Texas Managed Audits: What to Expect

The Texas Comptroller allows some businesses to complete state tax audits using their own tax pro or representative. If you receive an Audit Notification Letter, you have 60 days to request a managed audit. A Managed Audit is when you or your representative complete the audit, and an auditor from the Comptroller's office oversees and monitors your progress. 

The purpose of a managed audit is to save time for the Texas Comptroller's office and to help taxpayers avoid interest and penalties. To help you decide if a managed audit is the right option for your business, this guide explains the timeline and what to expect during the process. To get help now, use TaxCure to search for a tax pro based in Texas who understands Texas's unique tax rules and can guide you through the managed audit process. 

Benefits of a Managed Audit

Managed audits put you in control of the audit process. Additionally, if your managed audit shows that you owe additional tax, the Comptroller will not assess penalties unless fraud or evasion is involved. They may also waive all or part of the interest related to the underpayment. 

However, if you did not remit taxes that you collected from other parties, you will not qualify for the waivers. For example, if you collected sales tax from your customers but didn't pay it, you don't qualify for interest and penalty waivers on those amounts.

If you discover any overpayments during the managed audit, you can request a refund, but you must do so within the audit period. Once the audit is complete, you cannot request a refund related to that tax period. Arguably, your own tax pro will be more likely to discover overpayments than if you let an auditor for the state handle the process. 

With a managed audit, you can dispute the audit results if applicable. You have the same appeal rights as you do with any other audit. 

Do You Qualify for a Managed Audit?

The Texas Comptroller will not approve your managed audit request if fieldwork has already started on your audit. Your request will also be denied if a previous audit took 80 hours or less, but if your last audit took more than 120 hours, the Comptroller is likely to approve your request. The Comptroller's website does not specify what is likely to happen if your previous audit took between 80 and 120 hours. 

If you've never been audited by the State of Texas before, you need to convince the auditor that a managed audit will save time for the state and that you can do a good job in a timely fashion. Hiring a tax pro based in Texas helps to ensure that you can qualify to use this process.

When determining whether or not to approve your request for a managed audit, the Comptroller also takes the following into account:

• Texas tax knowledge. The person performing the managed audit should understand Texas's tax code. 
• The taxpayer's history of compliance. You must be up to date with your filing and payment obligations, and you shouldn't have a history of filing too many estimated returns.
• The taxpayer's resources to perform the audit efficiently. If this is your first managed audit, you will need to establish why you can do a more efficient job than the Comptroller of Public Accounts.
• Former audit settlement agreements. If applicable, your prior audit was not completed with a settlement agreement.
• The availability of records. You must be willing to show your records to the Audit Division.
• Taxpayer's ability to pay a tax assessment. You can't qualify for a managed audit if you're in bankruptcy. If you file bankruptcy during the managed audit, the department will withdraw your agreement. 
• Permits for the audit periods. The taxpayer must have had permits for the taxes covered by the managed audit agreement for the entire audit period. For example, if you're facing a restaurant sales tax audit, you can only qualify for a managed audit if your restaurant had a sales tax permit during the periods under audit. 

Finally, you generally must agree to include all reporting categories in the managed audit. Although the law allows you to do a managed audit on just a single reporting category, the Audit Division's policy is to deny requests that don't include all of the reporting categories. For example, if you request to do a managed audit on your sales of taxable items but not on purchases made under direct payment permits, the Comptroller will likely deny your request for a managed audit.

Timeline for a Managed Audit

First, you will receive a Notification for Audit in the mail. You have 60 days to respond and request a managed audit, and if you don't, the state will continue with the traditional audit process. 

The Audit Division will schedule an entrance conference where you and/or your rep meet with the auditor to talk about how the audit will be conducted. The auditor may also request additional meetings at your place of business to learn more about its operational and accounting methods. 

After that, you have 45 days to submit electronic data that will be used to sample the data covered in the audit. If you need more than 45 days to submit your electronic data, you can request an extension, but you must explain the extenuating circumstances.

