There are several stages to a Sales and Use Tax audit conducted by the Texas Comptroller. Your first contact with the State is a letter advising you of the upcoming audit and an audit questionnaire. Additional phases include document requests, audit fieldwork and negotiation and settlement. One misconception that most taxpayers have when faced with their first audit is that the audit will only take a few days. Unfortunately, sales tax audits can take several months and sometimes years.
At Brown Goertz, we believe that a comprehensive understanding of the business, the accounting processes and procedures, the documentation, and any changes in ownership or structure are vitally important so that we go into the audit with our eyes wide open and with a plan to guide the auditor in the direction that we want them to go. It is much easier to proactively direct the audit versus cleaning up a large mess created by an auditor who does not have a firm grip on the situation at hand.
Once you have contracted with our firm to assist you with the audit, we will work with you to prepare a Limited Power of Attorney and to correctly complete the Audit Questionnaire. Once both documents are in place, we will reach out to the auditor to let them know that we will be representing your organization in the audit. We will also negotiate the audit period and start date for the audit. From that point forward, you no longer need to have contact with the auditor unless you choose to do so.
Once we have an audit period and audit start date (also referred to as the Entrance Conference), we will schedule an introductory call with you. During this call, we will ask many questions that allow us to understand your company, your accounting practices, your current taxation understanding as it applies to your business and any issues that may exist that need to be considered when developing the audit plan. After this call, we will send you an email requesting the necessary documents to prepare for the audit. Upon receiving the documents requested by our office, we will begin preparing for the audit. Our review of your records is vitally important as it allows us to understand your business and your records. While reviewing these, we will formulate the best way to guide the auditor through their review of your records. In many cases, we will have questions and follow-up document requests prior to the start of the audit.
The fieldwork with the auditor begins with an Entrance Conference which is typically held via phone. All documents to begin the audit are uploaded to the auditor prior to the call. During the Entrance Conference call, we answer the auditor’s questions and advise them of anything that they need to know to effectively conduct the audit. Once the call has taken place, they begin their field work. This is the longest phase of the audit process. There is a lot of back and forth between us and the auditor regarding documents, issues, questions, policy, etc. These conversations can take place via email or phone and in some cases, in person if necessary.
During this step, we will keep you informed of the progress, and we will request additional documents from you based on the auditor’s field work. There may be issues for which the auditor needs clarification, and we will work with you to determine what documentation is sufficient support for the transactions. We may need input from you regarding specifics on certain transactions to effectively support the audit. In short, there is a lot of activity in this phase of the audit. We will work with the auditor and with you to ensure that the audit is correct and that all documentation available to support the audit has been provided.
In some audits, there are situations where sufficient documentation cannot be obtained during the fieldwork and an appeal must be filed for the audit. Once the audit is billed, we will file a Petition for Redetermination and Statement of Grounds (appeal). This filing will put your audit in Administrative Halt with the Comptroller and there is no follow up collection activity on the audit until the appeal is complete. During this phase of the audit, additional documentation and arguments are provided for transactions for which the auditor scheduled on your audit as taxable.
Once all fieldwork and any appeals have been completed, we will work with the Audit Division to negotiate a settlement agreement which may include a partial penalty and interest waiver or a payment plan that allows you to pay any assessment over time. Once the audit has been completely finalized, you will be able to rest assured that any audit assessment is correct and as low as possible. You will also have a better understanding of sales and use tax compliance for your business so that you can be better prepared if the Comptroller audits you again.