The following are general guidelines for the Texas self-audit program. As with any guidelines, there is the potential for unique situations that may warrant adjustments as the process comes to fruition. However, every effort should be made to follow these timelines whenever possible to ensure a high level of consistency.
The initial step in a managed audit is for the taxpayer to make a request with the local field office. This request should be issued no less than 60 days from the postmark date on the outside of the actual audit notification letter that first informed you of the pending exam. The general rule of thumb is that your request will be denied if you have already sent the auditor anything that can be used to perform the audit itself. I would still encourage you not to assume anything and inquire about the availability of the program if interested, because each audit is unique.
Another factor considered in the application process for approval is whether the prior audit took more than 120 hours. If it did, then your request is more likely to be approved.
What if there is no prior audit history? If the taxpayer can demonstrate that they have the resources to submit a quality product in a timely manner, you may still qualify. This simply means that you will not be approved unless you can show that you know what you’re doing. The program was intended to save both the state and the taxpayer money, time and resources to get a quality audit done quickly. The state will determine this during a question/answer session held by phone. Someone intimately familiar with the nuances of the program (who is also a sampling expert) should be with you on that call fielding their questions.
There used to be a rule that if you had performed two Texas managed audits in a row, that you could not request a third. That has changed. The state will consider granting you entry into the program a third time, but the penalty and interest waiver will not automatically be waived. The amount of penalty and interest waived on the third managed audit will depend on whether the taxpayer has made significant improvements in correcting errors that were identified on the prior audits.
Once you submit your request for entry into the program, one of two things will happen. They state could flat deny the request. I would not give up yet and depending on who you’ve hired to perform the audit, there’s a possibility this person might have some pull to get you approved. Secondly, it has been my experience that you do not get a congratulatory letter signifying your approval. Typically, you get a response similar to,
“We received your request and let’s talk about this on the phone two weeks from this next Tuesday.”
This response signifies that they are considering approval, so you better have your tax consultant picked out at that point, because they need to be fielding those “approval” questions. This call also could serve as the entrance conference where you will 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:
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 the 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 work diligently 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 local audit office manager. 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 interests for the audit; In some cases, the managed audit agreement may be revoked.
Communication between the auditor and the taxpayer is essential when determining an appropriate sampling approach. It is my opinion that you must have a sampling expert at your side or you’re going to accidentally inflate your audit assessment. The managed audit contract requires the Comptroller to select the sample. Developing a sampling approach will include:
Analysis of any sample will be conducted jointly by the taxpayer, consultant and the auditor, but the final sample selection decisions rest with the auditor. If you have any problems or disagreements with the sample selection process, then I would contact the local audit field office manager immediately before proceeding.
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:
Analysis of any sample will be conducted jointly by the taxpayer and the auditor, but final sample selection decisions rest with the auditor.
Audit schedules submitted by the taxpayer must be in the 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.
You will be given only three opportunities to correct error rates greater than 25%. Each one comes with its own written warning. The managed audit contract will be revoked after the third one.
There will be circumstances where the taxpayer has worked diligently but due to a variety of unforeseen circumstances, will need more time afforded to them in order 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 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% of the original time given as an extension to the deadline. Thereafter, if the audit is still not finalized, waiver of interest and credit interest will cease as of the date indicated in the letter accommodating the adjustment. Any delay caused by the Comptroller’s personnel will add time to an extension, if needed.
Any additional requests for extension may be granted if it is apparent that the taxpayer is still progressing but has not been able to adhere to the timeline. However, interest waiver or credit interest may be denied for the entire audit period.
Additional important information:
The information above is not a guideline for you to follow but just a snapshot of the Texas Comptroller managed audit program to help with your base understanding.
Always double check the state’s website for updates regarding this information.