Part 10: Catching up

At some point in the life of almost every growing e-commerce business, a seller looks at their compliance position and realizes that something has been missed. Maybe they never registered for sales tax in states where their FBA inventory has been sitting for years. Maybe they have been recording their Amazon deposits as revenue and filing income tax returns based on figures that do not reflect reality. Maybe they formed a US LLC as a non-US seller and filed nothing, because no one told them about Form 5472. Maybe they simply stopped filing in a state where they were registered, because life got busy and no one chased them.

The specifics vary. The emotional response is usually the same: a combination of dread, the impulse to do nothing and hope nothing comes of it, and a vague sense that the longer this has been going on, the worse the outcome will be. On the last point, they are usually right. But the outcome is almost always more manageable than the dread suggests, and the path to resolving it is clearer than most sellers realize, provided they understand what options are available and move before the situation is forced.

What Happens if you have been selling without Registering for Sales Tax

The first thing to understand about accumulated sales tax non-compliance is that it does not disappear on its own. States do not write off unregistered sellers after a period of time. The liability sits there, accruing interest, until something forces the issue.

The something that forces it is usually one of three things: the seller discovers the exposure themselves and decides to address it proactively, a state revenue authority identifies the seller through enforcement activities and makes contact, or the issue surfaces during due diligence for a business sale, investment round, or loan application.

• Sellers who discover their exposure during due diligence for a business sale have the worst possible negotiating position: they need to resolve it quickly, cannot take time to negotiate favorable voluntary disclosure terms, and the buyer knows it. The sellers in the best position are the ones who discover their exposure on their own and address it deliberately, on their own timeline, before anyone else is involved.

As covered in Part 3, the statute of limitations for sales tax assessments typically runs from the date a return was filed. For sellers who never registered and never filed, the limitations period may never have started. In many states, the assessment period for unfiled returns is effectively unlimited, meaning the state can in principle assess back tax from the date nexus first existed, however many years ago that was.

In practice, most states do not pursue the maximum possible lookback in voluntary disclosure scenarios. The VDA process exists precisely to encourage sellers to come forward voluntarily in exchange for a negotiated, limited lookback period and penalty waiver. The unlimited theoretical exposure is the worst case. The VDA negotiated outcome is typically significantly better.

Interest accrues on unpaid sales tax from the date it was due. State interest rates typically range from 6% to 12% per year and compound. A liability accumulating for five years carries five years of interest on top of the principal. Penalty structures for unregistered sellers typically include failure-to-file and failure-to-pay penalties, often 5% to 25% of tax due per return. For a seller with years of unfiled monthly returns across multiple states, the penalty exposure can exceed the underlying tax liability. The VDA process almost always includes a full or partial penalty waiver, which is the primary financial reason the VDA route is preferable to being discovered.

Voluntary Disclosure Agreements: The Mechanism for Coming Clean

A Voluntary Disclosure Agreement is a negotiated arrangement between a taxpayer and a state tax authority in which the taxpayer comes forward voluntarily to disclose an unregistered or underreported tax obligation. In exchange for voluntary disclosure, timely filing of back returns for an agreed lookback period, and prompt payment of the tax and interest due, the state agrees to waive penalties and limit the lookback period to a defined number of years.

VDAs are the standard professional approach to resolving accumulated sales tax non-compliance, and for good reason: they consistently produce better outcomes than any alternative.

Penalty waiver. The state agrees to waive all or most penalties that would otherwise apply to the back periods covered by the agreement. This is typically the most valuable component of the VDA, since penalties can be substantial relative to the underlying tax.

Limited lookback period. The state agrees to limit the period for which back returns must be filed. Most states offer a lookback period of three to four years, regardless of how long the seller's actual nexus period extends. Some states have fixed lookback periods defined by statute or policy; others negotiate based on specific circumstances.

No criminal referral. A properly structured VDA shields the taxpayer from criminal prosecution for the periods covered, provided the disclosure is accurate and complete.

Registration going forward. The seller agrees to register in the state, file returns on the correct schedule, and remain compliant going forward. The VDA does not cover future non-compliance.

The Anonymized Initial Contact Process

One of the most practically useful features of the VDA process is that initial contact with the state can be made anonymously, through a professional acting as the seller's agent. The professional approaches the state, describes the seller's general situation without identifying them, and requests the state's standard VDA terms. The state responds with its offer: the lookback period, penalty waiver terms, and any specific conditions.

This anonymized approach allows the seller to evaluate the terms before committing and, if the terms are unacceptable, to withdraw without having disclosed their identity. In practice, most states' VDA terms are reasonable and the anonymized phase is brief. Once the seller agrees to the proposed terms, the professional discloses the seller's identity, the formal agreement is signed, and the seller files the back returns and pays the tax and interest for the agreed lookback period.

