taxes

Auditing Fundamentals

Chapter 1 – Introduction


Overview

This manual is intended to be used as a training tool for new auditors and a reference guide for experienced auditors. The primary focus will be on sales tax, which is the number one revenue-producing tax for the State of Texas. However, there are other taxes which are administered and audited by the Comptroller of Public Accounts.

A complete list of tax codes follows:

  • 03 – Distributor Reporting Requirement
    • Sub-Types:
      • 22 – Beer and Wine Distribution
      • 25 – Tobacco Products Distribution
  • 13 – Franchise Tax
  • 14 – Motor Vehicle Sales and Use - Tax Assessor/Collector
    • Sub-Types:
      • 12 – Motor Vehicle Title Application Fee
      • 14 – Motor Vehicle Sales and Use Tax – TAC
      • 17 – Motor Vehicle Sales and Use Tax – TAC Surcharge
      • 21 – Motor Vehicle Registration Surcharge
  • 15 – Motor Vehicle Gross Rental Receipts Tax
  • 16 – Bank Franchise Tax
  • 17 – Inheritance Tax
  • 18 – Property Tax
  • 19 – Gross Receipts - Oil and Gas Well Servicing Tax
  • 20 – Sulphur Production Tax
  • 22 – Cement Production Tax
  • 23 – Gross Receipts - Utilities Tax
  • 24 – Telecommunications Utilities Tax – Repealed 08/31/2008
  • 25 – Commercial Mobile Service Providers – Repealed 08/31/2008
  • 26 – Sales and Use Tax
  • 27 – Direct Pay Sales Tax
  • 28 – Maquiladora Export Tax
  • 30 – Fireworks Sales Tax
  • 32 – Local Revenue Funds (Extension of Tax Type 38)
  • 33 – Texas Local Sports Venue District Tax
  • 35 – Loan Administration Fee
  • 36 – Crude Oil
    • Sub-Types:
      • 36 – Crude Oil - Purchaser
      • 48 – Crude Oil - Producer
  • 37 – Natural Gas Production
    • Sub-Types:
      • 37 – Natural Gas - Purchaser
      • 49 – Natural Gas - Producer
  • 38 – Local Revenue Fee
    • Sub-Types:
      • 40 – Photographic Traffic Enforcement Systems
      • 54 – Audit
      • 55 – Excess Highway Fines
      • 59 – Excess Motor Carrier Fines
      • 60 – County Road and Bridge Expenditures
      • 62 – Legal Services for Indigents
      • 63 – Child Safety Seat and Seat Belt Violations
      • 64 – City Criminal Costs and Fees
      • 65 – County Criminal Costs and Fees
      • 66 – Civil Fees
      • 67 – Sexual Assault/Substance Abuse Felony Programs
      • 68 – Compensation to Victims of Crime Auxiliary Fund
      • 69 – Drug Court Program Account
  • 39 – Prepaid Diesel Fuel
  • 40 – Prepaid Liquefied Gas
  • 41 – Aviation Gas
  • 42 – Texas Fee for Sexually Oriented Businesses
  • 43 – Amusement License Fee
  • 44 – Amusement Machine
  • 46 – Manufactured Housing Sales Tax
  • 47 – Public Utilities Gross Receipts Assessments
  • 48 – Interest Earned on Financed Sales Tax
  • 50 – Texas Emissions Reduction Plan Surcharge
  • 51 – Property Tax Arbitration
    • Sub-Types:
      • 51 – Arbitration Hearings
      • 52 – Arbitrator Registry
  • 53 – Unclaimed Property
  • 54 – 911 Fees
    • Sub-Types:
      • 91 – 911 Wireless Service Fee
      • 92 – 911 Landline Service Fee
  • 93 – 911 Equalization Surcharge
  • 55 – International Fuel Tax Agreement (IFTA) Jurisdictions
  • 56 – IFTA
  • 57 – Boat and Boat Motor Sales and Use Tax - Tax Assessor/Collector
  • 58 – Universal Refund Claims
  • 60 – Boat and Boat Motor Sales and Use Tax
  • 61 – Pari-Mutuel Wagering Tax – Horse
  • 62 – Pari-Mutuel Wagering Tax – Greyhound
  • 64 – Petroleum Products Delivery Fee
  • 65 – Marijuana and Controlled Substance Tax
  • 66 – Coastal Protection Fee
  • 67 – Battery Sales Fee
  • 69 – Automotive Oil Sales Fee
  • 70 – Motor Vehicle Seller-Financed Sales Tax
    • Sub-Types:
      • 45 – Motor Vehicle Seller-Financed Sales Tax Related Finance Companies
      • 70 – Motor Vehicle Seller-Financed Sales Tax
      • 78 – Motor Vehicle Seller-Financed Sales Tax Surcharge
  • 71 – Insurance Premium Tax
  • 72 – Insurance Maintenance Tax/Assessment
  • 73 – Mixed Beverage Gross Receipts Tax
  • 75 – Hotel Occupancy Tax
  • 76 – Texas Automobile Theft Prevention Authority
  • 77 – Fuel Tax Exemption (Jet Fuel)
    School Benefit Fund
  • 79 – Refund Claim Abatements
  • 80 – Oyster Sales Fee
  • 81 – Volunteer Fire Department Assistance Fund
  • 82 – Manufacturing Equipment Refunds
  • 83 – Enterprise Zone Refund Claims
  • 84 – Qualified Business – Sales
  • 85 – Qualified Business – Franchise
  • 86 – Motor Fuel Refund Claims
  • 87 – Diesel Fuel Refund Claims
  • 88 – Cigarette, Cigar, and Tobacco Products
    • Sub-Types:
      • 09 – Retailer Permit Fee
      • 18 – Tobacco Distributor
      • 31 – Cigarette Distributor
      • 34 – Cigarette Floorstock
      • 47 – Cigarette Internet Sales
      • 82 – Non-Retailer Permit Fee
      • 84 – Cigarette Manufacturer
      • 85 – Tobacco Manufacturer
      • 86 – Cigarette Stamping
  • 89 – Motor Vehicle Sales and Use Tax
    • Sub-Types:
      • 65 – Motor Vehicle Title Application Audit
      • 83 – Motor Vehicle Registration Surcharge Audit
      • 87 – Motor Vehicle Sales and Use Tax Audit Surcharge
      • 89 – Motor Vehicle Sales and Use Tax
  • 90 – Fuels Tax:
    • Sub-Types:
      • 05 – Terminal Operator
      • 06 – Gasoline
      • 07 – Diesel Fuel
      • 08 – Liquefied Gas
      • 41 – One-Time Inventory – Gasoline
      • 43 – One-Time Inventory – Diesel Fuel
      • 95 – Motor Fuel Transporter
      • 96 – Gasoline Interstate Trucker
      • 97 – Diesel Fuel Interstate Trucker
  • 98 – Liquefied Gas Interstate Trucker
  • 91 – AFDC Refund Voucher Program
  • 92 – Customs Broker
    • Sub-Types:
      • 61 – License Fees & Reporting
      • 62 – Stamping

