A Guide on the Texas Sales Tax Audit Process

Receiving an audit notice from the Texas Comptroller’s Office can be an unnerving experience for business owners and CPA teams. You may have concerns about possible unpaid sales tax exposure, either through prior reporting issues or the unfair methods of the auditor. Unfortunately, business owners and their accounting teams are often at a severe disadvantage in the audit process because of their limited knowledge about the rules governing it and their rights as a taxpayer. The first step in overcoming these challenges is familiarizing yourself with the Texas sales tax audit process. Our guide explains each step of a Texas sales tax audit and highlights key issues for business owners to consider when developing a defense strategy.

What Is a Texas Sales Tax Audit?

A Texas sales tax audit is a review of a business’s past transactions and sales tax return filings for compliance with their tax remittance obligations. An auditor or examiner from the Texas Comptroller’s Office conducts this review using standardized methods and processes. Their goal is to confirm a business’s compliance in their sales and use tax requirements and to recover any owed tax from under-reporting.

How the Texas Comptroller’s Office Selects Businesses for a Sales Tax Audit

Businesses often wonder how they get on the radar of the Texas Comptroller’s Office for audit selection. The truth is that audit selection can happen for many different reasons. Sometimes, a business is unlucky and chosen through random selection. Auditors also use the following methods in Texas to select a business for audit:

• Review based on a company’s large amount of reported taxable sales
• Businesses with an audit history that resulted in additional assessment
• Review of a business’s sales tax return that reveal anomalies or outliers
• Information sharing programs (e.g., DMV registration records, credit card data, etc.)
• Leads from audits of other businesses related to a company, such as a supplier or customer

Audit selection is largely outside of a business’s hands. Once chosen, the most a business can do is cautiously engage in the auditor’s process. Guidance from a sales tax professional is often useful at this stage to help businesses navigate certain communications and requests from the auditor. Businesses that fail to cooperate with an audit request may face hefty assessments, penalties, and other consequences.

Note: Texas has a four-year statute of limitations for the Comptroller’s Office to assess sales and use tax to a business under Administrative Code Rule § 3.339. Exceptions could extend this limitation period. For example, businesses that file a false or fraudulent return or that fail to file a sales tax return. Agreeing to an extension with a Texas auditor can also lengthen the period. It’s important to review an audit request for potential violations of the limitation period that could force the Texas Comptroller to drop its audit of your business.

A Step-by-Step Review of the Sales Tax Audit Process in Texas

The sales tax audit process in Texas involves several steps and can take anywhere from a few weeks to half a year or longer depending on the scope, size, and complexity of the audit. We explain each step below and highlight the issues a business will want to consider at each stage of the audit.

1. Notice of audit: The auditor will send a written notice confirming the audit selection and request the taxpayer return a completed Form 00-750 Audit Questionnaire. Once this is done, the auditor will also schedule an entrance conference for the audit. Carefully read the notice to learn the period subject to audit and whether it is outside the statute of limitations.
2. Pre-Audit research and review: The auditor will conduct preliminary review of the business by looking at old sales tax returns and any prior audits.
3. Taxpayer contact: The auditor will likely make contact by phone in advance of the entrance conference to discuss the audit process in more detail and make initial requests for documents. These requests are often overly broad and sometimes burdensome. A sales tax professional can help businesses understand which documents are truly necessary for the auditor to do their job and which are not.
4. Entrance conference: A formal meeting between the auditor, the business, and its representatives to discuss the audit plan.
5. Examination of records: The auditor reviews available records and confirms whether the business reported and paid all owed sales tax for the period using various control documents such as federal income tax returns for the business or bank records. If certain records are not available, an auditor may use a sampling method to estimate the owed sales tax. The auditor will then provide schedules that explain the auditor’s findings and give the business an opportunity to address any disputed adjustments.
6. Exit conference: A meeting where the auditor confirms any additional tax assessment based on the audit along with accrued interest or penalties.
7. Reconciliation conference: A business can attempt to resolve further disputes over the audit findings by requesting a reconciliation conference with the audit manager or supervisor.
8. Independent audit review conference: A further review process with an independent third party to address unresolved disputes after the reconciliation conference with the audit manager.
9. Audit review and finalization: The auditor’s findings and schedules are processed for finalization and are formally presented to the business through a notice of results.

Common Issues in Defending Against Unfair Assessment in a Texas Sales Tax Audit

Many issues can impact an auditor’s findings and result in an unfair assessment. Defending your past reporting can be difficult without a clear understanding of your business records and the rules governing sales tax collection in Texas. For example, the following items could play a key role in the auditor’s findings and be a source of dispute that a sales tax professional could help your business navigate:

• The taxability of sales for goods or services not clearly defined within the Texas Tax Code
• The acceptance of exemption certificates for certain transactions
• An auditor’s use of a sampling method that contains a bias against the business and does not fairly reflect taxable sales
• Accounting for nontaxable sales (e.g., out-of-state sales or sales through a marketplace facilitator)

Identifying these issues during an audit can be difficult without the guidance of an experienced sales tax professional who understands applicable audit procedures and Texas sales tax rules.

FAQs about Sales Tax Audits in Texas

What industries are most likely to be selected for a Texas sales tax audit?

Businesses most at risk for a Texas sales tax audit may include those involved in food service, construction or contractor work, computer software, online retail, service businesses, and cash-based businesses.

Should I sign an extension of the assessment limitation period during a Texas sales tax audit?

This is a difficult question that depends on the circumstances of the business. Refusing an extension often results in a higher assessment that the business must dispute through appeal processes. Our sales tax professionals can review an extension request and help a business decide which option may be more beneficial.

Should I agree to a sampling of my taxable sales by the Texas auditor?

Auditors rely on sampling when they believe available records are not sufficient to properly determine sales tax liability. Businesses should be cautious when agreeing to a sampling method because it may artificially inflate taxable sales.

Meet with a Texas Sales Tax Professional After Receiving an Audit Notice

Audits can be intimidating experiences because business often have a strong disadvantage in the process compared with the Texas auditor on the other side. Our Texas sales tax professionals provide businesses with their experience and skill in defending against unfair audit practices. We work with businesses in a variety of capacities during a Texas sales audit depending on their needs and preferences. Save time during an audit and don’t pay more sales tax than necessary by working with Sales Tax Helper, LLC today.