What to Expect With a Texas Sales Tax Audit
An audit is when a tax agency asks you to verify the information on your tax return. For example, a sales tax audit is when the state asks for more information about your sales tax returns. This is often a drawn-out and complicated process, but with well-organized records, you can sometimes get through audits relatively painlessly.
This guide explains what to expect if you're facing a Texas sales tax audit. It also answers common questions about the audit process, audit penalties, and more. To get help now, use TaxCure to search for a tax pro based in Texas who has experience dealing with sales tax audits.
Why Does the Comptroller Audit Sales Tax Returns?
According to the Office of the Comptroller's website, Texas sales tax audits help to reduce tax evasion and ensure the state's laws are uniformly applied. Audits also help to promote compliance — in other words, when taxpayers know there's a risk of an audit, they're more likely to file honest returns.
The state website also claims audits are educational. It says auditors can help business owners find bookkeeping mistakes. This may be the intent of the state revenue agency. Most auditors don't have the time to help you fix your bookkeeping records.
Remember, auditors work for the state. To get through the process, you should have someone in your corner who is focused on your best interests.
How Does Texas Select Businesses for Sales Tax Audits?
The Texas Office of the Comptroller selects some businesses randomly. Typically, it selects a sample of businesses from different industries to audit. Among the most popular businesses subject to audit are restaurants that serve alcohol. One reason for this is that the sales tax rules for these businesses have an added layer of complexity due to the high volume of cash sales and additional taxes on the sale of alcohol.
The state also selects audit targets based on information from other state revenue agencies, tax returns, and business periodicals. It may also follow up on tax evasion leads submitted by concerned members of the public.
Aside from restaurants, the state is most likely to audit the following: 1) businesses that owed over $25,000 in previous sales tax audits and 2) the businesses that report the highest amount of sales tax on their returns.
What Happens During a Sales Tax Audit?
During a sales tax audit, you provide the Comptroller's Office with information about your sales tax return. The auditor reviews the information and decides whether to change your return or accept it as filed. Here's a breakdown of the process.
-
Audit Notice
The Texas Comptroller's Office will send you a notice of audit with a questionnaire. Once you fill out the questionnaire, the auditor will schedule a conference with you. If you don't respond to the first questionnaire, the auditor will send another copy, and they will probably call you on the phone.
-
Getting Ready for the Audit
To prepare for the audit, the auditor will review your sales tax returns and details from any previous audits. They will also outline the objectives of the audit. During the auditor's first conversation with you, they will ask questions about your business and determine the documents you need for the audit. Then, they'll schedule a follow-up appointment to start the audit.
-
Examination of Records — Fieldwork
The auditor will look at all of your sales records, or they may just take a sample. They should explain the process to you and let you know what records they need to see. After they have reviewed your records, they will let you know if you have over- or underpaid the sales tax. Then, if you disagree, you have a limited amount of time to provide more documents to support your argument.
-
Exit Conference
After the auditor has reviewed all of the records you have provided, they will let you know if any tax has been assessed against you. They will also talk with you about penalties and interest. If you disagree, you can request a reconciliation conference or an audit review. If you agree, you should pay the tax or request a refund of overpayments.
-
Reconciliation and Reviews
During a reconciliation conference, you get to meet with a supervisor or manager to talk about your concerns. If you can't resolve the issue at the conference, you can request an Independent Audit Review (IAR) Conference with an independent third party. You don't have the right to request an IAR if you haven't been cooperative about providing records during the audit.
-
Finalization
After the reconciliation or IAR conference, the auditor will make a final determination. Then, their manager will review the final report and send the audit results to the taxpayer.
-
Contesting Disagreed Audits
If you still disagree with the results of the audit, you can dispute the results. However, you must make your request by the deadline printed on the audit notice. If you miss the deadline, you can still contest the results, but you must pay the assessment and request a refund.
How Far Back Can a Texas Sales Tax Audit Go?
Generally, the state only goes back four years. However, the auditor can go back further if they suspect fraud or if the business wasn't permitted.