Footnote: Audits coded '26' include State, City, County, Special Purpose District (SPD), and Transit taxes.

Audit Elements

An auditor's primary function is to determine if a tax has been correctly reported and paid. This should be done in the shortest possible time, and should create the least possible inconvenience for a taxpayer.

Five essential elements are used to meet audit objectives:

  1. Taxpayer Relations
    The benefit derived from developing a good relationship with a taxpayer is two-fold. The taxpayer tends to become more comfortable with the audit situation, which allows the audit process to flow more smoothly.
  2. Planning Activities
    Planning an audit begins when an audit assignment is received. It is very important that all audit activities, including pre-audit preparation, be documented in the Audit Plan (Audit Doc, in Comprehensive Audit Tax System (CATS). (See Chapter 3, Audit Planning and Documentation)
  3. Examination of Records
    Gather and evaluate sufficient records to provide an adequate basis for determining the accuracy of the tax returns filed. (See Chapter 5, Audit Procedures)
  4. Application of the Law
    • An auditor must be familiar with the requirements of the law administered. Copies of all tax laws are available in every audit office.
    • Rules issued by the Comptroller and registered with the Secretary of State have the effect of law and serve as guides for interpreting laws. Comptroller employees may view the rules on the Comptroller's internal Web site. The general public may view the rules via the Comptroller's website
    • Another reference source is memoranda issued by the Comptroller's office.
  5. Documentation
    Use documentation to note pertinent audit evidence discovered during an audit. A well documented audit will consist of a complete record of evidence examined by the auditor to support any findings. Also, document any oral statements made by the taxpayer which may be important to support any audit findings. (See Chapter 3, Audit Planning and Documentation)

Audit Assignment
The first step in the audit process occurs when the auditor receives the audit assignment. (See Chapter 2, Pre-Audit Research)

