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Texas Sales Tax Procedure

Sales tax audits in Texas can be generated from leads obtained while performing audits of other taxpayers, from reports required by Texas HB 11, newspaper articles, and bankruptcies

Audit Questionnaire

The IRS views failing to pay payroll taxes as the cardinal sin of tax delinquency because a large portion of the payroll taxes are your employees` withholdings. Not paying your company`s payroll taxes is tantamount to stealing your employees` money in the eyes of the IRS.

Texas Sales Tax Procedure

When an audit is generated, an audit questionnaire and an audit letter are mailed to the taxpayer. This is the first impression that the Auditor will receive, so it should be done completely and accurately and an experienced tax professional should be consulted. 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 is supposed to come in person to the taxpayer’s place of business to examine the business records. A subpoena can also be issued if records are not made available.

Auditor’s Preparation for the Audit

In preparation for an audit, the Auditor can obtain records from vendors, landlords, the IRS, and utility companies. Amounts of purchases obtained from vendors are then marked up by a reasonable percentage by the Auditor. Records that may be requested from the taxpayer may include: chart of accounts, general ledger, general journal, sales journal, depreciation schedules, computer records, etc.

Entrance Conference

The Auditor’s goals at the Entrance Conference is to determine the taxpayer’s knowledge of the law by discussing the taxpayer’s interpretation of both the law and the rules, to gain more information regarding operations, to determine the taxpayer’s method of compiling and reporting taxable amounts, and discuss audit procedures. It is obvious that a well qualified representative greatly assists the process at this point in the audit, because this often is the first face-to-face meeting with the Auditor.

Exit Conference

Once the audit is completed, the Auditor should conduct an Exit Conference to explain the audit procedures and findings including a description of examined records, audit procedures used, to ensure the taxpayer’s understanding of the audit adjustments, explain the taxpayer’s rights and remedies, educate the taxpayer as to proper procedures to follow in the future, and collect the deficiency.

Penalties

An assessment usually includes a 50% fraud penalty. For audits with a penalty of less than $10,000, the audit field manager has the authority to waive or deny the penalty. Interest and penalties can amount to 75% or 80% of the total assessed. Liens can also be filed on business as well as personal property.

Statute of Limitation

The 67th Legislature established a 4 year statute of limitation for all Texas taxes. This statute can be extended by agreement between taxpayer and the state for up to 2 years. It is very important to consult with an experienced professional before signing an agreement with the state.

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.

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. Usually 3 years of supporting documentation is required here.

Remedies

If issues cannot be resolved at the Exit Conference, a Reconciliation Conference can be scheduled with an Independent Audit Reviewer (IAR). A redetermination and refund request can also be filed within 30 days after receiving the Notice of Tax Due. Court proceedings are also an option here, but obviously there are strict deadlines here and a competent CPA should be consulted.

In Summary

A sales tax audit 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.

Disclaimer: This article is not meant as specific advice regarding a person’s individual case. An CPA should be consulted. This article does not create an Client relationship. Any tax information or written tax advice contained herein (including any attachments) is not intended to be and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.)

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