A sales tax audit is won or lost in the sample.

How the audit runs

The process starts with a notice of routine audit and an entrance conference, where the auditor and the business agree on an audit plan, the records to be produced, and whether transactions will be reviewed in detail or by sample. Fieldwork follows. At the exit conference the auditor explains the proposed assessment, penalty, and interest.

Texas requires taxpayers to keep records for at least four years, and that is the usual audit period. The Comptroller can go back further when a business operated without a required permit or when fraud is suspected.

Why sampling matters so much

If a sample is used, the auditor must tell you and explain how errors will be projected. Everything after that depends on the sample being fair:

• The sample period or block should represent normal operations, not an unusual month or a one-time project.
• Missing resale and exemption certificates are the largest source of assessments. A sale to a reseller with no certificate on file is treated as taxable, then multiplied. Certificates can often still be obtained from customers during the audit, within the time the auditor allows.
• Use tax on purchases is the other half. Equipment, software, and supplies bought from out-of-state vendors that did not charge Texas tax are scheduled and projected the same way.
• Extraordinary items that distort the error rate can sometimes be removed from the sample and handled separately.

Ways to resolve disputes before the bill

• Reconciliation conference with the audit supervisor or manager.
• Independent Audit Review Conference (IARC). An informal meeting with a Comptroller reviewer who was not involved in the audit. It must be requested after fieldwork ends and before the audit is billed, it costs nothing, and you may bring an attorney or accountant. It is not available when records were not provided and the liability had to be estimated.
• Taxability guidance from the Comptroller's Tax Administration, when you and the auditor agree on the facts and disagree about the law.

Penalties and interest

Tax assessed in an audit is generally subject to a 10 percent penalty, and an additional 10 percent if it is not paid by the due date on the notification. Interest runs at the prime rate plus one percent, beginning 61 days after the tax was originally due. The Comptroller considers waiving penalty and interest in every audit, and a denied waiver can itself be contested. Where the Comptroller finds fraud or intent to evade, a much larger penalty applies and the four-year limit does not protect you.

What happens if you ignore it

The determination becomes final. Payment is due within 10 days after that, and another 10 percent penalty is added if it is not made. From there the Comptroller can file a state tax lien, freeze and levy bank accounts, suspend the sales tax permit, and pursue the people who ran the business personally.

When a lawyer matters

Early. The most valuable work happens before the exit conference: agreeing to a sample you can live with, gathering certificates, separating nontaxable items, and documenting the waiver request. After the notification issues, the work becomes a contested case with pleadings and a judge. An attorney's communications with you are privileged, which matters when the records show tax that was collected from customers and not sent to the state.

Official sources

The rules described on this page come from these primary sources. Check them, or the notice you received, for current figures and dates.

• Texas Comptroller: Understanding the audit process
• Texas Comptroller Publication 96-1253: Contesting Disagreed Audits, Examinations and Refund Denials (PDF)
• Texas Comptroller: Sales and use tax
• Texas Comptroller: Interest rates on delinquent taxes
• Texas Tax Code chapter 151: Limited Sales, Excise, and Use Tax