It is not uncommon for Texas taxpayers to engage in a transaction in which they do not collect or pay Texas sales tax, believing the transaction to be nontaxable, only to later find out they had a tax responsibility.  Other taxpayers may be entirely unaware that a Texas sales tax or franchise tax responsibility exists at all.  In these and other cases, taxpayers may find relief by taking advantage of the Texas Comptroller’s “voluntary disclosure” program.

What is a Voluntary Disclosure?

As discussed in Comptroller Publication 96-576, the Comptroller’s Voluntary Disclosure Program provides taxpayers with an opportunity to voluntarily report and pay taxes owed for prior periods. [1] As the name suggests, the key here is that participation must be voluntary – taxpayers will only qualify if they have not been previously contacted by the Comptroller, either verbally or in writing, concerning a liability or estimated liability.

If admitted to the program, the Comptroller and taxpayer will enter into a “Voluntary Disclosure Agreement” (“VDA”) that will provide specific terms such as the period for which the taxpayer must report transactions, payment terms, and deadlines.  The taxpayer will then list all taxable transactions for the specified period, and make a payment (either partial or full, depending on the specific VDA terms) of the related tax amount.

The taxpayer may also be able to streamline and speed up this process by entering into a “Fast-Track VDA.”  This essentially requires that all documents, including the VDA and list of taxable transactions, as well as payment, be submitted up front.  While not advisable in all cases, there are circumstances where this option has substantial merit.

What are the benefits of a Voluntary Disclosure?

While participation in the voluntary disclosure program may provide several benefits to taxpayers, there are three primary benefits that warrant consideration of this option.

First, and perhaps most importantly, by engaging in the voluntary disclosure program, the taxpayer will likely find themselves in compliance with their reporting and payment obligations.  Of course, entering into a VDA does not prohibit the Comptroller from initiating an audit, but transactions reported as part of the voluntary disclosure process will not be subject to review by an auditor.

Second, in almost all cases, the Comptroller offers a waiver of penalties and interest on amounts reported as part of the voluntary disclosure process.  An exception exists for amounts of tax that were collected by the taxpayer but not remitted to the Comptroller – only penalties may be waived for those amounts.

Third, the Comptroller’s lookback period (i.e., the period that is subject to audit by the Comptroller) is limited to four years, with the exception of tax collected but not remitted.  This is particularly important for taxpayers who have not filed any tax returns, as the Comptroller’s lookback period for those cases is normally unlimited. [2]

[1] Comptroller Pub. 96-576.

[2] Tex. Tax Code 111.205(a)(2).

[View source.]