Texas Sales Tax Audits vs. IRS Audits: Why State Audits Are More Dangerous

Facing scrutiny from the Texas Comptroller’s Office presents substantial risks. Facing scrutiny from the Internal Revenue Service (IRS) also presents substantial risks. Facing a tax audit can be dangerous, and when facing tax-related scrutiny at the state or federal level, businesses (and their owners and executives) must ensure they are mitigating their risk effectively.

While IRS audits can be dangerous, Texas sales tax audits can be even more dangerous in some cases. Of course, the risks presented in any case will depend on the specific circumstances involved. But, in all cases, an informed and strategic defense is key, and business owners and executives cannot afford to make the mistake of assuming that a Texas sales tax audit is less risky simply because it takes place at the state level.

Understanding the Risks Involved in Facing a Texas Sales Tax Audit

Why are Texas sales tax audits so dangerous—and potentially even more dangerous than IRS audits in some cases? Here is an overview of some of the key risks involved:

The Complexities of Texas Sales Tax Compliance

Texas’ sales tax laws are complex. In fact, they are far more complex than many business owners and executives realize.

For many businesses, simply collecting 6.25 percent of the sales prices of their products will not be enough. To effectively manage compliance, businesses may also need to address other requirements. Some examples of failures that can (and frequently do) lead to trouble during Texas sales tax audits include:

• Misinterpreting Texas’ nexus laws
• Offering taxable services without collecting sales tax
• Failing to collect and remit local sales tax
• Failing to pay industry-specific taxes (i.e., hotel taxes or oil and gas taxes)
• Failing to maintain adequate documentation of sales tax compliance

These failures—among many others—can pose substantial risks for businesses targeted in Texas sales tax audits. The Texas Comptroller’s Office aggressively and comprehensively enforces compliance, and any mistakes or oversights can potentially expose businesses (and their owners and executives) to consequences beyond facing liability for the unpaid taxes that are owed.

The Consequences of Noncompliance

Noncompliance with Texas’ sales tax laws can have both immediate and lasting consequences. The Texas Comptroller’s Office has the authority to impose liability for back taxes, interest, and penalties, and noncompliance can lead to various other consequences. In Texas, an unfavorable sales tax audit can lead to:

• Back Taxes – Audited businesses can face full liability for the sales tax they owe. This is true regardless of whether they have collected sales tax from their customers.
• Interest – Interest begins to accrue 60 days after nonpayment of Texas sales tax. The Texas Comptroller’s Office charges interest at a rate equal to the prime rate plus 1. The current prime rate is 6.75 percent.
• Penalties – A five-percent penalty begins to accrue immediately upon delinquency. This increases to a 10-percent penalty after 30 days.
• Sales Tax Permit Revocation – In-state and out-of-state businesses need a sales tax permit to sell taxable goods and services to customers in Texas. The Texas Comptroller’s Office has the authority to revoke a business’s sales tax permit if warranted.
• Liens, Levies and Other Means of Enforcement – The Texas Comptroller’s Office also has the authority to enforce compliance through various means. These include liens, levies and asset seizures, among others.

These consequences can be devastating for many businesses. Even if your business is able to withstand the consequences of an unfavorable Texas sales tax audit, an unfavorable outcome could increase your business’s risk of facing additional scrutiny in the future. This can lead to additional costs (and additional risks), and this alone can make it well worth engaging experienced legal counsel to proactively engage with the Texas Comptroller’s Office and target a resolution that protects your business’s good standing going forward.

The Efficiency of the Audit Process

A key difference between Texas sales tax audits and IRS audits is the efficiency of the process. As a general rule, Texas sales tax audits proceed much more quickly than federal corporate income tax and payroll tax audits. This makes it critical to intervene promptly, and businesses targeted by the Texas Comptroller’s Office must be prepared to begin working toward a favorable resolution immediately.

This makes it important to promptly engage experienced legal counsel as well. Mistakes and oversights early in the process can prove very costly and limit businesses’ options for securing a favorable resolution. An experienced Texas sales tax lawyer should be able to intervene immediately and begin formulating and executing a defense strategy custom-tailored to the circumstances at hand.  

The Potential for Criminal Charges

Finally, in addition to the civil penalties listed above, Texas sales tax audits can lead to criminal prosecution in some cases. Specifically, state prosecutors can pursue criminal charges if an audit reveals that a business (or a business owner or executive) has either:

• Intentionally or knowingly failed to remit collected sales tax; or,
• Intentionally or knowingly falsified records required to be kept under state law.

Failure to remit collected sales tax is a first-degree felony when the amount at issue is $1,500 or more, and falsifying records in this scenario is a third-degree felony under Texas law. In many cases, businesses can face six-figure fines, while individuals can face both fines and prison time.

As you can see, Texas sales tax audits are serious matters that require an informed, strategic, and proactive defense. Engaging experienced legal counsel is the first step; and, if your business is facing scrutiny from the Texas Comptroller’s Office, we encourage you to contact us promptly to discuss how we can help.

Contact the Texas Sales Tax Lawyers at Brown PC

Is your business facing a Texas sales tax audit? If so, we can help, but it is important that you contact us promptly. To speak with one of our experienced Texas sales tax lawyers in confidence as soon as possible, call us at 888-870-0025 or request an appointment online now.