If the state auditor believes the data seems reliable, they will send you a managed audit agreement, and you have 10 days to return it. Your tax pro cannot sign the managed audit agreement. The business owner, corporate officer, or corporate director must sign the agreement. 

The agreement will outline the audit plan including the procedures that will be used and the reporting areas covered. It will also include an audit timeline as well as prescribed audit activities and their expected completion date. You also must sign a statute waiver to extend the audit statute 90 days after the completion date in the timeline.

During the audit, you must stick to the established timeline. If you fall behind schedule, you may incur more interest, and in a worst-case scenario, the auditor may rescind your managed audit agreement. 

Selecting Samples for the Managed Audit

The taxpayer and auditor will analyze the data samples together, but the managed audit contract requires the Comptroller to select the sample. This process involves identifying the population to be sampled, identifying the accounts of interest, verifying the population bases, and ensuring that selection and analysis are within the Comptroller's guidelines. 

Managed Audit Schedules

The Comptroller will also specify the format for your audit schedules. Generally, you must submit information in a spreadsheet. The auditor will review the schedules, and return them if you have an error rate over 25%.

 If you don't correct the schedules or if your second set of schedules also has an error rate over 25%, the auditor will deny the interest waiver. If a third review shows an error rate over 25%, you will not be allowed to complete the managed audit.

Delays and Extensions

If you don't meet the timelines and objectives outlined in your Managed Audit Agreement, the Audit Division will send you a letter outlining the delays and giving you 30 days to improve progress. If you don't improve, the Comptroller may rescind your agreement. 

If you need more time, be proactive and make an extension request at least 30 days before the scheduled completion date. The audit office manager will generally approve your request if you've been making reasonable time on the audit. Typically, they extend the deadline by 20% of the original time allotted. 

For example, if your audit timeline is 100 days, you will get an extra 20 days. If you cannot complete the process by the extended deadline, the interest waivers will stop on the extended deadline. For example, if you request to have the deadline extended to June 1 but you don't complete the audit until after that date, interest will start accruing on the underpaid balance on June 1st. 

You may qualify for additional extensions as needed as long as you're making progress, but if that happens, you will likely lose the interest waiver for the entire audit period. However, if the Comptroller causes a delay, you should get extra time added to your extension without any effect on your interest waiver. 

FAQs About Texas's Managed Audit Process

How long does a managed audit take?

The length of a managed audit varies based on the complexity of the business and the records involved. The Texas Comptroller says that you can estimate the timeline by multiplying the length of the previous audit by 1.4 and then dividing by 140 to determine the number of months for completion. 

Ie, if you multiply the length of the previous audit by 0.01, you will get the approximate number of months that you can expect to spend on the audit. In other words, if your last audit took 200 hours, this audit will likely take 2 months. 

What are the steps of a managed audit in Texas?

Here is an overview of the managed audit process:

1. Receive an Audit Notification from the Texas Comptroller.
2. Request a managed audit within 60 days of receiving the notice.
3. Meet with the auditor to talk about the audit process. 
4. Provide sampling data to the auditor. 
5. If sampling data is approved, sign the managed audit agreement.
6. Complete the audit based on the established timeline.
7. Request extensions to the timeline if needed. 
8. Receive the audit results from the state.
9. Appeal the results if you disagree. 

What if the managed audit leads to an unexpected tax bill?

If you owe taxes after the audit that you can't afford to pay in full, you can request a payment plan from the Comptroller's office. If you incurred penalties, consider asking for penalty abatement. 

If the audit leads to a tax bill, when does interest start accruing?

Generally, you will get an interest waiver on tax that is assessed due to the audit. However, interest will start accruing on the balance due 30 to 60 days after billing. The Comptroller's website cites 30 days in one place and 60 days on another page. If you pay the bill right away and you meet other requirements for the interest waivers, you may not have to pay any interest on your balance due. 

Get Help With a Managed Audit

A managed audit allows you to have your own tax pro handle the state tax audit. It also lets you avoid interest and penalties. To get help navigating this process, you need a Texas tax pro with audit experience. Use TaxCure to search for tax attorneys, CPAs, and enrolled agents based in Texas and narrow down the results to find people who have audit experience in particular.