Step #1: Audit Questionnaire – When an audit is generated, an audit letter and questionnaire are mailed to the taxpayer. This is the first impression that the Auditor will receive, so it should be done completely and accurately. If the completed questionnaire is not returned within 30 days, the taxpayer will be called and a 2nd questionnaire sent by certified mail. If there is no response, the Auditor will visit the taxpayer’s place of business to examine the business records and may issue a subpoena if records are not made available.
Step #2: Schedule the Start of the Audit – The auditor will contact the taxpayer to schedule a date to start the audit. Depending on the size of the business, they may schedule multiple days. They will send a form letter like the one shown below requesting documents. This letter can sometimes be confusing for taxpayers as not all taxpayers have all the documents listed on the letter. Remember, this is a form letter and is a guide to what should be provided, if available. You should provide what you have but don’t get worried if you don’t have everything on this list. As an example: “Contracts / Job Files”. If you are a Dry Cleaner, you won’t have contracts or job files.
Step #3 – Entrance Conference – The entrance conference is the first day of the audit. The auditor will interview the taxpayer and ask questions to learn about the taxpayer’s business and determine the taxpayer’s knowledge of the law as it applies to their business. They will ask questions about operations, determine the taxpayer’s method of compiling the information that is reported on the Sales and Use Tax Return, and discuss the audit procedures. Having an experienced and knowledgeable consultant to represent you at this time is critical. The Entrance Conference is the most important day of the audit! Making sure that the auditor is correctly informed of your business, and your processes and is applying the appropriate tax rules is paramount to a successful audit. It is extremely difficult to get an auditor back on track once they’ve gone off “into left field”.
Step #4 – Field Work – This is the period where the auditor performs their work. They may conduct most of it at the taxpayer’s office / location or they may do some of it at their office. After the first day(s) of the audit, the auditor may provide you with lists of documents to provide. Sometimes this is disconcerting to taxpayers as they don’t understand why the auditor is asking the questions they are asking and requesting the documents they are requesting. It’s like the auditors are speaking German and the taxpayer speaks Spanish and neither can communicate with the other. That’s where an experienced and professional consultant can make a big difference. We know what the auditor wants and why and we can work with the taxpayer to provide the appropriate documentation to satisfy the auditor and let them continue their field work. We also know when the auditor is asking for something that they really don’t need and can steer them in the direction that is more efficient to getting the audit completed.
Step #5 – Exit Conference – Once the auditor has completed their fieldwork, they will conduct an Exit Conference to explain the audit procedures and findings including a description of examined records, audit procedures used, explain the taxpayer’s rights and remedies, and educate the taxpayer as to proper procedures to follow in the future. The auditor may attempt to collect the amount that they have determined is due. Don’t feel pressured here. You do not have to pay the assessment at this time. Interest will continue to accrue on the final amount that is due; but what if the audit is wrong? What if you disagree with their findings? Don’t pay the assessment until you’ve had a professional look at the audit and make sure that it’s correct. Interest and penalties will be adjusted relative to the final tax amount due.
Step #6 – Appealing the Audit – You have the right to appeal your audit by filing a Petition for Redetermination Hearing and Statement of Grounds. This filing is due within 30 days of the billing date of your audit and will be stated on the front page of your audit bill. There are specific rules to filing for a redetermination hearing and consulting with an experienced, professional tax consultant should be considered if you wish to appeal your audit. It has been our experience that 80% of all Texas Sales and Use Tax audits are incorrect. It doesn’t hurt to have someone take a look at your audit to make sure it’s right before you pay it. Chances are, it’s not!