Multi-State VDAs and the MTC National Nexus Program

For sellers with exposure in many states simultaneously, filing individual VDA applications with each state is a significant administrative undertaking. Two mechanisms help manage this.

The Multistate Tax Commission's National Nexus Program offers a coordinated multi-state VDA process that allows sellers to seek voluntary disclosure in multiple participating states through a single application. When active, this program significantly reduces the administrative burden. The program may not always running, and the states that participate vary between cycles. Checking the MTC's current program status at the time you are addressing back liabilities materially affects the strategy.

For states not covered by an active MTC program, individual state VDA applications are filed sequentially or in parallel, each following the state's own process. A professional managing a multi-state remediation can run these simultaneously to compress the timeline.

A VDA resolves back sales tax liability for the states and periods covered by the agreements. It does not address income tax nexus, income tax filing obligations, or any tax type other than the one covered by the specific agreement. A seller who addresses their sales tax exposure through VDAs and considers the matter fully resolved may still have unaddressed income tax filing obligations in the same states. The two analyses are separate and both need to be completed.

The Impact of Prior State Contact on VDA Eligibility

The VDA option is available only to sellers who come forward before the state initiates contact. If a state has already sent an audit notice, a nexus questionnaire, a registration demand, or any other formal communication regarding the seller's compliance status, the VDA window for that state is typically closed.

A nexus questionnaire, which some states send to businesses identified through marketplace platform data sharing or other sources, can close the VDA window even before a full audit is opened. If you receive any communication from a state tax authority regarding your registration or filing status, contact a professional immediately before responding. The response to that initial contact can affect what options remain available.

Back Income Tax: What to do if you have been Underreporting or Not Filing

For sellers who have been filing income tax returns based on incorrect books, such as recording Amazon deposits as revenue instead of reconciling settlement reports, prior-year returns may not accurately reflect taxable income. Depending on the direction of the error, this may mean overstated income and overpaid tax, creating a refund claim opportunity, or understated income and underpaid tax, creating a liability. The IRS generally has three years from the filing date to assess additional tax based on understated income, or six years if income is understated by more than 25%.

Correcting prior year income tax returns is done through amended returns on Form 1040-X for individuals or the equivalent amended form for the relevant entity type. There is no VDA process for federal income tax in the same way as for sales tax, but filing late returns voluntarily is consistently treated more favorably than being assessed through an audit.

For sellers who have not filed income tax returns for one or more years, the IRS's standard approach is to contact the taxpayer through CP2000 notices or substitute for return assessments when it has information returns such as 1099-Ks indicating unreported income. Filing delinquent returns before the IRS takes action is far preferable to responding to an IRS assessment, because a voluntary filing allows the taxpayer to claim all available deductions rather than having the IRS calculate a deficiency based only on the gross income it can identify.

State income tax delinquencies follow a similar remediation path to federal delinquencies, with each state having its own process, statute of limitations, and penalty structure. Some states participate in income tax voluntary disclosure programs similar to the sales tax VDA framework, offering penalty waivers for taxpayers who come forward before the state initiates contact.

IRS Streamlined Filing Procedures for Non-US Sellers who have missed US Filings

Non-US sellers who have missed US income tax filings, whether because they were unaware of the obligation or because they received incorrect advice, may have access to a specific IRS program designed to facilitate compliance by non-willful non-filers: the Streamlined Filing Compliance Procedures (Streamlined procedures are for taxpayers who failed to report foreign financial assets / offshore income and certify non-willfulness, but should not be used a general catch-up route for every non-US e-commerce seller with missed U.S. business filings).

The Streamlined Foreign Offshore Procedures are available to non-US residents whose failure to file was non-willful. To use them, the taxpayer must file amended or delinquent returns for the three most recent tax years for which the filing deadline has passed (six for FBAR), pay all tax and interest due, and certify that their failure to file resulted from negligence, inadvertence, or a good-faith misunderstanding of the requirements rather than from a deliberate decision to evade US tax.

The significant benefit for non-US residents is that no miscellaneous offshore penalty is assessed on the tax due under the Streamlined Foreign Offshore Procedures. This makes them substantially more favorable than the standard failure-to-file and failure-to-pay penalty structure, and they are the appropriate mechanism for the large number of non-US e-commerce sellers who genuinely did not know they had US filing obligations.

The non-willfulness certification is a signed statement submitted with the Streamlined filing in which the taxpayer explains the facts and circumstances of their non-compliance. Non-US sellers who genuinely were unaware of their US filing obligations are typically well-positioned to certify non-willfulness credibly. The certification should be prepared with the assistance of a US tax professional to ensure it is accurate, complete, and framed appropriately.

