Can a Texas Sales Tax Audit Be Expanded After It Starts?

Successfully defending against a Texas sales tax audit can be a substantial undertaking. The time, effort, and resources involved can become even more substantial if the Texas Comptroller’s Office expands the scope of the audit after it starts.

This is a very real possibility, and it can happen for multiple reasons and in multiple ways.

With this in mind, when preparing for a Texas sales tax audit, it is important to consider all potential risks. If an examination of the business’ general ledger, sales invoices and other financial records is likely to raise questions about compliance—whether related to sales tax or otherwise—the business will need to be prepared to defend against all potential allegations in order to avoid unnecessary liability.

5 Ways a Texas Sales Tax Audit Can Lead to Additional Scrutiny

When does a Texas sales tax audit present risks beyond its original scope? Here are five ways a state and local sales tax audit in Texas can lead to additional scrutiny:

1. Sampling Reveals Broader Concerns About Sales Tax Noncompliance

In many cases, auditors use sampling to determine whether further scrutiny may be warranted. Sampling involves examining a subset of a business’ sales tax records in order to project the business’ overall sales tax liability.

Sampling presents multiple risks for businesses targeted in Texas sales tax audits. For one, sampling can be an unreliable way to assess a business’ overall sales tax liability for a variety of reasons—including seasonal sales patterns, recent growth in sales and other similar types of issues. For another, if sampling suggests broader concerns about sales tax noncompliance, it can lead to further scrutiny of the business’ records for the entire four-year audit window.

2. Auditors Decide to Go Further Back in the business’ Sales Tax History

Even if auditors don’t rely on sampling, if they begin by examining a business’ most recent sales tax filings, concerns about compliance could still lead to further scrutiny. While auditors may signal that they are only going to look at the business’ recent filings initially, this is not a guarantee, and auditors working for the Texas Comptroller’s Office will not hesitate to dig deeper if doing so appears to be warranted.

3. The Audit Uncovers a “Gross Error”

If a Texas sales tax audit uncovers a “gross error,” not only can this lead to substantial liability for back taxes, interest and penalties, but it can also expand the scope of an audit significantly. This is because enforcement in cases involving “gross errors” is not restricted by the four-year statute of limitations that typically applies.

As a result, if auditors uncover a “gross error,” they may examine the business’ historical sales tax filings for evidence of other “gross errors” as well. Under Section 3.339(a)(2)(c) of the Public Finance Title of the Texas Administrative Code, a “gross error” is defined as an error where “the amount of tax due and payable, after the correction of the error, exceeds the amount of tax reported on the return by at least 25%.”

4. The Audit Uncovers Possible Evidence of Sales Tax Evasion or Fraud

Tax evasion and tax fraud are criminal offenses that can expose businesses, their owners and executives, and other individuals to substantial penalties. If a Texas sales tax audit uncovers possible evidence of tax evasion or tax fraud, this could trigger a criminal investigation.

While criminal tax fraud and tax evasion cases can be extremely complex—especially in cases involving allegations of large-scale or widespread corporate tax crimes—generally speaking, businesses and individuals can face criminal exposure in cases involving allegations of knowing, willful, or intentional noncompliance. For example, if a Texas sales tax audit reveals evidence that a business has altered its sales records in order to avoid paying sales tax, this is a scenario in which a criminal investigation could quickly follow.

5. Issues Unrelated to Sales Tax Come to Light During the Audit

Another way that a Texas sales tax audit can expand after it starts is if issues unrelated to sales tax come to light during the audit process. When conducting sales tax audits, auditors will generally request broad access to the audit target’s financial records. While auditors will be primarily focused on identifying sales tax deficiencies, if an audit target’s financial records raise other compliance concerns, auditors are not restricted to evaluating sales tax compliance.

How Businesses Can Mitigate Their Risk of Facing an Expanded Audit (or an Investigation)

Due to these concerns (among others), businesses that are facing sales tax audits in Texas need to take a comprehensive approach to managing their potential exposure. This involves taking steps, including (but not limited to):

• Assessing the Business’ Risk Before Auditors Allege Noncompliance – Businesses that are facing Texas sales tax audits should work with their tax counsel to conduct a comprehensive and unbiased assessment of their potential risk exposure.
• Proactively Addressing Any Sales Tax Compliance Failures – If this assessment uncovers any sales tax compliance failures (or any other tax compliance failures), the immediate focus should shift to proactively addressing these failures so that they are not “discovered” during the audit process.
• Developing a Strategic Plan for Responding to the Audit and Any Additional Scrutiny – In all cases, businesses that are facing Texas sales tax audits should work with their tax counsel to develop a strategic plan for responding to all potential inquiries—whether during the audit itself or in a subsequent governmental inquiry.  

Learn More from the Texas State Tax Controversy Lawyers at Brown P.C.

At Brown P.C., we represent businesses of all sizes and across all industries facing Texas sales tax audits. If your business has received a Notice of Audit from the Texas Comptroller’s Office, we encourage you to contact us promptly for more information. To request a confidential consultation with an experienced Texas state tax controversy lawyer at our firm, please call 888-870-0025 or tell us how we can get in touch online today.