You have several options if you cannot pay your bill. Don’t worry! You don’t have to close your doors and lay off everyone that works for you!
Penalties – An assessment usually includes a 10% penalty. If this is your first audit, there should be no penalty assessed except for amounts that are considered “tax collected, not remitted” or for periods in which additional tax is due that your return filing was late. If this is not your first audit, 10% is standard on the entire amount due. In some cases, an additional penalty of 50% (also called “fraud penalty”) may be assessed if the error is considered a “gross” error. In these cases, the State may also create a “Personal Liability Assessment” which is an assessment against the principals of the company. For example, if you are the owner of a plumbing company and it is organized as an LLC (Limited Liability Corporation) and you are assessed a 50% fraud penalty, the State will open a taxpayer number specifically for you, the owner and assess you for the amount of the audit as well. This is not in addition to the audit, it’s the State’s way of preserving their ability to collect the tax due from you personally. Thought your LLC protected you didn’t you?
Settlement Options – The State is not interested in closing you down. If they do, that’s less revenue they take in. Putting Texas businesses out of business is not good business for Texas. They will work with you and depending on where in the process you ask for settlement, you’ll get different answers. In some cases, you can get an interest-free payment plan, in some cases, you can have all penalties and interest waived. Again, this is the time to consult with an experienced and professional tax consultant.
Insolvency – Insolvency is the inability to pay debts as they fall due in the usual course of business and/or having liabilities in excess of a reasonable market value of assets held, or insufficient assets to pay all debts. Section 111.102 of the Tax Code, Collection Procedures, gives the Comptroller authority to settle a claim for a tax, penalty, or interest. Substantial documentation will be required to prove that you are actually insolvent and eligible for this option.
Bankruptcy vs. Texas Sales Tax – If a taxpayer is bankrupt and did not file returns and remit taxes collected, the taxes collected generally will not be discharged by the bankruptcy court unless the Chapter 11 or Chapter 13 reorganization plan allows for such a discharge. If the State does not file a proof of claim prior to the Bar Date, the State’s claim for taxes in some instances may be discharged.
In conclusion, Texas Sales and Use Tax Audits can be a scary and potentially costly problem. However, good records should be kept and a qualified tax professional should be contacted to assist during the entire process.