taxes

Managed Audit Program

The 76th Texas Legislature enacted SB 1319 (effective Oct. 1, 1999) authorizing certain taxpayers to perform managed audits under the supervision of the Comptroller. The bill added Section 151.0231 to the sales tax statute; language related to this addition is included in Texas Administrative Code Rule 3.282, Auditing Taxpayer Records. The managed audit option is available only for sales tax and direct pay audits.

Managed Audit Time Guidelines

The following are general time guidelines for managed audits. As with any guidelines, there is the potential for unique situations that may warrant adjustments to the timelines. However, every effort should be made to use these timelines whenever possible to ensure a high level of consistency among all taxpayers.

Timelines for Accepting a Managed Audit Request

The initial step in a managed audit is the taxpayer’s request for a managed audit. This request should be made to the field manager via letter or email. The request must be received within 30 days of the date that the Audit Notification Letter was sent in order for a managed audit request to be considered. Managed audit requests will not be approved if the fieldwork has already begun or if the prior audit took 120 hours or fewer. No more than two sequential managed audits will be allowed.

Other factors will be considered in determining if a managed audit will be approved include:

  • Taxpayer's qualifications to perform a managed audit
    For example, a sole proprietor or an individual who prepared the tax returns may not perform the managed audit; the person performing the managed audit should have taxability knowledge; etc.
  • Taxpayer's history of compliance
    There should be no estimated returns by either the taxpayer or the Comptroller within the audit period. The taxpayer must be current in reporting all tax types.
  • Amount of time and resources available to the taxpayer to dedicate to the audit
  • Availability of the taxpayer's records
  • Taxpayer's ability to pay an assessment
    For example, a taxpayer in bankruptcy is ineligible for a managed audit. A taxpayer who files for bankruptcy during the course of a managed audit will have the managed audit contract revoked.
  • Audit history
    Taxpayers with no prior audits will not be considered for the managed audit program.
  • Tax permit status
    The taxpayer must have been permitted for the tax covered by the agreement for the entirety of the audit period.

If it is determined that a managed audit will be approved, an initial meeting may be held to discuss and plan how the audit will be conducted. The taxpayer will be given 45 days to submit all necessary forms and information. The package should include:

  • Signed Managed Audit Agreement
    An audit plan will be drafted describing audit procedures for each area of the audit. Any refund issues must be addressed in the audit plan. Any business or reporting areas to be excluded from the agreement should be identified.
  • Timeline outlining prescribed audit activities and expected completion dates
  • Electronic data containing sales and/or purchase information
  • Demonstration that electronic data provided are reliable and accurate (e.g., control totals must be tied to historical data)
  • Statute waiver protecting/extending statute 90 days beyond timeline completion date

The managed audit contract and the managed audit package should be mailed to the audit office. Once approved at the office level, the contract will be forwarded to Audit Headquarters for signature.

If the taxpayer is unable to submit all information within the 45-day period, an extension may be requested for extenuating circumstances.

The intent of this program is to reduce the time it takes to complete an audit. Once the Managed Audit Agreement has been accepted and signed, the managed audit timelines must be met. The taxpayer is required to update timelines as they change. There should be documented periodic reports reviewing the progress of the audit. If extension of the completion date is required, it must be approved by the manager of the audit office. Failure to comply with the audit timeline may result in the assessment of interest and denial of credit interest from the date the audit should have been completed. Further failure to abide by a reasonable timeline may result in the assessment of interest and denial of all credit interest for the audit; in some cases, the Managed Audit Agreement may be revoked.

Timelines for Calculating Completion Date

Determining a completion date can be difficult. For consistency, the time allowed should be calculated by multiplying the hours charged on the previous audit by 140 percent. The resulting hours should then be divided by 140 to determine the approximate number of months for completion. Company growth, acquisition of other companies, the sale of business divisions and other factors should be considered, and completion dates should be adjusted accordingly.

Selection of Sample

Communication between the auditor and the taxpayer is essential when determining an appropriate sampling approach. The managed audit contract requires the Comptroller to select the sample. Developing a sampling approach will include:

  • Identification of populations
  • Identification of accounts of interest
  • Verification of population bases
  • Selection of samples in accordance with Comptroller guidelines
  • Analysis of samples in accordance with Comptroller guidelines
  • Approval of sampling approach and Issuance of Notification of Sampling Procedures

Analysis of any sample will be conducted jointly by the taxpayer and the auditor, but final sample selection decisions rest with the auditor.

Schedules

Audit schedules submitted by the taxpayer must be in a format specified by the Comptroller. The taxpayer will be required to submit the information in an Excel spreadsheet. Instructions for spreadsheet preparation will be provided to the taxpayer.

As the taxpayer prepares the schedules, the auditor will review them. If the auditor’s initial review of the taxpayer’s schedules reveals an error rate greater than 25 percent, the schedules will be returned to the taxpayer for correction. The taxpayer will be put on written notice that, if appropriate corrections are not made, interest waiver will be denied. If the auditor’s second review of the schedules also reveals an error rate greater than 25 percent, interest waiver on the audit will be denied. The taxpayer will be put on written notice that, if appropriate corrections are not made, the managed audit contract will be revoked. If a subsequent review of the schedules by the auditor again indicates an error rate greater than 25 percent, the managed audit contract will be withdrawn.

Timelines for Calculating Extension of Completion Date

There will be circumstances where the taxpayer has worked diligently but, due to a variety of problems, needs more time to finish the audit. If an extension is requested by the taxpayer, a written request is required to extend the completion date, along with a revised timeline for the audit. Extension requests must be submitted no later than 30 days prior to the most recently established completion date. If reasonable progress has been made, The Audit office manager shall send the taxpayer a letter allowing an additional 20 percent of the original time given as an extension to the deadline. At the end of the extension, if the audit is still not finalized, waiver of interest and credit interest will cease as of the date indicated in this letter. However, any delay caused by Comptroller personnel will add time to an extension, if needed, without any loss of interest waiver or credit interest.

Any additional requests for extensions may be granted if it is apparent that the taxpayer is still progressing but has just not been able to adhere to the timeline. However, interest waiver or credit interest may be denied for the entire audit period.

Any time an extension is granted, the taxpayer will be required to submit a new timeline for approval by the audit office.

Failure to Progress in a Reasonable Manner

If it is determined that the taxpayer has failed to meet numerous objectives as set forth in the Managed Audit Agreement, and the delays are determined to be unreasonable, a letter will be sent to the taxpayer. This letter will outline the delays and allow the taxpayer 30 days to show significant improvement in performance or the managed audit contract may be revoked.

Other Important Information

  • Interest for the managed audit will restart 30 days after billing.
  • If the taxpayer intends to process a refund claim while the managed audit is in progress, then all refunds will be processed in the managed audit or requested when the taxpayer submits the Statement of Grounds.
  • If the taxpayer previously submitted a refund request and was paid for a period encompassing the managed audit, the credit interest paid on the refund will be offset against the managed audit.
  • Any outstanding refund claims that include the managed audit period must be withdrawn in writing, and the refunds must be included in the managed audit.