voluntary Disclosure Programs & Sales Tax,” 2024.
- See IRS guidelines on voluntary disclosure for additional federal insight: IRS.gov Voluntary Disclosure
State Voluntary Disclosure Programs provide taxpayers a practical solution to resolve unpaid state tax liabilities with reduced penalties and minimized risk. Proper planning and professional guidance maximize benefits and ensure ongoing state tax compliance.