Experienced Tax Counsel for Texas Franchise Tax Audits
The obligation to pay franchise tax applies to all taxable entities formed, organized or doing business in Texas—with only limited exceptions. This means that both in-state and out-of-state businesses can be required to pay. It also means that both in-state and out-of-state businesses can face Texas franchise tax audits if they fail to pay what they owe.
Our firm represents corporations, partnerships, limited liability companies (LLCs) and other entities before, during and after these audits. If your business is facing a Texas franchise tax audit, we can help you prepare and represent your business throughout the process. If your business has received an unfavorable audit determination, we can challenge the Texas Comptroller’s assessment of your business’ franchise tax liability through all available means.
Texas Franchise Tax: An Overview
Texas’ franchise tax is calculated based on a taxable entity’s “taxable margin.” Taxable entities must pay this tax until they obtain a Certificate of Account Status terminating their taxable status from the Texas Comptroller. Entities that may be subject to Texas’ franchise tax include (but are not limited to):
- Corporations (both C-corporations and S-corporations)
- Limited liability companies (LLCs)
- Partnerships (general, limited and limited liability)
- Joint ventures
- Trusts
- Banks, savings and loan associations, and limited banking associations
Under Texas law, an entity’s taxable margin can be calculated in several different ways. Unless an entity qualifies to use the Texas Comptroller’s “EZ computation,” it must calculate its taxable margin using one of the following methods:
- Seventy percent of total revenue
- Total revenue minus the cost of goods sold
- Total revenue minus employee compensation
- Total revenue minus $1 million
“Total revenue,” “cost of goods sold,” and “compensation” are all defined terms under Texas law. Credits and combined reporting requirements may apply as well. As a result, accurately calculating an entity’s franchise tax obligation can prove challenging, and this makes it essential for all entities to take an informed and strategic approach to the audit process.
Preparing for and Defending Against a Texas Franchise Tax Audit
With this in mind, when facing a Texas franchise tax audit, careful preparation is key. Companies must ensure that they have documentation to substantiate their franchise tax filings with the Texas Comptroller, and they must be prepared to address any legitimate issues. Once the audit begins, companies must be able to communicate with auditors effectively, and they must be prepared to challenge any flawed assumptions or methodologies used in assessing their franchise tax liability.
The Importance of Experienced Legal Representation
Due to the complexity of Texas’ franchise tax and the variety of challenges that franchise tax audits can present, experienced legal representation is essential. Companies that fail to defend themselves effectively can face not only additional tax liability, but also liability for interest and penalties:
- Interest is charged on unpaid amounts beginning 61 days after the due date.
- A 5-percent penalty applies to tax that is up to 30 days past due, while a 10-percent penalty applies to tax that is more than 30 days past due.
As with all types of state tax audits, when facing a franchise tax audit, knowing what is at stake is critical for making sound decisions. Once you engage our firm to represent your company, our lawyers will be able to assess your company’s risk and advise you regarding how best to approach the audit under the circumstances at hand.
FAQs: Texas Franchise Tax Audits
Why was my business selected for a franchise tax audit?
There could be several reasons why the Texas Comptroller has selected your business for a franchise tax audit. In many cases, the Texas Comptroller relies on computer-based random selection, so there could be no particular reason why your business has come under scrutiny. However, the Texas Comptroller also specifically targets large taxpayers and businesses that have faced significant liability in past audits, and it conducts audits based on information received from other agencies and members of the public as well.
How far back can the Texas Comptroller audit my business?
Texas has established a four-year statute of limitations for the enforcement of all types of tax liability—franchise tax included. The four-year limitations period runs “from the due date of the tax.” Taxpayers are required to retain their tax records for the previous four years so that the Texas Comptroller can review them in the event of an audit.
What is an “Independent Audit Review” (or “IAR”)?
An “Independent Audit Review” (or “IAR”) is an optional step in the franchise tax audit process in Texas. If a taxpayer disagrees with any of the Texas Comptroller’s methods or findings during a franchise tax audit, the taxpayer can request a reconciliation conference. If this conference does not produce a satisfactory outcome, the taxpayer can then request an Independent Audit Review. During an IAR, “[a] third party . . . meet[s] with the auditor and the taxpayer to attempt to resolve issues still in dispute after [the] reconciliation conference.”
While Independent Audit Reviews can be an effective means of resolving franchise tax disputes in some cases, businesses that dispute their franchise tax liability can take additional steps to challenge the Texas Comptroller’s assessment if necessary. This includes pursuing both administrative and judicial appeals.
I didn’t owe any tax. Why am I still being audited?
The fact that your business is facing a franchise tax audit does not necessarily mean that your business has underpaid what it owes. As discussed above, the Texas Comptroller initiates audits at random and for other reasons. If your business didn’t owe any franchise tax, our lawyers can work to prove this during the audit process.
Discuss Your Company’s Franchise Tax Audit with a Texas Tax Attorney at Brown, P.C.
If your business is facing a franchise tax audit in Texas, we invite you to get in touch. We represent in-state and out-of-state businesses in all matters involving the Texas Comptroller. To request a confidential initial consultation at Brown, P.C., please call 888-870-0025 or send us a message online today.