Penalties for Texas Sales Tax Audits
If the Comptroller assesses taxes against you, there will be a penalty of 10% of the tax. If you don't pay by the due date, you will incur an additional 10% penalty. Typically, the due date is 70 days after the final notice. The taxes are formally assessed 60 days after the notice and due 10 days later.
The auditor will automatically consider a penalty waiver on your account. They will let you know if they have waived the penalties when they send you the final report. Generally, they're only willing to remove penalties when the audited return was filed on time.
Interest on Sales Tax Audit Assessments
Interest accrues on the assessed balance starting 61 days after the tax was originally due. Here's an example. Imagine that you file a sales tax return due on June 21, 2021. Then, the state selects your return for an audit, and in August 2023, it determines that you underpaid sales tax by $5,000.
At that point, the state will backdate the interest to August 21, 2021 — that is 61 days after the original due date. The interest will continue to accrue until you pay the tax liability and penalties in full.
What Does a Sales Tax Audit Cover?
A sales tax audit can involve the following issues:
- Texas nexus — Businesses that have nexus in Texas must file and pay sales tax reports. If you have not been filing sales tax in Texas and the Comptroller's Office believes that you should be, they may contact you about an audit and start with a nexus determination.
- Sales records — To ensure you completed the sales tax returns accurately, the auditor will want to look at your sales records. They will look at your point of sales records, but beyond that, they will look at your other accounting records to look for signs of unreported taxable sales.
- Sales Reporting Categories — The auditor will want to see your total sales and taxable sales. They will also want to know which sales were subject to state, county, or local sales taxes.
- Reporting method — The auditor will look at the process you use when you fill out your sales tax returns. In particular, they will pay attention to changes in reporting methods or amounts being reported.
- Internal controls — The auditor will also look at your internal controls. They will ensure that your workflows aren't likely to create errors on your sales tax returns.
When the auditor contacts you to set up the audit, they should outline the type of issues they're going to cover and the documents you need to provide.
Managed Sales Tax Audits
A managed sales tax audit is when you audit your own books. Rather than meeting with you for a field audit, the auditor will tell you what documents you need to provide. Then, you will find the requested information and provide it to the state. The Texas Comptroller allows eligible taxpayers to opt for Managed Sales Audits of most of the state's taxes. Check out our guide to managed audits in Texas to learn about the benefits and requirements.
FAQs About Texas Sales Tax Audits
Have more questions about the audit process? Want to know what happens if the state assesses a tax against you after an audit? Here are answers to some frequently asked questions.
How Long Should Businesses Keep Sales Tax Records?
You must keep sales tax records for four years after filing a return.
What Records Do You Need for a Sales Tax Audit?
The exact records vary based on how you record sales for your business. Here are some of the records you may need:
- Sales invoices
- Resale and exemption certificates
- General ledgers and sales journals
- Chart of accounts
- Federal income tax returns
- Bank statements
- Accounting reports used to prepare sales tax returns
- Documentation supporting overpaid taxes
What If You Get Selected for an Audit and Don't Have Records?
You will need to recreate your records. This can be very complicated, and you may need to work with a forensic accountant.
Are Audits Public Records?
In Texas, there is a public record of the companies undergoing sales tax audits. Some tax debt resolution companies search these records and then try to sell their services to people undergoing audits.
Some of these tax debt resolution companies can be spammy. They may pretend to look like they are from the state. This is a cheap marketing tactic. Ideally, you should look for a tax pro with experience dealing with the state of Texas.
Get Help With a Texas Sales Tax Audit
If you're facing a sales tax audit, you should reach out to a tax pro who has experience with Texas taxes in particular. If you have an accountant or a bookkeeper, they may be able to help you through the audit process — especially if you have well-organized records and you filed your sales tax returns on time.
However, if you don't have an accountant, you should reach out for help. You may also need a specialist if there are complicated factors such as missing records, disputes about state nexus, or disagreements about the results of the audit.
Use TaxCure to look for a local tax professional. You can narrow down your search results to only look for tax pros based in Texas. Then, you can filter those results to find someone with audit experience. This is much more effective than hiring a big company that doesn't have experience in your state. Don't wait. Get help today.