How Sales Tax Penalties and Interest Can Snowball During a Texas Audit

For businesses targeted in Texas sales tax audits, allegations of noncompliance can lead to liability for more than just the business’ unpaid sales tax liability. Businesses that have not fully satisfied their sales tax obligations can also face liability for interest and penalties.

This additional liability can be substantial.

Along with interest and penalties, sales tax noncompliance can also expose businesses (and, in some cases, their owners, executives, and other individuals) to criminal prosecution. Businesses can face additional financial penalties in criminal tax fraud cases, while individuals can face both fines and prison time.

Interest on Delinquent Texas Sales Tax

Under Texas law, unpaid sales tax accrues interest 61 days after the due date. The Texas Comptroller’s Office charges interest at the prime rate plus 1%. After rising to 9.50 percent in 2024, this “prime plus one” rate fell to 8.50 percent in 2025 and is 7.75 percent in 2026.

Calculating the interest due on unpaid sales tax in Texas involves a three-step process:

• Step 1: Multiply the tax due by the annual interest rate (7.75 percent for 2026).
• Step 2: Multiply the figure calculated in Step 1 by the number of days interest has accrued; and,
• Step 3: Divide the figure from Step 2 by the number of days in the year (365 for 2026).

While the interest owed on small outstanding sales tax liabilities will be fairly nominal, for businesses that owe hundreds of thousands or millions of dollars in unpaid sales tax, interest can have a material impact on their overall liability. The longer the sales tax remains unpaid, the more a business’ liability will continue to grow. As a general rule, this is true even if the amount is in dispute.

Penalties for Non-Payment of Texas Sales Tax

Penalties for unpaid sales tax liability are also calculated as a percentage of the amount owed. However, unlike interest, penalties are calculated using a flat percentage that is determined based on the number of days that the sales tax at issue is past due:

• Up to 30 Days Past Due: 5 percent of the sales tax owed.
• More than 30 Days Past Due: 10 percent of the sales tax owed.

Penalties can have a far greater impact than interest on a business’ overall liability, at least in the short term. This is intentional and designed to encourage voluntary compliance. While the Texas Comptroller’s Office has discretion to settle businesses’ interest and penalty liability (in addition to their sales tax liability), a settlement is not guaranteed in any scenario. For businesses that need to pursue a settlement, engaging tax counsel to assist with coming forward promptly will be a key first step toward targeting a favorable resolution.

Criminal Penalties for Sales Tax Fraud in Texas

As noted above, businesses and individuals can also face criminal penalties in some cases. If a Texas sales tax audit uncovers evidence (or apparent evidence) of intentional or willful noncompliance, this can trigger criminal scrutiny. Under Section 151.7032 of the Texas Tax Code, intentionally or knowingly failing to pay sales tax collected is a felony in all cases involving $1,500 or more. It is a third-degree felony in cases involving $20,000 or more; a second-degree felony in cases involving $100,000 or more, and a first-degree felony in cases involving $200,000 or more.

Defending Against Interest and Penalties During a Texas Sales Tax Audit

Due to the substantial risks involved in facing Texas sales tax audits, businesses that are facing these audits need to execute an informed and strategic defense. Whether this involves seeking to avoid liability entirely or targeting a settlement with the Texas Comptroller’s Office will depend on the specific circumstances of each individual case.

With this in mind, some key considerations for defending against interest and penalties during a Texas sales tax audit include:

1. Is the Business in Full Compliance with Its Sales Tax Obligations?

When facing a Texas sales tax audit, it is critical to have a clear understanding of the business’ outstanding liability (if any). This involves conducting an internal compliance assessment, and this assessment should take place as soon as possible.

2. Does the Business Have Documentation to Substantiate its Compliance?

When assessing sales tax compliance, businesses should also verify that they have the documentation needed to substantiate compliance during the audit. Auditors can seek extensive access to targeted businesses’ financial records, and if a business is unable to provide any required documentation, this alone can lead to the imposition of additional liability.

3. If the Business is Not in Full Compliance, What is Its Risk Exposure?

If a business’ internal assessment reveals that the business is not in full compliance, then one of the next critical steps will be to assess the business’ risk exposure. Knowing the full scope of the business’ potential liability will be essential for formulating a targeted defense strategy.

4. Is Criminal Prosecution a Concern?

When assessing the business’ risk exposure, it will be important to assess the likelihood of the audit leading to criminal allegations as well. If any documents that are subject to review during the audit suggest (or arguably suggest) intentional or willful noncompliance, this requires careful and strategic consideration.

5. Is It In the Business’ Best Interests to Target a Settlement?

In all cases, if there is a risk that the audit will lead to liability for back taxes, interest and penalties, it will be worth considering whether it is in the business’ best interests to target a settlement. While facing additional liability in this scenario is not a foregone conclusion, business owners and executives must make informed decisions about what makes the most sense under the circumstances at hand.

Request an Appointment with a Texas Sales Tax Lawyer at Brown P.C.

If you need more information about the risks of facing a Texas sales tax audit, we invite you to get in touch. To request an appointment with a Texas sales tax lawyer at Brown P.C., please call 888-870-0025 or contact us confidentially online today.