When a Texas Sales Tax Audit Turns Criminal: Red Flags Business Owners Miss

In the vast majority of cases, Texas sales tax audits are civil inquiries that present the risk of facing monetary penalties but not the risk of incarceration. However, these inquiries can turn criminal in some cases. The Texas Comptroller’s Criminal Investigation Division (CID) investigates suspected tax evasion and tax fraud, and criminal tax charges can result in both fines and prison time under Texas law.

So, when can a Texas sales tax audit turn criminal?

The Texas Tax Code and Texas Administrative Code outline several criminal offenses related to the nonpayment and underpayment of state sales tax. The Texas Comptroller’s CID investigates all of these offenses, and state prosecutors aggressively pursue convictions when warranted.

Potential Criminal Charges Stemming from Texas Sales Tax Audits

Texas law imposes steep penalties for criminal sales tax violations. As the Texas Comptroller’s CID explains:

“Enacted in 2011 by the 82nd Legislature, SB 934 amended the Tax Code to treat tax cheats more like thieves under the law. Now, anyone who collects and intentionally does not remit sales taxes could face felony charges, depending on the amount involved.”

As the CID also explains, in addition to pursuing tax-related charges, state prosecutors can pursue money laundering and organized crime charges in various circumstances. As a result, when facing allegations of criminal sales tax evasion or sales tax fraud in Texas, it is imperative that targeted individuals and organizations defend themselves by all available means.

Here is a look at some of the tax-specific charges that state prosecutors can pursue in these cases:

Stating that Sales Tax is Not Part of the Sales Price

If a seller “directly or indirectly advertises, holds out, or states to a customer or to the public that the tax is not part of the sales price payable by the customer,” this can lead to a misdemeanor charge under Texas law that is punishable by a fine of $500 per occurrence. However, the law provides exceptions for cases in which: (i) the seller indicates that it is paying the tax due for the customer; (ii) the seller does not indicate or imply that the sale is exempt from taxation; and (iii) the purchaser’s receipt or statement separately lists the amount of tax due.

Making False Entries or Failing to Keep Records

Businesses and individuals who knowingly or intentionally make false entries or fail to keep records required under the Texas Tax Code can be charged with a third-degree felony. Businesses and individuals can also face third-degree felony charges for knowingly or intentionally concealing or destroying any records they are required to keep by law. In Texas, third-degree felonies carry up to a $10,000 fine and 10 years of prison time (with a minimum prison sentence of two years).

Resale Certificate Fraud

Texas law prohibits numerous forms of fraud related to the issuance and reliance on resale certificates to evade state sales tax liability. State prosecutors can pursue criminal charges against any business owner or other individual who:

• “[I]ntentionally or knowingly makes a false entry in, or a fraudulent alteration of, an exemption or resale certificate,”
• “[M]akes, presents, or uses an exemption or resale certificate with knowledge that it is false and with intent that the certificate be accepted as valid;” or,
• “[I]ntentionally conceals, removes, or impairs the verity or legibility of an exemption or resale certificate.”

The specific charges for resale certificate fraud are determined based on the amount of sales tax involved:

• Class C Misdemeanor: Less than $20 in sales tax avoided.
• Class B Misdemeanor: $20 to $199 in sales tax avoided.
• Class A Misdemeanor: $200 to $749 in sales tax avoided.
• Third-Degree Felony: $750 to $19,999 in sales tax avoided.
• Second-Degree Felony: $20,000 or more in sales tax avoided.

While Class C misdemeanors carry a fine of $500, all other offenses listed above carry both fines and jail or prison time. When charged with second-degree felony offenses, business owners and other individuals can face up to a $10,000 fine and 20 years in prison (with a minimum prison sentence of two years).

Failure to Pay Sales Tax Collected

Intentionally or knowingly failing to pay sales tax that a business has collected from purchasers is also a criminal offense under Texas law. Similar to resale certificate fraud, specific charges in these cases also vary depending on the amount of sales tax involved:

• Class C Misdemeanor: Less than $50 in sales tax collected but not paid.
• Class B Misdemeanor: $50 to $499 in sales tax collected but not paid.
• Class A Misdemeanor: $500 to $1,499 in sales tax collected but not paid.
• State Jail Felony: $1,500 to $19,999 in sales tax collected but not paid.
• Third-Degree Felony: $20,000 to $99,999 in sales tax collected but not paid.
• Second-Degree Felony: $100,000 to $199,999 in sales tax collected but not paid.
• First-Degree Felony: $200,000 or more in sales tax collected but not paid.

In cases involving $200,000 or more in sales tax collected but not paid, first-degree felony charges carry a maximum sentence of a $10,000 fine and life imprisonment. In all cases, state authorities can pursue levies, seizures, and other penal measures.

Failure to Produce or Allow Inspection of Records During a Sales Tax Audit

Failing to produce or allow the inspection of any records that businesses are required to keep under the Texas Tax Code is prosecutable as a Class C misdemeanor. This includes records that businesses are required to disclose during a Texas sales tax audit. Under Texas law, “[a] separate offense is committed each day the person fails to allow inspection of records or fails to produce records.”

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

While these are all examples of criminal charges that can result from a sales tax audit in Texas, this list is not exhaustive. If you need more information, we encourage you to contact us promptly. To speak with an experienced Texas sales tax lawyer in confidence as soon as possible, call 888-870-0025 or request an appointment online now.