Unaddressed, historical state tax exposure is often an outgrowth of being focused on building a company and not properly keeping track of an expanding state and local tax footprint. The exposure accumulated as the business grew; the problem never rose to the top of the priority list, and now it sits in the background as an unresolved liability that nobody is quite sure how to address.
This is a very common situation and one where the decision about what to do next carries real financial consequences. A business that comes forward proactively through a VDA will almost always pay substantially less than a business that waits for a state to initiate an audit. The difference is not marginal. It can be the difference between a manageable resolution and a genuinely disruptive one, and it comes down entirely to timing.
Understanding why requires a clear look at what each path actually costs.
The Changing Landscape of State Tax Enforcement
State revenue agencies have become substantially more sophisticated in their approach to identifying non-filers. The days when a business could quietly operate in a state without filing and assume it would simply be overlooked are largely behind us. States now cross-reference data from a wide variety of sources, including federal tax returns, marketplace facilitator reporting, payment processor data, and third-party commercial databases, to identify businesses that appear to have taxable activity in the state without a corresponding filing history.
The 2018 decision in South Dakota v. Wayfair, Inc. significantly expanded the universe of businesses with state tax obligations, and state revenue departments responded by investing in compliance infrastructure to capture that expanded base. Every state with a sales tax has economic nexus requirements for remote out-of-state sellers, and states have built systems to identify which businesses are meeting those thresholds without registering and remitting. If your business has meaningful revenue in a state and no filing history, you are not invisible. You are simply not yet prioritized.
Being identified for a state audit, rather than proactively coming forward through a VDA, changes the dynamics of the situation significantly and almost never in the taxpayer’s favor.
What an Audit Actually Costs
When a state initiates an audit, it does so on its own terms. The scope, timing, and parameters of the examination are largely within the state’s control, and the default starting position is not beneficial to the taxpayer.
One of the most consequential differences between an audit and a VDA is the lookback period. In an audit, most states can lookback indefinitely, possibly to the start of the business, if no returns were filed. For a business that has had nexus in a state for multiple years without filing, the full historical liability can be substantial.
Beyond the base tax owed, audits routinely carry penalty assessments that can substantially to the total bill. Penalty structures vary by state but are consistently significant, but are often add around a 25% additional cost on top of an already large base liability. Interest compounds the problem further. Interest is usually assessed in full regardless of the resolution path, and it accrues on the full amount of unpaid tax from the date it was originally due. For a business carrying years of unaddressed liability, the interest component alone can represent a significant additional obligation, when factoring in approximately 7% compound interest.
Then there are the indirect costs. A state tax audit requires management time, documentation gathering, coordination with advisors, and often disrupts ongoing business operations. The audit process is more adversarial, less predictable, and involves considerably more back-and-forth with the state. The professional fees associated with audit defense are almost universally higher than those associated with a proactive VDA.
What a VDA Actually Costs
By contrast, a Voluntary Disclosure Agreement offers a structured and significantly more favorable path to resolution. Most programs limit the lookback period to three or four years and offer penalty abatement.
The combination of a limited lookback period and penalty abatement, is the core economic value of a VDA relative to an audit. For a business that has had nexus in a state for six years, a VDA that limits the lookback to three years, immediately cutting the base tax. Penalty waiver eliminates an additional layer of cost that would otherwise be assessed at around 25% or more. What remains is the base tax for the lookback period plus statutory interest..
Additionally, many states allow VDA applications to be submitted anonymously through a representative, which means a business can negotiate the terms of the agreement, including the specific lookback period and which tax types are covered, before it formally identifies itself to the state.
The Window Does Not Stay Open
There is one more dimension to the cost of waiting that is easy to underestimate: the VDA window itself can close. A business that has received a nexus questionnaire, a notice of audit, or any other formal contact from a state revenue agency regarding unpaid taxes is typically no longer eligible for that state’s VDA program. That eligibility is predicated on the business coming forward proactively, before the state has identified it as a compliance target.
As states continue to invest in data analytics and cross-referencing capabilities, the likelihood that a business with meaningful revenue and no filing history will receive some form of state contact increases over time. Every quarter of inaction is a quarter closer to the moment when the option to come forward on your own terms no longer exists.
The business that acts while the VDA window is open controls the terms of the resolution. The business that waits until a state finds it does not.
How Escalon Approaches This
At Escalon, our State and Local Tax practice manages the full VDA process for clients, from initial exposure assessment , anonymous pre-screening with the state where available, negotiation with state revenue agencies, and transition to ongoing compliance. Our team covers both the indirect tax components, including sales and use tax, and the direct tax components, including income and franchise tax, so clients have a single coordinated partner rather than separate advisors working in silos.
The math of a VDA versus an audit is not close. The businesses we work with that choose to act proactively almost universally reach better outcomes, at lower cost and with less disruption, than those that wait for a state to initiate contact.
If your business has reason to believe it has unaddressed historical state tax exposure, the most valuable thing you can do today is start the conversation. The options available to you right now are better than the ones that will be available later.
