Dealing with a Texas Comptroller’s Audit

What is a Tax Audit in Texas?

A tax audit is a systematic and independent examination of data, statements, records, operations and performances (financial or otherwise) of an enterprise to ensure that books of Accounts have been maintained in accordance with the provisions of the Tax Code.

The main objective of the tax audit is to compute the taxable income according to the law and for maintaining transparency in the financial statements.

Professional and experienced Tax Lawyer in Texas can advise you on tax disputes and tax problems.

Wondering Why You Were Selected For Audit By the Texas Comptroller?  

There are several factors the Comptroller’s Office historically has used to determine what businesses to audit.  The Texas Comptroller typically will divide taxpayers into the following major groupings, such as:

Previous Audit Problems 

If you have been audited in the pass that resulted in significant increases in taxes owed, penalties and interest, you can most likely expect another audit in three to four years. This audit effectively curbs Tax Evasion and ensures Tax Compliance, and also ensures that the accounts are properly being presented to the assessing officers when called for.

Significant State Taxpayer

This is the small group of tax payers that pay the bulk (80 to 90%) of the taxes collected under the Texas Tax Code.  They can expect to be audited every four years even if they have never had any significant tax deficiencies.

The Comptroller audits these taxpayers every four years to avoid the expiration of the Statute of Limitations. The law generally requires that the Comptroller assess state taxes within four years from the date the tax becomes due and payable.  The Statute of Limitations starts running on the day after the last day a payment is required by the applicable chapter of the Tax Code imposing the tax.  Therefore, significant State Taxpayer’s can expect an audit every four years even if they have never had any significant errors in their returns.

Tax Law Change Review Section

The Texas Comptroller is charged with reviewing the tax implication in all Legislative Changes or new laws. These reviews are to determine whether certain types of taxpayers, industries, or types of entities may have a different or increased tax burden.  Therefore, you might be audited because the Texas Legislature recently passed new legal requirements with tax implications for your business.

Supplier or Customer of an Audited Taxpayer or High Profile Person or Entity

The Texas Comptroller may choose to audit other taxpayers who are suppliers, customers or some-how related to high profile people who are under review by the Internal Revenue Service, Texas Workforce Commission or some other governmental agency to see if the particular supplier or customer is complying with applicable tax laws that are enforced by the Texas Comptroller.

Disproportionate Tax Reporting Compared to Others in the Industry

The Texas Comptroller may choose to audit a taxing unit due to anomalies noted in comparison to the taxpayer’s taxable sales reported compared to similarly situated competitors’ reported taxable sales in Texas.  Also the reporting of huge, out of the ordinary exempt sales compared to taxable sales could very well trigger an investigation by the Texas Comptroller’s audit team.

Technological Inventions and Nexus Taxpayers

The Texas Comptroller may choose to audit a taxpayer because of technological advances that creates significant nexus in Texas.  The analysis could be applied to foreign entities or businesses physically located outside of Texas but conducting transactions within Texas.

Random Examinations

The Texas Comptroller can randomly select a taxing unit to examine the return and goes over it for fact checking, no errors need to be found for the Enforcement branch to examine a tax return. Random selection exams tend to be more extensive and time-consuming than other forms of review. Sometimes it seems like an interview of the taxpayer.  These types of audits are probably rare.

What Powers Does The Tax Code Endow Upon the Comptroller?

Well to put it succinctly, a lot!  

1. The Comptroller can subpoena persons and records of the taxing unit;
2. The Comptroller can report to the Secretary of State who could strip the taxing units right to do business in the State of Texas, or strip the corporate charter;
3. The Comptroller can requests any and all records deemed necessary to determine whether the taxing unit is collecting, organizing and accounting for taxable transactions.
4. The Comptroller can employ statistical methods in determining the taxing unit’s tax liability.

The Comptroller Is Coming to See You, What Can You Do When Audited?

The number one thing the taxing unit must do is get prepared for the auditor.  Upon receipt of the auditor’s letter, review the tax laws that applies in your industry, look for any exemption certificates that might apply to your business, review your prior sales records and make any corrections that might be warranted, hire a professional tax attorney to help you get ready for the audit.  It is best to resolve tax disputes at the auditor level, if at all possible.  You must be prepared with evidentiary proofs and not attempt to blow off the auditor by trickery or otherwise.  If you do, you could dig a bigger hole for yourself and cause the auditor to expand the scope of the original audit.

The number two thing the taxing unit can do is cooperate with the auditor. Timely supply the sales reports and any other relevant documents requested by the auditor.  Make sure you make available on a timely basis knowledgeable employees, supervisors, managers and executives during the course of the audit.  Don’t treat the auditor as an enemy; this will work against you in most cases!



The number three thing the taxing unit can do is to stay in tune with how the audit is going.  That means an appropriate person in the taxing unit need to periodically, at least weekly, if not daily, discuss with the auditor any findings or concerns the auditor might be having.  This permits the taxing unit to supply additional materials that might satisfy the concerns, it permits the taxing unit to bring in outside tax advisor, lawyers and others with specific expertise that might be required to address the problem. 

This blog is written by
Coleman Jackson | Attorney & Counselor At Law | 6060 North Central Expy, Suite 443| Dallas, TX 75206 | www.cjacksonlaw.com | 214-599-0431