What to Expect, What to Do and What Not to Do During a Texas Sales Tax Audit

Texas sales tax audits can pose substantial risks for targeted businesses. Knowing what to expect is critical, and business owners and executives need to know what to do (and what not to do) to avoid unnecessary liability. By engaging an experienced Texas business tax attorney early in the process, business owners and executives can make informed, strategic decisions in light of the risks at hand.

Since Texas doesn’t have a state income tax, the state relies heavily on sales tax revenue. To ensure that businesses are paying what they owe, the Texas Comptroller’s Office conducts audits on a regular basis—and these audits can pose substantial risks for businesses that are not in compliance with the state’s tax laws.  

If your business is facing a Texas sales tax audit, it’s critical to be prepared. Start by knowing what to expect during the process.  

What Happens During a Texas Sales Tax Audit?

A Texas sales tax audit begins with the issuance of an Audit Questionnaire (Form 00-750). Businesses under audit must complete the questionnaire and schedule an entrance conference with their assigned auditor. This is mandatory, and, as the Texas Comptroller’s Office states, “liability may be incurred if there is no contact.”

After receiving the business’ completed questionnaire, the auditor will review the business’s filing history and any prior interactions with the Comptroller’s Office. Next is the entrance conference, followed by an examination of the business’s books and records. During this examination, the auditor may review the business’ sales tax history in its entirety, or rely on sampling. While sampling is common, it poses several potential issues that can lead to flawed determinations of businesses’ liability.

After completing the examination, the auditor will schedule an exit conference, and the business may request a reconciliation conference or an independent audit review (IAR) conference if it disputes the auditor’s findings. The auditor will then issue a final report, and the business can initiate the appeals process if necessary.

What Should Business Owners and Executives Do During the Audit Process?

During a Texas sales tax audit, informed and strategic decision-making is key. This applies throughout the process—from completing the Audit Questionnaire to deciding whether to request a reconciliation conference or IAR conference after the auditor’s examination. Business owners and executives also need to ensure they meet their disclosure obligations without unnecessarily providing internal records to the Texas Comptroller’s Office. Businesses should implement a legal hold at the outset, and business owners and executives should work with legal counsel to protect the business’ interests every step of the way.

What Should Business Owners and Executives Avoid Doing During the Audit Process?

While there are several mistakes to avoid during a Texas sales tax audit, one key mistake is assuming the business’ sales tax liability. Effectively defending against an audit requires a clear understanding of the business’ state tax obligations and its outstanding payment obligations (if any). Assumptions can lead to uninformed decisions and potentially to adverse consequences that could (and should) have been avoided.

FAQs: Defending Against a Texas Sales Tax Audit

Why has my business been selected for a Texas sales tax audit?

The Texas Comptroller’s Office selects audit targets through various means. If your business is being audited, it may have been selected randomly. However, it may also be selected because of its sales volume, prior audit history, or apparent discrepancies in its sales tax reporting.

What are the potential consequences of a Texas sales tax audit?

Broadly, a Texas sales tax audit can have two outcomes: (i) it can confirm the business’ compliance with the state’s tax laws; or (ii) it can lead to a determination of noncompliance and the imposition of additional liability. If an auditor from the Texas Comptroller’s Office determines that a business has underpaid its sales tax liability, the Comptroller’s Office can seek to recover back taxes plus interest and penalties.

Will auditors come to our offices during a Texas sales tax audit?

Auditors may come to your business’ offices during the fieldwork stage of the audit process. If auditors plan to examine your business’ books and records in person, ensure you have policies and procedures in place to prevent unnecessary access and document the auditors’ on-site activities.

How We Help Businesses During Texas Sales Tax Audits

Brown PC represents in-state and out-of-state businesses during Texas sales tax audits. If your business is facing an audit, we can help make sure you are fully prepared. We can also represent your business during the audit and provide post-audit representation if needed.

Our services for businesses that are facing Texas sales tax audits include:

• Pre-Audit Preparation – This includes implementing a legal hold, responding to the Audit Questionnaire, assessing the business’ risk, and developing a tailored defense strategy
• Direct Communication – Our firm will communicate directly with the Texas Comptroller’s Office, ensuring that no one on your team says anything that could jeopardize the process.
• Advice and Consultation – We will advise you throughout the audit process and help you make informed and strategic decisions every step of the way.
• Defense Representation – We will oversee the audit process and work to steer it toward a favorable resolution that protects your business now and going forward.
• Post–Audit Assistance – If necessary, we can help challenge the audit outcome. We can also help implement effective sales tax compliance policies and procedures.

Request a Confidential Consultation with Texas Business Tax Attorney Lawrence Brown

If you need to know more about defending against a Texas sales tax audit, we invite you to get in touch. Please call 888-870-0025 or contact us online to request a confidential consultation with Texas business tax attorney Lawrence Brown.