1. Reasons for Texas business tax audits

First, the failure to pay employment tax is one surefire way to get yourself audited. A company is required to withhold taxes and social security/Medicare taxes from their employees’ wages. They are also charged with paying their share of social security and Medicare taxes. But instead of using these funds for personal use, some businesses will divert them to other operations. When the amount becomes due, that company files for bankruptcy or ceases operations. Then they plan to open under a different name and keep their withheld taxes. That is not the worst part. In regard to a business tax audit, those responsible are personally liable for the total amount of taxes withheld. This includes the employee’s withheld portion that should have been paid.

Some Texas business tax audits happen for no reason whatsoever. They happen to businesses that have never been audited. No mistakes have been found in the recorded financials. The company does not sell any products that the IRS tends to scrutinize more. Nonetheless, the company has been audited. Some have associated it with a coin flipping process. That is, the IRS audits a company without cause, just to keep it on its toes. When an auditor approaches you, do what most accountants recommend: get your documents professional, confident, and respectful.

If you started a small business, it is stressful enough to keep it afloat and manage your employees. One of the last things you need to deal with is a tax audit. A Texas business tax audit can result in severe penalties. Now specific triggers or reasons for business tax audits have been made public, but here are four that should make any business owner sit up and take notice. Even after preparing for this eventuality, it is best to consult an Austin TX accountant for advice and added information.

1.1. Inaccurate income reporting

One way to report inaccurate income on your return is to not report or underreport your 1099 income. If you’re caught by the IRS, you could receive an additional tax bill, interest, and penalties. A Texas business tax audit will involve similar repercussions of a tax audit with the exception that instead of filing an amended return, your business may face criminal prosecution, increased penalties, or worse. To make sure all your income is reported, conduct a review of your records. This may involve interviewing your employees, volunteers, or other folks who deal with your funds to uncover unrecorded transactions or personal withdrawals of cash.

One of the most important things to do to get ready for your business tax audit is to start early. If you know you’ll be facing extra scrutiny, you can bet on the fact that it’ll be obvious to the auditor if you aren’t well prepared. Getting your books in order well before the meeting can also give you time to fix errors, locate and obtain documentation, spreadsheet your expenses, and prepare yourself for audit questions or the potential need to defend your business tax return. It’s also important to remember that a tax audit can trigger other types of audits, and that the auditor will likely look at your personal tax returns (the auditor certainly has software and training to flag discrepancies for further review).

1.2. Suspicious deductions

But that is exactly what happened in the recent BOO. Exemption rates that are significantly higher than the norm can be a red flag. Not only are they suspicious, but they demonstrate that an examiner needs to look further into the facts and circumstances of each contracting audit. It is not without reason that the exemption rates in contracting industries have been viewed with a significant amount of skepticism. This, even though the Texas Comptroller has stated that they are not of that firm’s rates. This was determined after their files of CST-16 forms were reviewed for CDTFA audits.

Excerpt: “Suspicious deductions.” Few things attract the attention of an examiner faster than significant amounts of deductions in certain categories. This is particularly true if such deductions claim the deduction of previously categorized as subject to sales tax as now either a “General Deduction,” a “Compensation Deduction,” or a “Cost of Goods Sold” deduction. This is especially true when a taxpayer that has been classified as a Wholesaler by the STAR system over a three-year period is asserting that certain costs are now “Cost of Goods Sold” deductions. Insurance is one of those costs. Traditionally, insurance was made on the finished product. If I do not have any finished products, then it is hard to see how the insurance costs are costs that can be deducted on the Schedule C as “Cost of Goods Sold.”

2. Tips for organizing financial records

A third tip is to keep a copy of your tax software. When auditors see QuickBooks, TurboTax, or other popular software brands, they may ask to see the accompanying program files. You may think it’s a crazy request, but it could happen. You want to be prepared. Finally, make an attempt to learn the auditor’s reason for selection. In some cases, computer software and data mining has caused the audit, but the most common reasons involve a prior audit where discrepancies were noted, or data matching conducted by the state. If you are not aware of the auditor’s reasoning for selection, now will be a good time to learn, but this step is preparatory in nature. Knowledge is a useful precaution.

