taxes

Managed Audit Program

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 follow 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. The request should be made to the field office manager via letter or email. The request should be received within 60 days of the date the Audit Notification Letter was sent in order for a managed audit request to be considered. Managed audit requests will be denied if the fieldwork has already begun.

As a rule, if the taxpayer's prior audit took more than 120 hours, a managed audit will be considered. If no prior audit has been conducted, as long as the taxpayer can demonstrate to the State that a managed audit will save the State staffing resources and the taxpayer can submit a quality product in a timely manner, we will consider a managed audit. If two sequential managed audits have been completed, we may consider granting a third managed audit. However, penalty and interest will not automatically be waived after a consecutive second managed audit agreement. The amount of penalty and interest that may be waived will depend on whether the taxpayer has made significant improvement in correcting the errors noted in their prior audits.

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

  • Taxpayer's qualifications to perform a managed audit. The person performing the managed audit should have Texas tax knowledge.
  • Taxpayer's history of compliance. There should be no excessive estimated returns filed and taxpayer must be current in reporting all tax types; having no outstanding liabilities.
  • Taxpayer must have available resources to dedicate to conduct the audit efficiently.
  • Taxpayer must make records available.
  • Taxpayer's prior audit was not completed via a settlement agreement/bringing forward.
  • 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.
  • Taxpayers with no prior audits will need to provide support of how it would be more efficient for them to conduct the audit versa CPA’s staff.
  • The taxpayer must have been permitted for the tax covered by the agreement for the entire audit period.

The field office manager will notify the taxpayer if we will start the process to proceed with the managed audit request. Thereafter, an entrance conference will be held with the auditor and the taxpayer's contact to discuss and plan how the managed audit will be conducted. If samples will be conducted, the taxpayer will be given 45 business days to submit all necessary electronic data for the auditor to verify that the data is complete and accurate. Once the data is deemed reliable, the taxpayer must submit the following forms and information within 10 business days:

  • Signed Managed Audit Agreement
  • CPA's audit plan, which will describe the 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 also be identified.
  • CPA's Timeline outlining prescribed audit activities and expected completion dates. Timeline should include periodic checks for each category being examined to ensure taxpayer is scheduling errors correctly.
  • Statute waiver protecting/extending statute 90 days beyond timeline completion date.

The managed audit package should be provided to the auditor. Once approved at the office level, the package 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 to the field office manager.

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, both parties need to strive to meet the managed audit timelines. If the timeline changes, after discussing this with the auditor and agreeing to new timelines, the taxpayer is required to update them. If an extension of the completion date is needed, 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 needed by the taxpayer, a written request is required to extend the completion date, along with a revised timeline for the audit and statute waiver. 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.

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.
  • Reminder, all refunds for periods covered in the managed audit must 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.