The 28-year-old will pay £14 million for the period 2001-2004 with payments for 2005 and 2006 making the total figure around £27 million.
"I am happy with how this issue has been resolved. It is a high figure but it is more important to be calm, serene and happy," he told a news conference in his home province of Pesaro on Italy's east coast.
The winner of seven world titles had been investigated for tax evasion linked to his decision in 2000 to take up residence in Britain and still spend time in Italy.
Season 2008
Hayden demands Honda improvements
01/03/2008 AT 20:11
The Yamaha rider could have faced a bill for as much as 112 million euros but said that was "a threat to start talks". He will now declare taxes for 2007 in Italy, where he is planning to move to permanently.
"I had already decided to return to Italy. I couldn't return and have problems with Italian tax," he said, joking that he would not move back in with his mum. "Now I'm grown up."
Rossi is one of a number of high-profile Italian sports personalities to have their tax payments probed.
New England soccer coach Fabio Capello is being investigated for Italian tax fraud with a legal source saying last month that officials were seeing if "millions" had gone undeclared. Capello has said his finances are in order.
Italy was shocked when news broke of Rossi's tax problems last August. He is one of the country's highest earning sportsmen and rivals top footballers when it comes to sponsorship deals.
At the time he said his advisors had assured him they had respected the rules when filing his taxes. Rossi, without a title since 2005, has since parted company with his manager.
Season 2008
Stoner slams Losail gravel traps
01/03/2008 AT 14:36
Season 2008
Suzuki unveil new machine
11/02/2008 AT 15:08