If you are selected for a Texas business tax audit, it is important to prepare for your meeting or meetings with the auditor. By taking some steps to organize your financial records in advance, you can make the audit proceeding go a bit smoother. One tip is to go ahead and prepare a trial balance, which will work as an accounting worksheet showing the balances of all your general ledger accounts. An auditor may want to correct the balance in one account without messing up the rest of the ledger, and a trial balance will make that process a little quicker and easier to manage. You can also group deposits in a methodical manner. The auditor wants to see that company receipts are reported accurately, and he or she doesn’t like to waste time in the process. Make the auditor’s job easier by segregating deposits by week, by customer, or by source of deposit. You have a lot of options, but make sure that each are logical and clearly marked.

2.1. Keep separate business and personal expenses

One of the most common ways that business owners combine accounts is by using one bank account for both personal and business expenses. Make sure that the name of your account distinguishes it as a business account, i.e., Bank X (Business or DBA). Business accounts should be used to pay business expenses, and that’s it. Only personal accounts should be used to take care of running house expenses. Avoid placing too much money in your business account. All business expenditure should be traceable, from the bank statement, to the receipt and ultimately, to the expense. If you have questions later on about the tax deductibility of an expense, you can always consult a lawyer or accountant to see what works best for your business.

One of the most important things you can do to prepare for the Texas Comptroller’s audit is to keep a thorough and separate record of business expenses from your personal expenses. Record keeping is one of the key requirements under Texas sales tax law. However, it’s also one of the easiest mistakes to make as a business owner, so most business owners end up failing their audit due to poor record keeping. We have seen a lot of audits, and most of our clients that are undergoing an audit are being audited because of bad record keeping of business transactions or just poor management of records for business and personal taxes. Having said that, there are a few guidelines that you should absolutely adhere to when managing your records.

2.2. Maintain accurate and up-to-date records

You also need to be familiar with the laws and regulations that apply to your Texas business, including any recent changes. The Texas comptroller’s office audits a variety of tax returns, including sales, franchise and mixed beverage taxes. You may be selected for a Texas business tax audit for any number of reasons, and much of what you’re required to provide will depend on the type of tax return being audited. Go through all of your tax data, sales receipts and documents for your business. Types of required materials may include: receipts for sales, taxes, purchases, business expenses, and other business transactions; bills, invoices, receipts, and other documents supporting recorded expenses and payments; general ledger and explanations of coded entries and classification of sales and expenses; detailed disbursements for each month of the accounting period; record of the depreciation schedule for all fixed assets; contracts and other sales and revenue contracts; and other documents and materials you used to prepare the Texas business tax return being audited.

The first, and most important, step in preparing for a Texas business tax audit is maintaining accurate and up-to-date records. Your tax returns are based on these records, and an auditor will want to compare them. They want to see a complete paper trail that includes all of your transactions. The Texas comptroller’s office recommends that you keep all business records for a minimum of four years from the date the tax is due or paid, whichever is later. It may be tedious or even cumbersome, but maintaining good records can help you pass a Texas business tax audit with flying colors. Keep these records in a safe and secure location, and update them regularly. Clear records will make an auditor’s job easier, and your audit should be completed more quickly.

Guideline for how to prepare for a Texas business tax audit. As a business owner, the possibility of a Texas business tax audit is something that probably causes you a great deal of stress. Planning for a Texas business tax audit may be the last thing you want to focus your attention on, but a little bit of preparation can go a long way in relieving the stress and worry. With the right mindset and four simple tips, you should be able to pass the audit without a hitch.

2.3. Use accounting software for better organization

You may be thinking, “Why have the auditor take this information over the more traditional means of printouts”? While it is true that the traditional, hard copies of financial papers are often the preferred version of your records, an electronic copy from QuickBooks will be sufficient and has taken precedence over non-electricized records at a quicker pace than we ever imagined, resulting in it indeed saving sufficient time. Auditors, much like the rest of us, prefer and work within what’s easier for them. Nowadays, technology has allowed for the lightning-fast disposal of non-value-added tasks, making having the entirety of the company records in one place enormously worthwhile.

