If you have unfiled periods in a state where you had nexus, there are two main ways to get compliant: a Voluntary Disclosure Agreement (VDA) or filing the overdue returns directly. This post covers the tradeoffs of each and gives you a framework for choosing between them.
Note: Program terms vary by state. Always confirm the specific state's VDA terms before choosing a path.
Key Terms
Voluntary Disclosure Agreement (VDA) A negotiated agreement where you come forward before the state contacts you, register, and pay back tax and interest for a limited lookback period. In exchange, the state typically waives penalties and agrees not to pursue periods before the lookback.
MTC National Nexus Program (NNP) The Multistate Tax Commission's program for negotiating VDAs with multiple participating states through a single point of contact. You can stay anonymous to the states until agreements are signed. Not every state participates.
Filing overdue returns directly Registering (if needed) and filing all past-due returns through the state's normal process, paying tax, penalties, and interest as assessed. Penalty abatement can be requested separately.
Lookback period The number of years of back tax a state requires under a VDA, commonly 3 to 4 years from the date the agreement is signed or from when you first contact the state.
Option 1: Voluntary Disclosure Agreement (VDA)
A VDA's main value is cutting off old periods and penalties. That value grows with how far back your exposure goes.
Pros
Limited lookback. Most states cap back tax at 3 to 4 years. If your nexus started 6 years ago, the oldest periods drop off entirely.
Penalty waiver. Failure-to-file and failure-to-pay penalties are generally waived. On a large balance, this alone can justify the process.
Anonymity during negotiation. A representative approaches the state without naming you. If the terms are unacceptable, you can walk away without having been identified.
Certainty. The signed agreement closes out pre-lookback periods. The state generally won't audit or assess those years later.
Multi-state efficiency through the MTC. The NNP handles several participating states in one process with consistent terms.
Some room to negotiate. A few states will discuss interest relief, payment plans, or lookback start dates, especially for strong facts.
Cons
Eligibility is lost once the state makes contact. A nexus questionnaire, audit notice, or inquiry letter usually disqualifies you for that state.
Slow. Expect weeks to months for a single state, and often longer through the NNP. Exposure keeps building while you wait unless you register prospectively.
Interest is still due. Interest is rarely waived and can be significant on older periods.
Tax is owed even if you didn't collect it. If you didn't charge your customers, you pay the tax out of pocket. Recovering it from customers after the fact is rarely practical.
Collected tax gets less favorable treatment. Many states exclude collected-but-unremitted tax from the lookback limit or penalty waiver and require all of it back to the first period.
Binding admission. Signing generally concedes nexus and liability for the covered periods, which limits later disputes over nexus or taxability.
Cost and overhead. Representation fees, exposure calculations, and state-specific paperwork add up, especially across many states.
Strict terms once signed. Returns and payment are often due within 30 to 60 days of signing, and you must stay compliant going forward.
Option 2: Filing Overdue Returns Directly
Filing directly is the faster, simpler route. It works best when your exposure is recent and small.
Pros
Speed. No application or negotiation. Returns can go in as soon as the account is registered and the data is ready.
Lower upfront cost. No representation fees or VDA paperwork.
Always available. Works even after the state has made contact, when a VDA is off the table.
Penalty abatement is still possible. Most states accept reasonable cause requests, and some offer first-time abatement. Results vary by state and by facts.
No real loss when nexus is recent. If every unfiled period already falls inside the typical lookback, a VDA saves only penalties.
Cons
Unlimited lookback. The statute of limitations generally doesn't start until a return is filed, so every period back to nexus is open.
Full penalties and interest. Penalties apply unless abatement is granted, and abatement isn't guaranteed.
No anonymity. You're identified from the first filing, and a batch of late returns can draw audit attention.
Can expose earlier periods. Registering with a back-dated start, or filing recent periods, may prompt the state to ask about earlier ones.
No closing agreement. Prior periods stay open to audit and assessment.
How to Decide
In short: A VDA is generally the better fit when your exposure predates the state's lookback or penalties are material, and the state hasn't contacted you. Filing directly is the better fit in most other cases.
Questions to Ask
Has the state contacted you? If yes, a VDA is likely unavailable for that state. File directly and request abatement.
When did nexus start? If all unfiled periods fall within that state's lookback, the VDA benefit is limited to penalties.
Did you collect tax? Collected-but-unremitted tax gets less relief under most VDAs and carries more risk if left unaddressed. Prioritize these states either way.
How large is the exposure? Weigh estimated penalties saved against representation fees and time. Small balances rarely justify a VDA.
How many states are involved? Several states with old exposure may point toward the MTC NNP for participating states.
How urgent is it? A pending acquisition, audit, or funding round may favor the speed of direct filing, or the certainty of a signed VDA, depending on what the other party needs.
Common Scenarios
Situation | Typical path |
Nexus 5 years ago, never collected, no state contact, meaningful balance | VDA |
Nexus crossed 14 months ago, small balance, want it cleaned up this quarter | File directly |
State already sent a nexus questionnaire | File directly |
Old exposure in some states, recent nexus in others | Mixed approach: VDA in states with old exposure, direct filing in states where nexus is recent |
Common Pitfalls to Avoid
Registering before deciding. Registering with a back-dated start can identify you and cost you VDA eligibility. Decide on your path first.
Assuming terms are uniform. Lookback length, start date, interest treatment, and collected-tax rules differ by state. Check the state's current program terms.
Letting exposure grow during the VDA. Register prospectively where the state allows it without forfeiting the agreement, so new periods don't pile up.
Missing post-signing deadlines. Late returns or payment can void the agreement and reinstate penalties.
Overlooking local taxes. Some states administer local taxes outside the state VDA. Confirm what the agreement covers.
Treating abatement as a sure thing. When filing directly, plan for penalties at full value and treat abatement as upside.