Pre-Audit Research and Review
This research period is when the auditor reviews information about the account and the business to be audited. (See Chapter 2, Pre-Audit Research)

Taxpayer Contact
The first contact with the taxpayer occurs after initial pre-audit research and review has been completed. The auditor calls the taxpayer to set an appointment to begin the audit. (See Chapter 2, Pre-Audit Research)

Entrance Conference
The first face-to-face meeting with the taxpayer occurs during the entrance conference. During this meeting, the auditor will obtain more information regarding the taxpayer's business, answer taxpayer questions, discuss records required, and ask any other questions which will help in completing the audit. (See Chapter 4, Entrance Conference)

Examination of Taxpayer Records
It is important to determine how the taxpayer calculated the reported amounts. The auditor should have the taxpayer show how the return was prepared. Reconcile appropriate accounts with the taxpayer history after establishing the validity of summary records. (See Chapter 5, Audit Procedures)

Exit Conference
Upon completion of the field work, the auditor will meet with the taxpayer and explain the results of the audit and administrative remedies. (See Chapter 8, Exit Conference and Administrative Remedies)

Reconciliation Conference
A reconciliation conference is available to a taxpayer who disagrees with the audit findings. The purpose of this conference is to re-evaluate the audit findings and resolve any taxpayer disagreements, if possible. The conference usually includes the taxpayer the auditor, the group supervisor and/or audit manager. (See Chapter 8, Exit Conference and Administrative Remedies)

Independent Audit Review Conference
This conference may be held in addition to or instead of the reconciliation conference. An independent audit review conference is an informal meeting of the independent audit reviewer Independent Audit Reviewer (IAR), the taxpayer, the auditor, and the group supervisor and/or audit manager. The IAR is an impartial Comptroller employee with tax and audit expertise who will listen to both sides and try to resolve any disagreements before the audit enters the hearings process. The IAR reports directly to the assistant director of Tax Administration and does not work at any Comptroller office that conducts audits. (See Chapter 8, Exit Conference and Administrative Remedies)

Audit Finalization (Audit Write-up)
This is the process of summarizing the results of the examination. (See Chapter 9, Audit Finalization)

Audit Review
When audit write-up is completed, it will be reviewed in the audit office and at the Regional Processing Center. The purpose of the review is to ensure that the audit is technically, procedurally, and mathematically correct. (See Chapter 9, Audit Finalization)

Redetermination
A taxpayer who disagrees with the results of an audit has several options.

  • A Refund Hearing Request, if the audit has been paid in full
  • District Court, if the audit has been paid in full
  • Redetermination Hearing, if the audit has not been paid in full

(See Chapter 8, Exit Conference and Administrative Remedies)

Amended Audits
Any changes to an audit after it has been completed on the computer system will result in an amended audit.

Statute of Limitations

The 67th Legislature of Texas established a uniform four-year statute of limitations for all taxes. This legislation became effective August 31, 1981. The statute expiration date is four years from the due date of the tax. The occurrence of these expiration dates may be monthly, quarterly or yearly, depending on the tax type.

Audit Manuals

The process of updating audit manuals is ongoing. The task of revising and updating audit manuals is coordinated by staff in the Audit Training Section of Audit Division.

A list of manuals available to auditors follows:

  • Audit Procedures for Cigarette Taxes
  • Audit Procedures for Cigar & Tobacco Product Taxes
  • Audit Procedures for Cement Production Taxes
  • Audit Procedures for Contractors and Repairmen
  • Audit Procedures for Grocery Stores
  • Audit Procedures for Hotel Occupancy Tax
  • Audit Procedures for Insurance Tax
  • Audit Procedures for Local Revenue Funds
  • Audit Procedures for Manufacturers
  • Audit Procedures for Miscellaneous Gross Receipts Tax
  • Audit Procedures for Mixed Beverage Tax
  • Audit Procedures for Motor Fuels Taxes
  • Audit Procedures for Motor Vehicle Tax
  • Audit Procedures for Sulphur Production Tax
  • Audit Procedures for Telecommunications Taxes
  • Audit Procedures for Unclaimed Property
  • Audit Procedures for Vessels
  • Audit Procedures for Well Servicing Companies
  • Auditing Fundamentals
  • Criminal Court Cost Charts 2004 – 2006
  • Sampling Manual

TOC | Preface | 1 | 2 | 3 | 4| 5 | 6 | 7 | 8 | 9 | 10 | Appendix | Glossary | Timelines

(Revised 06/2008)