The Streamlined procedures address income tax filing delinquencies. The $25,000 per year Form 5472 penalties discussed in Part 8 are information return penalties operating under a different framework and are not automatically waived by the Streamlined procedures. For Form 5472 penalty relief, the relevant mechanism is a reasonable cause penalty abatement request submitted either with the delinquent filing or in response to a penalty notice. For sellers who were genuinely unaware of the obligation and received no guidance from their formation agent or home-country advisor, this is often a credible argument worth making in every case where the facts support it.

Working with a Professional on Back Tax Remediation

Initial assessment. The starting point is understanding the full scope of exposure: every state where the seller has had nexus, the period during which nexus existed in each state, the estimated tax that should have been collected and remitted, and any income tax filing obligations that have been missed. This assessment produces a clear picture of the total exposure before any action is taken, allowing the seller to make informed decisions about how to proceed.

Prioritization. States with higher estimated liability, more aggressive enforcement programs, and the highest risk of independent discovery are typically addressed first. Prioritization also takes into account whether the MTC multi-state program is available, since coordinating disclosures through the program where possible reduces administrative work.

VDA applications. The professional drafts and submits VDA applications to each state, initially anonymously, negotiates the terms offered, and advises the seller on whether to accept. Once terms are agreed, the seller's identity is disclosed, the agreement is signed, and back returns are prepared and filed.

Back return preparation. For each state and period covered by the VDA, sales tax returns are prepared based on the seller's actual transaction data. For sellers whose historical records are incomplete, reconstructing data from Amazon settlement reports, Shopify order histories, and other platform data is part of the process.

Payment and resolution. Once returns are filed and the tax and interest for each period are calculated, the seller makes payment to each state. The VDA is then satisfied and the seller is registered and compliant going forward.

Timeline. A multi-state sales tax remediation involving ten or more states typically takes three to six months from initial assessment to final resolution, depending on state response times, the complexity of historical records, and the number of states involved. Working through a single state with a straightforward fact pattern can be completed in four to eight weeks.

Professional fees for a multi-state remediation covering ten to fifteen states with relatively clean historical data typically normally range from $5,000 to $15,000 (but check directly). For larger and more complex remediations, fees scale accordingly. These fees are in addition to the tax, interest, and any residual penalties not waived under the VDA terms.

How to avoid falling behind again once you have caught up

A remediation that resolves back liabilities but does not address the underlying infrastructure that allowed them to accumulate is a remediation that will need to be repeated. The goal is not just to get current but to stay current, and that requires the compliance infrastructure covered throughout this guide.

A sales tax automation platform, configured for all registered states and connected to all selling channels, handles rate calculation and return filing automatically. A monitoring process for new nexus ensures that states where thresholds are crossed as the business grows are identified and addressed before they become a new back liability. An annual compliance review with a professional confirms that the infrastructure is keeping pace with the business. Accurate books, maintained on a current basis with proper settlement reconciliation, mean that income tax returns are prepared from reliable data.

The combination of proper infrastructure and periodic professional review is what makes staying current achievable. It is not a one-time fix but an ongoing operational posture, and the cost of maintaining it is a fraction of the cost of another remediation.

• Antravia Advisory handles voluntary disclosure analysis, VDA negotiations, multi-state back tax remediation, and IRS Streamlined filing for e-commerce sellers and international businesses. If you have accumulated compliance exposure that needs to be addressed, contact our team. The sooner the conversation starts, the more options remain available.

Part 11: Growing and Scaling continues next.

About Antravia Advisory

Antravia Advisory is a US-based tax and accounting advisory firm headquartered in Winter Park, Florida, operating nationally and internationally.

We advise international businesses entering the United States and complex US companies operating across multiple states, entities, and revenue structures. Our work spans advanced tax strategy, multi-state sales tax oversight, cross-border structuring, and high-level accounting architecture for e-commerce brands, subscription and SaaS businesses, platform-based models, and multi-entity groups.

We work with founders and leadership teams who require technical precision, structural clarity, and financial frameworks built for scale, capital events, and long-term resilience.

The E-Commerce Seller’s Complete Guide to US Tax, Accounting, and Compliance

Part 1 — The Big Picture

Part 2 — Entity Structure

Part 3 — Sales Tax

Part 4 — Income Tax

Part 5 — Platform-Specific Issues

Part 6 — Bookkeeping and Accounting Architecture

Part 7 — Payroll and Hiring

Part 8 — International Sellers Selling Into the US

Part 9 — Sales Tax Automation

Part 10 — Catching Up

Part 11 — Scaling and Exit Planning

Part 12 — Annual Compliance Calendar

Part 13 — Working With Professionals

Disclaimer:
Content published by Antravia is provided for informational purposes only and reflects research, industry analysis, and our professional perspective. It does not constitute legal, tax, or accounting advice. Regulations vary by jurisdiction, and individual circumstances differ. Readers should seek advice from a qualified professional before making decisions that could affect their business.

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