Issue #1: Resale Certificates – Resale certificates can be a major red flag. Using them to purchase items that will be used rather than resold can result in enormous penalties. Understanding the rules about your business and what can and cannot be purchased tax-free is vital. If you have issued a resale certificate improperly, you are an audit candidate.
Issue #2: Exemption Certificates – Much like resale certificates, it is important to understand when it is appropriate to issue an exemption certificate for your purchases and when it is not. Issuing exemption certificates for non-exempt purchases highlights you for an audit. Companies that purchase or sell a lot of exempt items are happy hunting ground for auditors as there is ample room for misinterpretation, error, and fraud around what is exempt and what is not.
Issue #3: Audit Lead – If one of your vendors has not charged you proper use tax, and that vendor gets audited, you may be audited as well. By the same token, if you have not taxed your customer correctly, the auditor may look to see if that customer has reported use tax on their return and if they have not, the auditor will most likely flag them for an audit. Current audits provide the best sources and leads for future audits.
Issue #4: Visual Inspections – Auditors will often take note of surrounding businesses to those they are auditing and flag them as an audit lead.
Issue 5: Whistle-blowers – The State of Texas Criminal Investigation Division is all too happy to take hotline calls. Disgruntled employees, upset customers, aggressive competitors, and even neighboring businesses upset at you for one reason or another can make a call that puts you on an audit list.
Issue #6: Casual Observation – Auditors are people too, and they are out there buying items and living normal lives. Rest assured they do not turn off their professional antennae when purchasing from you.
Issue #7: High Non-Taxable Sales Reported – The State monitors the deduction percentages by industry and if you are reporting a higher percentage of deductions than is normal for your industry, you will be audited to insure that you are taxing your customers properly.
Issue #8: Certain Susceptible Industries – Companies that are in an industry with a tradition of under reporting are often low-hanging fruit for the Texas Comptroller.