Accounting software packages, such as QuickBooks, will facilitate the auditor’s job and will work to your advantage. Companies, when faced with an audit, will sometimes present data in a lackluster manner in hopes that the auditor will bypass further testing. Further analyzing the surprise inspection will then only catch the best of the company’s bad habits. Most auditors have seen sneaky approaches employed by companies willingly presenting their flags only, and will refuse to be subjugated. The auditor will rely more heavily on the accounting software’s digital database and less on the presentation materials. For this reason, provide the auditor with copies of your financial data at once. The odds will then work in favor of the audited company. The auditor will have an organized and professional opinion of the company. The remaining process will seem less arduous to the auditor and will result in a more favorable audit.

3. Documentation for a smooth audit process

Be ready to show that you have always reported the funds that are not yours, and if your business had a loss in the year under audit, have a clear explanation of the guarantees that creditors, suppliers, employees, and customers believe in your business. Honestly, debts are settled, and all appropriately recognized revenue and cost of goods sold are accounted for regardless of the year of completion. DECLARE ALL CASH RESERVE BALANCES SENT TO YOUR BANK ACCOUNTS, INCLUDING PERSONAL ACCOUNTS FOR MONEY SPENT ON BUSINESS TRANSACTIONS. Keep yourself ready to answer ‘How’ to sourcing the funds you used in purchasing investments, properties, personal or business assets. Documenting evidence showing that funds used are from non-taxable sources, or from gifts, loans, or income before business start-up (an accountant will request your business plan). An audited record is a sure means of surviving an audit, of a committed Internal Revenue Service agent.

Without an effective bookkeeping system, you are really going to jeopardize your chances to show evidence of fixing a tax mistake. An ordinary auditor might not come with an expectant mood to find you perfectly prepared for the tax audit process, but as you begin to present the cash receipts, ledgers, and spreadsheets of your business, the hope of finding accurate business transactions may be raised. Also, note that arranging documented copies of tax returns, bank statements, credit card statements, invoices, and cancelled checks are very vital. Also, include calendars or diaries of business appointments. Secure proofs of business vehicle expenses, such as odometer logs, repair bills, credit card receipts, and other papers (lease documents or car hire purchase agreements), showing the split of business and personal expenses. Lower your business tax return risk through an effective method, which should not only prove your innocence but will also significantly decrease your business tax liabilities.

3.1. Gather all relevant receipts and invoices

The review would still be a lengthy process, but at least the punishments will not be applied since everything is orderly and according to the law. With such a process, the company would be able to continue with its operations without any hassle of penalties being written on the fine print at the end of the audit.

Considering a tax audit is a thorough process and experiences intervals depending on the size and complexity of the company, this would surely be a very stressful experience. But when the company is ready and documents are all set, then it would only be a smooth sailing process. During the examination of your records, the auditor or reviewer will respect your right to confidentiality and will tend to take care in handling your records so that they are not lost, misplaced, or stolen. An auditor carefully monitors access to and movement of records within and outside the department, and only those employees who are helping with the audit have access to taxpayers’ records.

Before conducting a business tax audit in Texas, an auditor usually contacts the taxpayer, either by letter or telephone, to explain the audit process and answer general questions. As a general rule, businesses are audited for one of two reasons. One is to verify amounts reported on a tax return; the other is to verify that all legal requirements are met (e.g., reporting and remitting sales tax, collecting and paying over state and federal taxes, and remitting payments to workers and independent contractors and properly classifying workers as employees or independent contractors).

Preparing for a Texas business tax audit is important and can be a complex procedure. During a tax audit, a taxpayer must show the person performing the examination, usually an auditor or reviewer, all the records that explain, support, and verify items reported on tax returns. Taxpayers who fail to provide the necessary records are subject to penalties as prescribed by law and easily lose credibility with the auditor. Your cooperation will expedite the audit. Whenever possible, provide requested records on a timely basis.

3.2. Prepare detailed explanations for deductions

During the business tax audit, the Texas Comptroller’s staff typically ask for original or final documents to support claimed deductions. Preparation and complete documentation is critical. Don’t spend time summarizing and organizing your records; rather, present your records in the same sequence that the Methodology section of the Texas Comptroller’s Examination Procedures Manual (EPM) lists the items it wants during its typical business tax audit. This method maximizes the auditor’s understanding of the numbers and the level of your organization, summarizes the documentation in one easy step, utilizes professional courier services, and ensures that the homes of expensive missing items increase.

