An auditor’s (or contracted examiner’s) main task is to determine if businesses have properly collected, reported and paid state taxes. They strive to identify both under- and overpaid tax, as taxpayers at times pay taxes on items that may be exempt.
The division’s goal is to conduct these audits as efficiently as possible with the least inconvenience to taxpayers. Although an audit is a tool to ensure tax compliance, it can also be educational. During an audit, auditors can help businesses identify and correct bookkeeping problems to avoid additional tax liabilities in the future.
Audits are conducted to:
- ensure that Texas tax laws are applied uniformly;
- deter tax evasion;
- promote voluntary compliance; and
- educate taxpayers.
Methods vary for selecting a business or individual to audit. Here are some examples of how potential audit candidates are identified:
- Priority One Accounts – the state’s largest taxpayers in terms of sales tax reported
- Prior productive accounts – taxpayers previously audited whose audits revealed tax due of $25,000 or more
- Computer-based random selection by specific industry
- Information-sharing programs with other state agencies and state governments
- Analyses of tax return information
- Business publications, periodicals, journals and directories
- Leads submitted to our agency by the public
Taxpayers must keep all records for a minimum of four years. The Comptroller’s office may audit for periods longer than four years if a business was not permitted but should have been or if fraud has been detected.
By law, information as to who is being audited by the Comptroller is public information and therefore subject to open records requests. Therefore, taxpayers may be solicited by attorneys or consultants regarding this information. Professional representation is not required of taxpayers in dealing with an audit from the Comptroller’s Office. It is solely a business decision made at taxpayers’ discretion.
Twelve Steps of an Audit
The auditing process is divided into these sets of actions:
Notice of Audit
The auditor notifies the taxpayer by mail of the selection and requests a completed Form 00-750, Audit Questionnaire (PDF). The auditor schedules an entrance conference upon receipt of the completed questionnaire. If the questionnaire is not returned on time, a second questionnaire is mailed and the auditor may make contract by phone; liability may be incurred if there is no contact.
Pre-audit Research and Review
The auditor becomes familiar with the taxpayer’s account by reviewing reporting history and any prior audits that may have been conducted on the business. Preliminary objectives for the audit plan may be established.
During the initial conversation, the auditor discusses the taxpayer’s business and operations and determines requisite documentation. The auditor schedules an appointment to begin the audit and lists the records that may be needed.
Auditors by law may examine a taxpayer’s books and records to determine the accuracy of taxes paid.
Taxpayers must furnish all necessary records requested including, but not limited to, the following documents:
- Sales invoices, along with any current resale and exemption certificates
- Purchase invoices, capital asset invoices and depreciation schedules
- General ledgers, other ledgers and subsidiary journals
- Charts of accounts and financial statements reflecting profit and loss
- Federal income tax information
- Bank statements
- Working papers and accounting data used to prepare tax reports
- Electronic data, if available
- Documentation supporting overpaid tax
- Documentation supporting credits taken on returns
The auditor conducts a formal discussion with the taxpayer to design a cost-efficient audit plan.
Examination of Taxpayer Records
During fieldwork, the auditor informs the taxpayer of the work being conducted. Transactions are examined either in their entirety or by sampling. If a sample is performed, the auditor notifies the taxpayer and explains how errors are projected.
Upon completion of fieldwork, the auditor gives the taxpayer schedules identifying potential over- and/or underpaid tax. The taxpayer is allotted a reasonable amount of time to obtain more information to dispute any proposed scheduled adjustments.
Audits are to be completed and refunds issued (if any) in a timely manner.
Additional information can be found in the Notice of Routine Audit (PDF) brochure.
After all documentation has been provided, the auditor informs the taxpayer of any tax assessments along with penalty waiver recommendations and interest to be assessed.
The taxpayer may request a reconciliation conference and/or an independent audit review conference to discuss any disagreements.
The audit manager and/or supervisor meets with the auditor and the taxpayer to address outstanding issues raised by the audit findings.
Independent Audit Review (IAR) Conference
A third party is also available to meet with the auditor and the taxpayer to attempt to resolve issues still in dispute after a reconciliation conference.
Finalization (written findings)
After determination of reconciliation conference and/or IAR conference results, the auditor finalizes the audit schedules to present the results to the taxpayer.
The audit is reviewed by the auditor’s supervisor and the regional processing center, after which the notification of results is mailed to the taxpayer.
The taxpayer may contest the audit results as stated in the Comptroller publication Contesting Disagreed Audits, Examinations and Refunds (PDF). A mailed Statement of Grounds outlining the disputed/contested items must be received by the deadline on the Audit Notification in order to contest the assessment without paying.
Please note the following as to when it will be considered timely filed:
- a hearing request submitted by mail is considered timely if submitted by the date-stamp affixed by the agency mail room is on or before the notice expiration date.
- a hearing request submitted by hand-delivery is considered timely if received by agency staff on or before the notice expiration date.
- a hearing request that is submitted electronically is considered timely when it is received on or before the expiration date at any time during the 24-hour period from 12:00 a.m. through 11:59 p.m. The date of receipt shall be determined by the time and date stamp recorded on the electronic transmission by the agency’s system.
In the event the audit results change during the redetermination process and the taxpayer agrees with the changes, an in-house amendment is generated. If the taxpayer disagrees, the process shifts to the hearings phase.
If taxpayers do not agree with an audit’s findings, they have recourse available through a formal hearings process. Information about this process is explained in Contesting Disagreed Audits, Examinations, and Refund Denials (PDF).