Is it possible to negotiate penalty relief in a VDA?

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Yes. Most state tax agencies allow partial or full penalty relief when a business enters a Voluntary Disclosure Agreement, because the primary purpose of a VDA is to encourage voluntary compliance rather than impose enforcement penalties. Government sources including the Multistate Tax Commission, the Texas Comptroller and the California Department of Tax and Fee Administration confirm that VDAs commonly offer limited lookback periods and negotiated penalty waiver when taxpayers come forward before being contacted by the state. While federal legislation such as the Inflation Reduction Act has increased tax enforcement at the federal level, state voluntary disclosure programs operate independently, and states generally expand VDA outreach due to their own post-pandemic revenue needs and increased enforcement of economic nexus rules.

How States Support Penalty Relief in VDAs

States offer VDA benefits because voluntary compliance saves government resources. For example:

• The Texas Comptroller states that penalties and sometimes interest can be waived for taxpayers who voluntarily disclose taxes due before being contacted by the state.
• The California Department of Tax and Fee Administration (CDTFA) explicitly authorizes penalty waiver if taxpayers enter the VDA before receiving a notice of audit.
• The Washington Department of Revenue allows anonymous voluntary disclosure and typically forgives penalties for qualifying taxpayers.

This relief is not automatic. Effective voluntary disclosure negotiation is essential. The state must confirm that noncompliance was not intentional and that the taxpayer has not previously been contacted about an audit or nexus inquiry.

Can Penalties Always Be Negotiated?

Most states offer vda penalty relief, but the degree varies. For example:

State	Penalty Outcome	Notes
Washington	Usually waived	Anonymous submission allowed
Texas	Penalty waived, interest negotiable in some cases	Must not have been contacted
New York	Penalty waiver allowed but full disclosure required	Identity not anonymous

If a taxpayer collected tax but failed to remit it, many states refuse tax penalty abatement, arguing that the business held money in trust. States differentiate between failing to collect, and collecting but keeping tax dollars.

How Does Negotiation Work?

Effective negotiation revolves around three elements:

1. Disclosure and transparency
    Businesses must reveal nexus-creating activities, estimated liability, and timing. If information is omitted, states may void the agreement.
2. Demonstrating good faith
    States view VDAs as taxpayer-initiated correction. Demonstrating compliance intent supports requests for penalty reduction.
3. Establishing payment terms
    Many states allow installment plans if liabilities are large. Though uncommon in a standard VDA program, economic hardship documentation can strengthen negotiations in tough financial climates.

Pros and Cons of Seeking Penalty Relief in a VDA

Pros

✔ Penalty reduction and lookback limitation
 Most states restrict historical exposure to 3–4 years, protecting businesses with Multi-State Sales Tax Exposure. This is far better than an audit without a statute of limitations.

✔ State tax forgiveness is possible
 Some states provide partial interest concessions when liabilities are large.

✔ Reduced risk of discovery
 Anonymity protects businesses until terms are agreed.

Cons

✖ Penalty relief may be denied if tax was collected but not remitted
 The state treats those funds as trust money.

✖ Disclosure must be complete
 If material facts are omitted, the agreement can be voided, and penalties reinstated, along with possible investigations.

✖ States may extend disclosure to other taxes
 Businesses may uncover liabilities beyond sales tax, increasing the total cost in the VDA process. While this can still reduce risk compared with audit exposure, the outcome may differ from expectations.

Voluntary Disclosure vs. Managed Audit

Although both options provide relief, a VDA is proactive while a managed audit is reactive. In a managed audit, the state controls the review and may still impose penalties. A VDA allows negotiation before exposure is known to the state. Businesses should not wait to be contacted because contact disqualifies most applicants.

Final Answer

Negotiating penalty reduction through a Voluntary Disclosure Agreement is not only possible but common, provided the taxpayer has not been contacted by the state, complies with disclosure rules, and did not intentionally evade tax. States prefer compliance over enforcement and offer concessions to bring taxpayers into the system quickly. When managed strategically and timely, a VDA program remains one of the strongest compliance tools to minimize tax exposure, lower risk, and potentially secure meaningful state tax forgiveness for past liabilities.

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