Review and summarize each type of deduction your Texas business will claim on its franchise tax report. For example, if you claim a cost of goods sold deduction, summarize the items included – opening and closing inventory, purchases, wages, etc. – and then provide documentation to support these items during the examination phase. Although Texas considers some of the same types of deductions when you report your adjusted gross income to the Internal Revenue Service and to the Texas Comptroller’s office, they have different rules. Texas borders on being fiscally invasive when you compare it to the IRS.

4. Importance of seeking representation from a qualified CPA

A routine audit is a scenario in which you should seek representation by a qualified CPA. The phrase “routine audit” is a euphemism for an audit that is a result of a random draw into an audit screening. Generally, no computer audit screenings are suggested by a CPA unless the audit committee is able to spin straw into gold and is having an awfully busy day. The guidelines generally have more credence if the business is in an intellectual property industry where the details of the technology are encyclopedic and quickly visible. The days when our revenue agency was called the Income Tax Department were the golden days for the humble laud. During the present-day nadir of an International Business tax audit, the name auditors of the Humble Firm generally come from a carefully selected pool of university graduates who are expected to possess both extraordinary intellect and a tirelessness previously reserved for burrowed moles. The natural physical properties of this pool of talent mean that random audit screening, even in its nascent stages, is completely unknown to the vast majority of auditors who could, outside of becoming auditors, be a natural part of a band of well-trained chimpanzees carrying out the same tasks for only very slightly higher wages. Only when the audit occurs is the magnanimous fact that you have been skidded over by the audit process mentioned in the subsequent literature. Don’t take my word for it. It’s all in the literature. Of quite some importance would be having an Irving accountant from the Humble Firm resting in the conference room at your business providing more than an average amount of tedious detail as needed and making the cup of coffee last a little bit longer than average.

An audit can be a stressful and time-consuming event. This is even more so if you are unprepared. Business owners can conduct some small steps to help alleviate the stress and demonstrate confidence for their business audit. Working with one of the Irving CPAs can also help business owners because they possess inside knowledge on how the audit process works. Paying attention to the audit guidelines and working with dedicated professionals can help lower the risks of any small business tax audit.

4.1. Understanding complex tax laws

Or at least to identify the risk and the related tax impact. Putting all the potential tax paid on a non-TPBT variance issue in context by comparing it to total annual cash flow. A background on a primary service or product. An adverse POI for a given quarterly period, which drastically increases the TPBT under- or over-payment exposure. Why is on a GAAP accrual basis with a small TPBT, where the issue of concern is attributed to largely theoretical, negligible, non-cash, or permanent book-tax differences, a taxpayer is frequently blindsided by the sheer magnitude of this tax exposure. In a year when minimal or no true-up payments are actually made, the taxpayer can, as a result, remain on solid ground.

It is very critical and important for a taxpayer to understand basic Texas business tax provisions that provide for the sourcing of receipts or gross receipts. It is ever increasingly important in today’s economy with its “narrowing” of the tax base, mind-boggling, and sometimes baffling tax structure. Comprehensively be prepared for a complex state gross receipts database called Texas NGL. A deep understanding of economic nexus interpretation. Also, to completely understand what’s the correct method for estimating Texas factor numerator to the utmost extent as allowed by Texas tax provisions. Above all, it is important for a taxpayer to learn an accepted method for estimation of such Texas factor numerator, and of course stick to it if it holds water.

4.2. Negotiating with tax authorities

Settlement is always an option, but you might not like the result. The audit process can drag on and you may want to settle to get it behind you. In some situations, you can show the auditor evidence that suggests purchasing without tax is allowed. But circumstances can get complicated very quickly. If the issue is an e-way bill, the e-way bills for taxes paid in other states will factor into the final amount of negotiations. NavigationItemSelectedListener is critical and may result in some negotiations not working in your favor. So try to make them so that they are acceptable and fair to all involved. Ultimately, you are defining your audit future.

In Texas, the Comptroller’s office is sometimes willing to reach a settlement, but this option isn’t always to your advantage. To avoid going to trial, you need to collect persuasive evidence that shows your interpretation of the tax code is correct. If you’re able to link all of the audit evidence together and show that the rule you’re using is correct, there are opportunities to negotiate and still save a bit of money. But, as we mentioned, you won’t always be able to find areas of agreement. Arguments can end in a conundrum very quickly, for example due to issues of business expenses. And spending money can quickly become very costly.