The Texas Comptroller’s office conducts thousands of sales tax audits every year, and most business owners have no idea why they were selected. Some audits are random, but most are not. The Comptroller uses data analytics, industry comparisons, and reporting anomalies to identify businesses that may be underreporting or mishandling sales tax. Understanding what puts you on the radar can help you avoid an audit in the first place, or at least prepare you for what’s coming if you’ve already received a notice.
Inconsistent Reporting Patterns
One of the most common audit triggers is inconsistency in your sales tax filings. If your reported taxable sales fluctuate dramatically from period to period without an obvious explanation, the Comptroller’s algorithms will flag your account. The same is true if your reported sales tax doesn’t align with other information the state has about your business, such as federal tax filings, industry averages, or credit card processing data the state can access through third-party reporting.
Businesses that report zero taxable sales for extended periods while clearly remaining operational also attract attention. The Comptroller knows that restaurants, retailers, and service businesses generate taxable transactions. A string of zero returns from an active business suggests either non-compliance or a misunderstanding of what’s taxable.
Industry-Specific Targeting
Certain industries face higher audit rates simply because they present more opportunities for error or abuse. Restaurants are perennial audit targets because of the complexity of taxing food and beverages differently depending on how they’re sold. Construction contractors get audited frequently because the taxability of their work depends on the type of contract and whether they’re improving real property or providing a taxable service. Auto repair shops, retailers with mixed inventory, and businesses that sell both goods and services all face elevated audit risk.
If you operate in one of these industries, assume the Comptroller is paying closer attention to your filings than a business in a lower-risk category. That doesn’t mean you’ll definitely be audited, but it does mean your filings should be defensible.
Nexus Triggers for Out-of-State Businesses
Texas has become increasingly aggressive about auditing out-of-state businesses that sell into Texas without collecting sales tax. Since the Wayfair decision in 2018, states can require remote sellers to collect tax once they exceed certain sales thresholds. Texas set its threshold at $500,000 in annual Texas sales.
The Comptroller identifies out-of-state businesses through marketplace data, shipping records, and information-sharing agreements with other states. If you’re selling into Texas from another state and haven’t registered to collect Texas sales tax, an audit notice may be your first indication that the Comptroller knows about your Texas sales. At that point, you’ve lost the opportunity to come forward voluntarily and limit your exposure through the state’s voluntary disclosure program.
Customer Complaints and Competitor Reports
It doesn’t happen often, but audits sometimes originate from tips. A disgruntled former employee, a competitor, or even a customer who notices you’re not charging sales tax can report you to the Comptroller. The state investigates these tips, and if the information appears credible, an audit may follow.
This is another reason to take compliance seriously even if you think your business is too small to attract attention. You can’t control whether someone reports you, but you can control whether the Comptroller finds problems when they look.
What To Do If You Receive an Audit Notice
If you’ve received a notice that the Comptroller intends to audit your business, don’t panic, but don’t ignore it either. The notice will specify which periods are under review and request certain records. You typically have 60 days to respond, though extensions are sometimes available.
Before you respond, consider consulting with a tax professional who handles Texas sales tax audits. The way you respond to the initial notice and the records you provide can significantly affect the audit’s outcome. Providing too much information can expand the scope of the audit. Providing too little can lead the auditor to estimate your liability using methods that don’t favor you.
The Comptroller’s auditors are professional, but their job is to find additional tax owed. Having experienced representation levels the playing field and ensures you don’t make avoidable mistakes that increase your liability.
Taking the Next Step
If you’ve received a Texas sales tax audit notice or believe your business may be at risk, we can help you understand your exposure and develop a defense strategy. Schedule a free consultationto discuss your situation with our team.
