< Back to Q&A
A Voluntary Disclosure Agreement is a negotiated arrangement with a taxing authority that lets a taxpayer come forward before the government initiates contact, disclose prior noncompliance, pay tax for a limited historical period, and often obtain penalty relief. In state practice, these agreements are commonly used when a business has nexus but has not registered or filed returns.
The related voluntary disclosure program is attractive because it can reduce exposure, narrow the lookback period, and allow the taxpayer to resolve liabilities on a controlled basis rather than in an audit setting.
The benefits are real. State programs typically offer a shorter lookback period, waiver of penalties, and a structured path into ongoing compliance. Oklahoma’s published guidance is a good example: qualifying taxpayers may receive a three-year or 36-month lookback and consideration for waiver of penalty, with partial interest relief in some cases. For businesses with unresolved nexus issues, especially in sales and use tax, a VDA can be an efficient way to clean up the past and move forward.
That said, the “headline” benefits can obscure meaningful costs and risks.
Hidden costs
- Data reconstruction can be expensive and time-consuming.
A VDA usually requires the taxpayer to quantify liability accurately and quickly. In practice, that can mean rebuilding books and records, extracting transaction-level data, sourcing sales by jurisdiction, and preparing amended or delinquent returns. State guidance notes that taxpayers must be prepared to present detailed data and that VDA periods may still be audited. What looks like a simple cleanup project can become a major internal accounting exercise, particularly for sales tax voluntary disclosure matters involving multistate operations.
- Interest often remains fully payable.
Penalty waiver is common, but interest relief is much less generous. The general state VDA discussion indicates that penalties are often waived while interest is usually imposed in full. Even where a state offers some interest relief, that relief may be partial or conditioned. Oklahoma, for example, contemplates waiver of only one-half of interest in some cases, and not all taxpayers qualify for that treatment. Taxpayers sometimes focus on penalty forgiveness and underestimate the cash cost of accrued interest.
- The agreement can trigger new ongoing compliance costs.
Once the taxpayer registers, it must stay current. That may require new filing calendars, software changes, exemption certificate procedures, and revised internal controls. The state VDA practice guide emphasizes that a taxpayer entering a VDA must be prepared for increased and continuing filing obligations, including potentially monthly returns and added administrative burden. In other words, the agreement resolves the past but also formalizes future sales tax compliance obligations.
- Refund flexibility may be lost for covered periods.
Once a VDA is submitted and the covered period is settled, the taxpayer may be unable to later file refund claims for transactions in that period that are subsequently determined to be exempt or otherwise overreported. That means the taxpayer bears a real cost if it rushes into the agreement without fully vetting exemptions, resale treatment, or apportionment issues. This is especially important where Transaction Lookback Reviews reveal both underpayments and potential overpayments.
Risks
- Ineligibility if the state has already made contact.
A core condition of most state programs is that the disclosure must be voluntary. Many states will not allow participation if the taxpayer is already registered, under audit, or has already been contacted about the tax at issue. Oklahoma similarly requires that the taxpayer not have been contacted by the state or IRS and not be under audit. If the taxpayer waits too long, the opportunity can disappear.
- Misstatements can void the deal.
A VDA depends on truthful and complete disclosure. Oklahoma expressly states that if the taxpayer or representative misrepresents information or applicable tax data, the agreement can be voided and the state may proceed as though no agreement existed. That creates a serious risk where records are incomplete or the taxpayer discloses only one tax type while other exposures exist.
- The VDA may invite scrutiny of other taxes or periods.
The state practice guide warns that a taxing authority may audit other tax types after a VDA, and some states require all taxes to be addressed. Oklahoma also reserves the right to examine books and records for pre-registration periods to verify the taxpayer’s representations and assess additional tax not discharged under the agreement, with penalties and interest applying to those additional amounts. A taxpayer trying to solve one issue may expose broader liabilities.
- No Guarantee of Relief
Although common, penalty abatement is not guaranteed; tax authorities retain final discretion over the terms of the agreement. In some cases, unresolved issues or incomplete disclosures may still lead to audits, assessments, or broader Tax Controversies even after the VDA process has begun.
A VDA can be an effective tool, but it is not costless and it is not risk-free. The principal value is certainty: limited historical exposure, reduced penalties, and a path to compliance. The principal danger is assuming that the advertised benefits tell the whole story. Before signing, the taxpayer should understand the real administrative burden, the likely interest cost, the effect on future filing obligations, and the consequences if the disclosure is incomplete or inaccurate. In some cases, the agreement avoids a Failure-to-File Penalty and much worse; in others, it simply converts an unknown exposure into a negotiated but still expensive resolution.
How BT Can Help
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact DiAndria Green, Partner in Bennett Thrasher’s State and Local Tax (SALT) practice, or call us at 770.396.2200.
Back to Q&A 
