How a Boston Startup Cleaned Up Three Years of Unfiled State Returns
Sam's List Editorial | 2026-08-04
This is an illustrative scenario, representative of the kind of multi-state cleanup work described below. Details are anonymized, figures are for illustration, and outcomes vary by state and by facts.
Unfiled state tax returns are the most common expensive mistake in remote-first startups, and almost nobody makes it on purpose. You hire a great engineer who happens to live in Colorado, you run them through payroll, and nothing bad happens. So you do it three more times.
This representative case follows a Boston software company that hired remote employees in four states, registered in none of them, and filed only its Massachusetts return for three years before anyone looked closely.
The Problem
The company had about twenty people. Roughly a third worked outside Massachusetts, spread across four states, hired over about thirty months as the team grew.
Payroll ran through a national provider, which withheld and remitted Massachusetts tax by default because that was how the account had been configured on day one. No one changed it. The founders assumed, reasonably enough, that using a payroll company meant payroll compliance was handled.
Three years of returns had been filed in Massachusetts and nowhere else. No state income tax or franchise returns outside the home state, no employer withholding accounts opened, and no registration with any secretary of state in the four employee states.
The trigger was ordinary: a lead investor's diligence checklist asked for state tax filings by jurisdiction, and the answer was a blank column.
Why It Was Four Problems, Not One
The critical misunderstanding here is treating "state compliance" as a single item. Hiring one employee in a new state can create four separate obligations, each with its own registration, its own agency, and its own penalty regime.
There is payroll withholding, which requires an employer account with the state revenue department and correct withholding from the first paycheck. There is state unemployment insurance, a separate registration with a separate agency. There is the company's own income or franchise tax filing, since in most states an employee working from home establishes nexus for the business itself. And there is foreign qualification, a registration with the secretary of state, which is corporate law rather than tax law and carries its own fees and, in some states, a penalty for operating unregistered.
An employee in a state can trigger all four. Missing them accrues separate exposure on separate clocks. And in most states the statute of limitations on an unfiled return never starts running, so the exposure does not age out the way founders assume.
The Approach
The work, representative of a multi-state cleanup engagement, started with facts rather than filings.
Step one was a nexus timeline. Every employee, every state, every start date, plus travel days and any contractor who looked more like an employee than the paperwork suggested. That single table drove everything downstream, because exposure is a function of when an obligation began, not when someone noticed it.
Step two was quantifying exposure by state and by year. For each jurisdiction: the withholding that should have been remitted, the company's own income or franchise tax at that state's apportionment, unemployment insurance contributions, registration fees, and an estimate of penalties and interest. Some states produced trivial numbers. One produced most of the total, driven by a minimum franchise tax that applied regardless of whether the company allocated any profit there.
Step three was choosing a path per state. Not one strategy for all four. In two states, the exposure was small enough that simply filing the delinquent returns and paying with a penalty abatement request was the efficient route. In the other two, the numbers justified pursuing a voluntary disclosure agreement.
Why the Voluntary Disclosure Route Mattered
Many states offer a voluntary disclosure program for taxpayers who come forward before the state contacts them. The typical trade is that the state limits how many prior years it will look at and waives or reduces penalties, and the taxpayer files and pays for the limited period.
The important part is the sequencing. That option generally evaporates once a state initiates contact, whether by notice, audit letter, or nexus questionnaire. Coming forward voluntarily is a negotiating position; responding to a notice is not.
Terms vary substantially by state. Lookback windows, penalty relief, whether the program is anonymous through a representative, and whether trust-fund taxes like withholding are eligible all differ. A few states offer very little. This is why the per-state analysis came before any decision, rather than after.
The Outcome
In this representative scenario, all four states were brought current across roughly ten weeks. Penalties were reduced meaningfully in the two voluntary disclosure states and partially abated in one of the two states where returns were simply filed late.
Interest still accrued. That is worth stating plainly, because it is the part founders hope to negotiate away and generally cannot. The company also absorbed real professional fees and several weeks of founder attention during a fundraise, which was the more expensive cost in practice.
The durable change was process. Payroll onboarding now includes a state registration step that happens before the first paycheck, not after the first quarter. A single owner is accountable for a nexus table that gets reviewed whenever someone is hired, moves, or leaves. Adding a state is now a fifteen-minute checklist item rather than a future cleanup.
The lesson: the cost of doing this correctly on the way in is a small fraction of the cost of doing it retroactively, and the gap widens fast once a third party is looking. Amounts, timelines, and available relief vary widely by state and by facts, and none of this is guaranteed.
Why Specialized Help Mattered
Multi-state cleanup is not harder accounting so much as a different discipline. It requires knowing which agency in each state governs which obligation, which states run useful voluntary disclosure programs, and how to sequence outreach so the door does not close first.
Anomaly CPA is a Boston firm listed on Sam's List, founded in 2018, working with SMB owners, venture-backed startups, high-net-worth individuals, and real estate investors. That combination of startup and multi-jurisdiction work is the profile that fits a nexus cleanup, where the analysis matters more than the return preparation.
Anomaly CPA has 2 verified client reviews on Sam's List as of 2026-06-26. Reviews reflect the experiences of individual clients, do not represent an endorsement by Sam's List, and are not indicative of future results.
If you have hired outside your home state and are not certain what is registered where, the nexus timeline is the first hour of work and it is worth doing before a diligence checklist forces it. Confirm scope and fit before engaging, and review the firm's profile on Sam's List.
Frequently Asked Questions
Does hiring one remote employee create state tax obligations? In most states, yes. A single employee working from their home in a state commonly creates payroll withholding and unemployment insurance obligations, nexus for the company's own income or franchise tax return, and a foreign qualification requirement with the secretary of state. Each is a separate registration, and thresholds vary by state.
What is a voluntary disclosure agreement for state taxes? An agreement in which a taxpayer comes forward about unfiled returns before the state makes contact, and the state typically limits the lookback period and reduces or waives penalties in exchange for filing and paying for that period. Availability, lookback length, and eligible tax types vary substantially by state.
How far back can a state go for unfiled tax returns? Generally there is no limit. In most states the statute of limitations begins when a return is filed, so an unfiled year stays open indefinitely. That is why exposure grows rather than expires, and why coming forward voluntarily is usually more favorable than waiting for a notice.
Does using a national payroll provider handle state registrations? Not automatically. Payroll providers withhold and remit based on how the account is configured, and many offer registration services only if you request and pay for them. The obligation to register in each state remains the employer's, and a default configuration pointed at your home state will quietly withhold in the wrong place.
About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.