Audit Process in Texas

The state of Texas conducts audits to ensure that businesses are properly collecting, reporting and paying state taxes. Businesses are selected for an audit for various reasons such as:

• Priority one accounts: the states largest taxpayers in terms of sales tax reported
• Prior productive accounts: taxpayers previously audited whose tax revealed a tax due of 25,000 or more
• Random selection by a specific industry
• Information sharing programs with other state agencies and state governments
• Analyses of tax return info
• Business publications
• Leads submitted by the agency.

It is important for taxpayers to keep records for a minimum of 4 years. It is possible for the audit to go for periods longer than 4 years if the business was not permitted or fraud has been detected. Information regarding businesses being audited is public information so attorneys and consultants may be reaching out to your company. While representation is not required it is recommended.

There are 6 steps to an audit:

1. Audit Questionnaire: The taxpayer will receive an audit questionnaire in the mail. Once this is complete the auditor will reach out to the taxpayer to schedule an entrance conference.
2. Pre-Audit Research and Review: the auditor will review the reporting history as well as previous audits.
3. Taxpayer Contact: The auditor will let the taxpayer request information such as Sales invoices, purchase invoices, general ledgers, accounting data and bank statements.
4. Entrance conference: a discussion with the taxpayer will be held to discuss a cost-efficient audit plan.
5. Examination of taxpayer records: Records will be examined entirely or through sampling, it is important at this point for the auditor to notify the taxpayer how any errors are projected. Once records have been reviewed the auditor will give the taxpayer schedules to identify over or underpaid tax. The taxpayer is then given time to gather more information or to argue and schedule adjustments.
6. Audit Completion: Once the audit has been completed the auditor will provide the taxpayer with the tax due as well as penalty waiver recommendations and interest.

If you have any disagreements with the auditor, it is at this point that you can request a reconciliation conference or an independent audit review. The difference between the two is listed below.

• Reconciliation conference: audit manager/supervisor meet with the auditor and the taxpayer to address any issues raised by the audit findings.
• Independent audit review conference: a third party meets with the auditor and taxpayer to attempt to resolve issues still in dispute after the reconciliation conference.

After the conferences the auditor finalizes the schedule and presents them to the taxpayer. The audit is reviewed by the auditor’s supervisor and regional processing center after which the results are mailed to the taxpayer.

If you are still unhappy with the results or still disagree with the results, the taxpayer may contest the audit results. A mailed statement of grounds outlining the dispute/ contested items must be postmarked by the deadline on the audit notification in order to contest the assessment without paying. If the results change during the re-determination process and the taxpayer agrees to the findings an in-house amendment is generated. If the taxpayer still disagrees the process moves on the hearings phase.

During the hearing phase an attorney assigned to you from the Administrative Hearings Section (AHS) will send you a notice indicating the date and time you are to appear to present evidence and oral argument. If you want your case to be considered on the basis of written submissions, the Administrative Law Judge (ALJ) will review your written evidence and argument. After the hearing, whether oral or based on written submissions, the ALJ will propose a decision to you and to AHS. The Comptroller will render the final decision. If you plan on arguing this decision by filing for a refund or protesting suit it is recommended to hire a tax consultant or attorney that can help you exercise your rights.