Received a Texas Sales Tax Audit Notice? What Happens Next—and What Mistakes to Avoid

If your business is facing a Texas sales tax audit, avoiding unnecessary liability will require an informed, strategic, and proactive defense. The Texas Comptroller’s Office aggressively targets sales tax underpayments, and, when in doubt, the state’s auditors err on the side of assuming noncompliance.

Building an informed, strategic, and proactive defense starts with knowing what to expect during the process.

A Texas sales tax audit is a multi-step process that presents both risks and opportunities at every stage. When facing these audits, businesses must work with their tax counsel to ensure they are protecting themselves effectively—and preserving their ability to file an appeal if necessary.

What Happens After You Receive a Texas Sales Tax Audit Notice

Businesses that receive a Texas sales tax audit notice have a duty to respond. The Texas Comptroller’s Office makes this clear, stating, “liability may be incurred if there is no contact,” in response to a Notice of Audit.

Once the Texas Comptroller’s Office has issued a Notice of Audit, the steps in the audit process include:

Completion and Submission of the Audit Questionnaire

Upon receiving a Notice of Audit from the Texas Comptroller’s Office, the recipient of the notice is required to complete an Audit Questionnaire (Form 00-750). This is a one-page form that mostly requests information about the business and its point of contact, though it also requests:

• Confirmation of whether the business has received a state tax refund in the past four years;
• A “detailed explanation” of any reorganizations, mergers, or name changes within the past seven years; and,
• The locations where the business’ financial records will “be made available for examination.”

Businesses must accurately complete and submit their Audit Questionnaire on time to avoid immediate liability. Upon receiving a business’s completed Audit Questionnaire, an auditor will schedule an entrance conference with the business’s designated point of contact.

Pre-Audit Research and Review

After initiating the sales tax audit process, the auditor will “become familiar with the taxpayer’s account by reviewing reporting history and any prior audits that may have been conducted on the business.” While this is taking place behind the scenes at the Texas Comptroller’s Office, the business should undertake its own audit preparations.

Preparing for a Texas sales tax audit begins with locating and preserving all relevant records. The appropriate internal personnel should then work with the business’s tax counsel to review these records and assess the business’s sales tax compliance record. At this stage, the focus should be on conducting a comprehensive and unbiased assessment, as this will inform the business’s next steps during the audit process.

Entrance Conference

Following these preliminary steps, the auditor will schedule an audit conference. At this stage, the auditor will also inform the business of the records that it is required to make available for review. While the stated purpose of the entrance conference is to, “design a cost-efficient audit plan,” a Texas sales tax audit can be an invasive and resource-intensive process, and it can present substantial risks if the business is not prepared to defend itself effectively.

The Sales Tax Audit Begins

At this stage, the sales tax audit begins in earnest. The auditor will examine the taxpayer’s audits in the field—either in their entirety or through sampling. In either scenario, it is imperative for the business to play a direct role in the process. While businesses are afforded “a reasonable amount of time to obtain more information to dispute any proposed scheduled adjustments,” and can file an appeal if necessary, businesses will want to avoid the need to take these additional steps if possible.

5 Mistakes to Avoid When Facing a Texas Sales Tax Audit

When facing a Texas sales tax audit, businesses must be careful to avoid several potentially costly mistakes. Here are five examples of mistakes to avoid:

Mistake #1: Ignoring the Notice of Audit

The first—and, in many respects, most serious—mistake businesses need to avoid is simply ignoring the Notice of Audit. To protect themselves, businesses need to actively participate in the Texas sales tax audit process. Businesses must submit their Audit Questionnaires on time and promptly begin preparing their audit defense strategies.

Mistake #2: Failing to Locate and Preserve All Relevant Documents

Businesses are required to provide auditors with access to relevant documents during the audit process, and failing to preserve them can raise red flags. To ensure that they meet their legal obligations, businesses should engage experienced tax counsel to assist with locating and preserving all relevant documents.

Mistake #3: Failing to Conduct a Comprehensive Risk Assessment

Businesses that are facing Texas sales tax audits need to know whether auditors are likely to uncover evidence of underpayments. If they are, this is a factor businesses need to consider when building their audit defense strategies. If they are not, businesses need to be prepared to dispute any misguided findings during the audit process.

Mistake #4: Allowing Auditors to Do Their Work Unchecked

Mistakes during Texas sales tax audits are not uncommon, and, as noted above, auditors will generally err on the side of assuming noncompliance. As a result, businesses cannot afford to allow auditors to do their work unchecked.

Mistake #5: Failing to Document Errors and Other Grounds for Appeal

Along with proactively addressing errors during the audit process, businesses targeted in Texas sales tax audits should also document any errors and any other grounds for appeal. If a sales tax audit results in an unwarranted determination of liability, this documentation will be critical for challenging the audit’s outcome in subsequent stages of the process.

Contact the Texas Sales Tax Audit Lawyers at Brown Tax, P.C.

If your business is facing a sales tax audit in Texas, we encourage you to contact us for more information. Call 888-870-0025 or contact us online to request an appointment with a Texas sales tax audit lawyer at Brown Tax, P.C.