If you make a voluntary disclosure of a sales tax error (giving rise to a payment), you get ahead of the problem. You maintain an element of control. If the Canada Revenue Agency or provincial governmental authorities (whichever is applicable) find the problem during the audit, you may have little control over the outcome. This is why it is recommended that you make a voluntary disclosure if you find your sales tax mistakes and do not wait for the auditor to "maybe find it".
The Canada Revenue Agency and the Ontario Ministry of Revenue have developed voluntary disclosure programs that promise to not charge a gross negligence penalty (and other forms of penalty) if you voluntarily come forward to report the errors and pay the tax and interest. In some cases, the authorities will even grant relief on a portion of the interest if the disclosure goes back many years.
For a voluntary disclosure to be accepted, it must be voluntary. This means that the authorities have not informed the taxpayer of an upcoming audit. If you were not on their radar and you come forward, there is a potential for financial savings.
But, that is not enough for the disclosure to be accepted. It must be the first time this problem is identified with the tax authorities. If you have made this type of error before and were informed about the error, the authorities will not accept the disclosure as voluntary. They expected you to make the corrections to the sales tax recording and remittance systems after their earlier discussions with you.
Even if this is a first time issue, that is not enough for the disclosure to be accepted. It must be complete. You must do the work that an auditor would do. You cannot hide some of the information or transactions. For example, I recently worked with a non-resident client to make a voluntary disclosure of Ontario retail sales tax payable on goods imported from outside Canada for own use. The client made an initial disclosure and payment based on Canada Customs import documentation. Before we submitted the paperwork, we undertook a second review of the records and realized we have forgotten imports from another province. We updated the disclosure and paid the additional tax. We submitted to the authorities a detailed spreadsheet with each of the transactions and the back-up documentation at tabs matching the excel spreadsheet line number. We made it easy for the government to audit and agree with our calculation.
The auditor assigned to the voluntary disclosure may conduct a desk audit or an on-site audit after the supporting documentation is provided. If the auditor finds that the disclosure is not complete, he/she will assess the tax that you said was owing, the additional tax he/she found was owing, and then will calculate interest and penalties on the entire amount.
Many mistakes can be the subject of a voluntary disclosure; but, not all mistakes can be the subject of a voluntary disclosure. If you collected sales tax and did not remit it, you will not be permitted to make a voluntary disclosure. The government has a serious issue with you keeping their money.