Disputing a Sales Tax Assessment From a Texas Comptroller Audit

Introduction

Many business owners find the appeals process for Texas Comptroller sales tax audits daunting. The best way to resolve contested issues in an audit is directly with the auditor. However, when you are unable come to an agreement with the auditor, there are various channels available to taxpayers to pursue a more favorable result. The purpose of this article is to provide a basic roadmap of the appeals process.

The Reconciliation Conference and the Independent Audit Review Conference

Importantly, the easiest and most efficient way to resolve contested issues in an audit is before the audit is finalized. After the auditor provides their initial determination but before the audit becomes final, the taxpayer should request a Reconciliation Conference with the auditor and the auditor’s supervisor. Other than the back-and-forth with the auditor during the exam, the Reconciliation Conference is the first opportunity to raise an issue in the exam. Further, the Reconciliation Conference is the least formal step in the audit appeals process. Requesting the conference is as simple as sending an email to the auditor. The typical timeframe for holding the conference is 2-6 weeks after requesting the conference. You should be prepared to discuss your legal and factual arguments during the Conference and bring all of your supporting documents.

If the taxpayer and the auditor are unable to resolve outstanding issues at the Reconciliation Conference, the taxpayer may request an Independent Audit Review Conference (IARC). This can be requested over the phone or via email to the auditor. The typical timeframe for scheduling the IARC is 1-3 months after the Reconciliation Conference. The IARC is held by an independent audit reviewer. The reviewer will review the arguments of both parties, the taxpayer and the auditor, and make an objective determination. The auditor will then finalize the audit based on the independent audit reviewer’s determination. After the IARC, the auditor will submit the audit for finalization. The taxpayer should expect to receive the Notification of Audit Results in the mail 1-2 months after the audit is finalized by the auditor. If after the IARC is completed, the taxpayer still disagrees with any assessment in the audit, it is important that the taxpayer monitors their mailbox closely for the receipt of the Notification of Audit Results, as this letter will provide a strict deadline for requesting a Redetermination Hearing, which is the next step in the appeals process.

Submitting a Request for a Redetermination Hearing

The Notification of Audit Results that the taxpayer receives in the mail will provide a deadline for the taxpayer to request a Redetermination Hearing. The typically deadline is 30 days after the date of the notice. However, in the case of jeopardy determinations, the deadline is shortened to 20 days. If submitting the request virtually via email, taxpayers have until 11:59 PM on the last day of the deadline to submit the request.

The request must contain the taxpayer’s Statement of Grounds. See 34 TEX. ADMIN. CODE § 1.11. The Statement of Grounds must contain the taxpayer’s contentions in the audit and legal and factual basis for his position. The Statement must also be signed by the taxpayer or his representative. After the request is submitted, it will be sent to the auditor for review. If the auditor agrees with the taxpayer’s arguments, they will update the audit to reflect the changes. If the auditor disagrees with any part of the taxpayer’s argument, the case will be assigned to an Administrative Hearings attorney. The AHS attorney will respond to the Statement of Grounds with their Position Letter. The taxpayer will then submit a Reply to the Position Letter. While all of this occurring, the taxpayer should begin working with the AHS attorney to reach a settlement. This stage of the process is typically the first opportunity to agree to settle the audit. It may be helpful to speak to an attorney to discuss various strategies for settlement. If the taxpayer and AHS attorney are unable to agree to a settlement or resolution, the case will be referred to the State Office of Administrative Hearings (SOAH).

Referring a Case to the State Office of Administrative Hearings (SOAH)

If an agreement is not reached at the Redetermination stage, the AHS attorney will refer the case to SOAH. The hearing may either by held via written submission or orally. The hearing is presided by an Administrative Law Judge. This stage of the appeals process operates similar to a trial. The parties will exchange witness lists and evidence to be presented at the hearing. The Judge will issue a Proposal for Decision to the Comptroller based on all of the evidence presented. If the taxpayer still disagrees with the result after the hearing with SOAH, they may submit a protest or refund suit with the district court. During this stage, taxpayers should consider the costs of litigation against the amount at issue and the strength of their arguments. Typically, during this stage, taxpayers are represented by counsel. However, it would be wise to hire a professional to help during all stages of the audit, especially if the audit involves nuanced areas of the law.

Conclusion

The Comptroller has authority to enforce the tax assessments through a variety of methods, including tax liens, property seizure, and criminal prosecution. It is important that taxpayers are cooperative during the entire audit process, as this can impact potential penalty waivers and the timely completion of the audit. Of course, it is wise to consult a professional if you have any questions about the audit process or the law.