Why CPAs Struggle With Texas Sales Tax Audits (and Why You Need a Tax Attorney)

Businesses of all types can (and should) rely on a certified public accountant (CPA) to help them maintain their books and records and file their quarterly and annual returns. Many CPAs are extremely good at what they do, and they are meticulous about ensuring that their clients keep accurate financial records and check all the right boxes.

But for businesses facing Texas state sales tax audits, working with an experienced tax attorney is essential.

This is not to cast aspersions on CPAs. Rather, it is simply an acknowledgment of the different roles that CPAs and tax attorneys play in helping businesses protect their interests. Just as hiring a tax attorney isn’t the right approach when it comes to addressing a business’s accounting needs, hiring a CPA isn’t the right approach when a business needs legal representation.

The Importance of Legal Representation During a Texas Sales Tax Audit

Since Texas does not have a state income tax (though it does have a corporate franchise tax), sales tax is a key source of state revenue. As a result, the Texas Comptroller’s Office strictly enforces state sales tax compliance, and audits are its primary means of determining when enforcement action is warranted.

Businesses that are facing Texas sales tax audits need to engage experienced defense counsel promptly. Here are just some of the reasons why:

1. Texas Sales Tax Audits Are Complex

Texas’ sales tax laws are exceedingly complex, which means Texas sales tax audits are as well. Beyond the complexity of Texas’ sales tax laws themselves, the methodologies that auditors use to assess compliance add further complexity—and it is not unusual for flawed auditing practices to lead to flawed conclusions.

As a result, during a Texas sales tax audit, a business’s tax attorney will generally need to:

• Proactively assess the business’ sales tax compliance record in order to determine its potential liability exposure;
• Assist with locating and preserving the records the business will need to have available during the audit;
• Play an active role in the audit process to help prevent overreach and ensure that auditors correctly interpret and apply the law;
• Challenge flawed assumptions about the business’s operations or tax compliance obligations and address other issues that have the potential to result in an unwarranted outcome;
• Steer the audit toward a favorable resolution, whether this means avoiding additional liability entirely or targeting a settlement that mitigates the consequences of past noncompliance.

Not only will CPAs generally be ill-equipped to assist with these matters (again, this is simply because this is not part of their education or professional practice), but providing representation during a Texas sales tax audit also constitutes the practice of law. CPAs cannot engage in the unauthorized practice of law; and, as a result, most seasoned CPAs will recommend that their business clients engage legal counsel to represent them during the audit process.

2. Texas Sales Tax Audits Are High-Risk

Not only are Texas sales tax audits complex, but they are also high-risk. In addition to back tax liability, businesses targeted in these audits may also face interest and penalty liabilities. Interest begins to accrue 61 days after the due date, and a 10-percent penalty applies to Texas state sales tax that is more than 30 days past due.

In certain circumstances, Texas sales tax audits can also pose risks for criminal prosecution. If businesses (or their owners, executives, or other personnel) are accused of knowingly or intentionally failing to remit sales tax collected, they can face substantial fines and prison time. Facing scrutiny from the Texas Comptroller’s Office can lead to the loss of state licenses and other significant adverse consequences.

3. Businesses May Need to Point to Errors Made By Their CPAs

Another reason why businesses should engage legal counsel when facing a Texas sales tax audit is that they may need to point to errors made by their CPAs. If a business relied in good faith on the advice it received from a CPA regarding state sales tax compliance, this could significantly mitigate its risk exposure. This applies across the board—from advice regarding nexus (and whether a business is required to collect and remit sales tax at all) to advice regarding the applicability of specific tax rates and exemptions.

4. There Are Various Options for Seeking a Favorable Resolution

When facing a Texas sales tax audit, there are various options for seeking a favorable resolution. A tax attorney with extensive experience representing businesses during these audits will be familiar with the available options and can provide advice tailored to the circumstances at hand. As noted above, depending on the circumstances, these options may range from targeting a settlement with the Texas Comptroller’s Office to using the business’s on-hand financial records and compliance documentation to avoid additional liability entirely.

5. It May Be Necessary to File an Appeal

In the event that a Texas sales tax audit leads to an unmeritorious determination of liability, it may be necessary to file an appeal. There are procedures for appealing the outcome of a Texas sales tax audit both administratively and in the Texas state courts. These, too, are formal legal procedures that require experienced legal representation.

Appeals can involve a variety of complex issues—including both substantive issues related to a business’s sales tax liability and procedural issues related to the audit process itself. An experienced Texas sales tax attorney will be familiar with all pertinent issues and will be able to take the necessary steps to file and prosecute an appeal in a timely manner.

Schedule a Call with a Texas Sales Tax Attorney at Brown PC

The Texas sales tax attorneys at Brown PC provide experienced legal representation for state sales tax audits statewide. If your business is facing an audit related to its state sales tax liability, you can call 888-870-0025 or tell us how we can reach you online to request a confidential consultation.