Why Waiting to Hire Counsel Makes Texas Sales Tax Audits More Expensive

If your business is facing a Texas sales tax audit, there are several important decisions you need to make promptly. One of these decisions is whether (or when) to engage legal counsel. Due to the costs involved, many business owners will delay engaging legal counsel for as long as possible. However, in many cases, this can ultimately prove to be a more costly approach.

Why? Texas sales tax audits are high-risk inquiries. Regardless of your business’s compliance record, you will need to take affirmative steps to avoid unnecessary liability. You will also need to be prepared to affirmatively demonstrate compliance if possible, or proactively target a resolution that mitigates your business’s liability if necessary. There are several mistakes you will need to avoid along the way, and making informed decisions about what to do and what not to do will require the advice and insights of a lawyer who has been through the process many times before.

 7 Important Reasons to Promptly Engage Legal Counsel for a Texas Sales Tax Audit

While businesses can handle many aspects of Texas sales tax compliance on their own once they have an effective compliance program in place, facing a Texas sales tax audit is a unique situation that presents unique risks. Here are seven reasons (among others) why defending against a Texas sales tax audit requires experienced legal representation:

1. The Risks Involved in Texas Sales Tax Audits Are Substantial

First and foremost, the risks involved in Texas sales tax audits are substantial. If the Texas Comptroller’s Office determines that a business has underpaid its state sales tax liability, it can seek to collect not only the taxes owed, but also interest and penalties. A five-percent penalty applies immediately, and a 10-percent penalty applies after 30 days. The Texas Comptroller’s Office begins charging interest on past-due sales tax at a rate of prime plus one after 60 days of delinquency.

The Texas Comptroller’s Office also has several means of enforcement at its disposal. Underpayment of sales tax can lead to liens, levies, bank account freezes, asset seizures, and other consequences. As a result, targeted businesses cannot afford to take the risks involved lightly, and business owners and executives need to ensure they make sound, strategic decisions based on the advice of experienced legal counsel.

2. The Issues Involved in Texas Sales Tax Audits Are Complicated

Not only are Texas sales tax audits high-risk, but they are also extremely complicated. From nexus determinations to the applicability of sales tax exemptions, Texas’ sales tax laws contain numerous provisions that present both risks and opportunities for businesses. When facing a sales tax audit, it is critical to have a clear understanding of how these laws apply within the unique context of the business’s operations.

3. Businesses Must Be Prepared to Protect Themselves During the Audit Process

Given the risks and complexities of Texas sales tax audits, businesses must be prepared to protect themselves throughout the audit process. Among other things, this means:

• Ensuring a clear understanding of the business’s sales tax liability (if any)
• Proactively engaging in the audit process
• Making informed decisions about what information and documents to disclose
• Challenging flawed assumptions, methodologies, and calculations during the audit process
• Steering the audit toward a favorable resolution

Auditors are responsible for evaluating businesses’ sales tax obligations and imposing liability if warranted. They are not responsible for informing audit targets of their rights or helping audit targets mitigate their liability. Once you engage legal counsel, you will be able to rely on your counsel’s advice to ensure that you are making informed decisions with your business’s long-term best interests in mind.  

4. Businesses Must Preserve Their Ability to Pursue an Appeal if Necessary

Another key step to take when facing a Texas sales tax audit is preserving your business’s ability to file an appeal. While businesses may be able to appeal unfavorable audit determinations on various grounds, doing so requires proof that mistakes were made during the audit process. Once engaged, your business’s legal counsel will be able to take the necessary steps to preserve your business’s appellate rights. While your business’s counsel will focus on securing a favorable result, your business’s counsel will also be prepared to file an appeal immediately if necessary.

5. Assessing Texas Sales Tax Liability is Not a Simple or Straightforward Process

Due to the complexity of Texas’ sales tax laws, assessing sales tax liability is not a simple or straightforward process. For the vast majority of businesses, calculating Texas sales tax is not simply a matter of multiplying their sales by 6.25 percent. Instead, various exceptions and exemptions may apply, and local sales tax rates may also apply. Auditors can—and do—make mistakes, and targeted businesses must be prepared to clearly show how much they owe.

6. Mistakes During a Texas Sales Tax Audit Can Prove Very Costly

From overlooking relevant exceptions and exemptions to providing unrestricted access to the business’s financial records, mistakes during a Texas sales tax audit can prove very costly. There are many mistakes that business owners and executives must avoid, and doing so requires the advice and insights of experienced legal counsel.

7. Engaging Counsel Once Something Has Gone Wrong Can Prove More Costly

Ultimately, while waiting to engage legal counsel might save money in the short term, waiting until something has gone wrong can prove more costly overall. At this stage, your business’s counsel will need to devote substantial time and resources to getting up to speed, and engaging in damage control can be more time-consuming (and thus more costly) than steering an audit toward a favorable resolution from the outset.

Discuss Your Business’ Audit with a Texas Sales Tax Lawyer at Brown PC

At Brown PC, we have extensive experience guiding businesses through the Texas sales tax audit process. If you have questions about engaging legal counsel for a Texas sales tax audit, we invite you to call 888-870-0025 or contact us online to learn more.