Texas Sales Tax Audit Triggers: Why the Comptroller Chose Your Business

When facing a Texas sales tax audit, understanding why can be important for building an informed defense strategy. While businesses should take a proactive approach to defending against state sales tax audits in all scenarios, if an audit is targeted—meaning that it is based on suspicion of noncompliance—this can present additional risks.

7 Potential Reasons for a Texas Sales Tax Audit

The Texas Comptroller’s Office conducts sales tax audits for several reasons. It identifies the following as “examples” of how it chooses businesses to audit:

1. Priority One Accounts

The Texas Comptroller’s Office refers to businesses that report the highest total amount of sales tax as “Priority One Accounts.” Since audits of Priority One Accounts present the greatest opportunity for recovery of substantial underpayments, the Texas Comptroller’s Office prioritizes audits of these businesses.

For businesses classified as Priority One Accounts, facing a sales tax audit does not necessarily mean that the Texas Comptroller’s Office has specific concerns about noncompliance. However, this is a possibility that these businesses should not ignore.

2. Prior Productive Accounts

The Texas Comptroller’s Office also prioritizes auditing “prior productive accounts,” which the Office defines as taxpayers whose prior audits revealed underpayments of $25,000 or more. Here too, while facing an audit based on this designation does not necessarily mean that auditors have received information or raised concerns about potential noncompliance, this is a possibility that merits investigation.

3. Computer-Based Random Selection

In addition to targeting Priority One Accounts and prior productive accounts, the Texas Comptroller’s Office also randomly selects businesses for sales tax audits in some cases. Specifically, the Office uses “[c]omputer-based random selection by specific industry.”

If a business has been randomly selected for a Texas sales tax audit, it means the audit is not based on any specific compliance-related concerns. In this scenario, businesses should work with their tax counsel to assess their sales tax compliance history to inform decisions on how best to approach the audit process.

4. Information-Sharing with Other Government Agencies

In some cases, the Texas Comptroller’s Office initiates sales tax audits based on information received from other government agencies. This includes other government agencies in Texas, as well as the Internal Revenue Service (IRS) and tax and law enforcement authorities in other states.

This can be a particularly high-risk scenario. If the Texas Comptroller’s Office has received a referral from another government agency, this means that some sort of inquiry is already underway. If a business targeted in a sales tax audit due to a referral is not aware of the preceding inquiry, it will be critical to discern the full scope of the business’s risk immediately.

5. Analysis of Tax Returns

In addition to conducting audits, the Texas Comptroller’s Office also analyzes businesses’ tax returns to assess compliance. If a review of a business’s tax returns raises red flags, this can trigger an audit focused on fully assessing the business’s reporting and payment compliance history.

Red flags in any tax return can trigger a Texas sales tax audit. They can also trigger scrutiny of businesses’ other filings. Businesses facing scrutiny from the Texas Comptroller’s Office need to have a clear and comprehensive understanding of their risk—and, if they are aware of any filing or payment deficiencies, they should work with their tax counsel to take a proactive approach to coming into compliance as safely and with as little additional liability as possible.

6. Review of Business Publications and Directories

The Texas Comptroller’s Office also conducts audits based on information uncovered in “[b]usiness publications, periodicals, journals and directories.” For example, if a publication runs a feature story about a business that sells online to Texas residents and has not paid Texas sales tax, this could trigger a high-risk audit. This highlights another important aspect of Texas sales tax audits as well: These audits do not solely target businesses that have a physical presence in Texas.

7. Leads from the Public

Finally, the Texas Comptroller’s Office acknowledges that it also conducts sales tax audits based on “[l]eads submitted . . . by the public.” This includes consumers and other taxpayers who are concerned that businesses are not paying their fair share, as well as businesses’ current and former employees. While accusations from non-tax experts are not necessarily indicative of noncompliance, if a public complaint appears valid, the Texas Comptroller’s Office will dig deeper to determine whether an audit is warranted.

Responding to a Texas Sales Tax Audit

In all cases, responding to a Texas sales tax audit requires an informed, strategic, and proactive approach. Among other steps, upon receiving a Notice of Audit from the Texas Comptroller’s Office, businesses should:

• Engage Tax Counsel Promptly – Due to the risks involved in facing scrutiny from the Texas Comptroller’s Office, businesses that are facing state sales tax audits should engage experienced tax counsel promptly.
• Preserve All Relevant Documents – Businesses that are facing Texas sales tax audits (and other tax audits) must preserve all relevant documents. Failing to do so can raise red flags and have other adverse consequences.
• Investigate the Reason for the Audit – Working with their counsel, businesses that are facing Texas sales tax audits should investigate the reason for the audit. As discussed above, this is an essential step for building an informed and comprehensive defense strategy.

After taking these steps, businesses should work with their tax counsel to formulate their audit defense strategy, and then rely on their tax counsel to communicate with the Texas Comptroller’s Office on their behalf. If your business is facing a Texas sales tax audit, we encourage you to contact us promptly for more information.

Discuss Your Business’ Texas Sales Tax Audit with a Lawyer at Brown P.C.

Our firm represents businesses in all industries in Texas sales tax audits. To discuss your business’s audit with one of our lawyers in confidence as soon as possible, call 888-870-0025 or request a confidential consultation online now.