This article originally appeared in Interstate Tax Insights, Volume 2, Number 11, 1999. Reprinted with the permission of Interstate Tax Corporation, 193 East Avenue, Norwalk, CT 06855.
Introduction
Written Agreement
Interest on Refunds
Broad Scope
Projection Based on Sampling
Estimated Completion Date
Proposed Rule
Approval Process
The Audit Itself
The Audit Concludes
Audit Plan Summary
Benefit to the Taxpayer
Introduction
Recently, the Texas Legislature enacted into law S.B. 1319, which allows Managed Audits for sales and use taxes under Section 1, Subchapter B, Chapter 151 of Tax Code Section 151.0231, effective October 1, 1999. Texas now joins a growing number of states to offer certain taxpayers this option of managing audits. Some states, like California1 and Connecticut,2 have similarly enacted legislation authorizing such audits while others, like Ohio, have allowed managed audits through negotiations between the department of taxation and willing taxpayers.3
Written Agreement
Specifically, Section 151.0231 allows the Texas Comptroller of Public Accounts ("Comptroller") to give written authorization to a taxpayer to conduct a managed audit within certain parameters and guidelines. In exchange for the taxpayer's performance of the managed audit in compliance with the written agreement, the Comptroller cannot assess a penalty and has the option to also waive interest on any deficiency determined to be due. The only exception is that these waivers do not apply to deficiencies resulting from taxes collected but not remitted.
Interest on Refunds
Also during the same session, the Texas Legislature passed S.B. 1321 which adds Tax Code Section 111.064, allowing the Comptroller to pay interest on refunds. This provision applies to taxes overpaid on purchases made on or after January 1, 2000. The impact of this change on managed audits is that the waiver of interest on deficiencies found during such audits is within the discretion of the Comptroller, but interest on refunds is required.
Broad Scope
The statute broadly provides that the audit may be conducted on sales; purchases of fixed assets, expense items, or under a direct pay permit; and any other category specifically authorized in an agreement. Naturally, not all taxpayers are candidates for a managed audit. Some of the factors in determining candidacy include the taxpayer's history of compliance, resources to perform the audit, availability of records, and ability to pay any anticipated deficiency.
Projection Based on Sampling
S.B. 1319 also provides for the determination of tax adjustment under Section 151.430 utilizing projection based on a sampling of transactions. Prior to this legislation, a taxpayer was authorized to project tax based on sampling only for tax paid directly to the state, not for tax paid to vendors. Now a taxpayer can use sample and projection methodologies for refunds of taxes paid to vendors and for determination of tax liability or refund under managed audits. Use of a sample still requires approval from the state and issuance of the Comptroller's "Notification of Sampling Procedures."
Estimated Completion Date
A part of the signed agreement provides for an estimated completion date, the purpose of which is to bring the audit to closure in a timely fashion. Any extension request must be reduced to writing by the taxpayer at least thirty (30) days prior to the estimated completion date. This provision benefits both the taxpayer and the Comptroller in an effort to avoid never-ending audit cycles that overlap with subsequent periods. Since the statute makes no mention of the Comptroller's ability to request an extension, one may conclude that the estimated completion date cannot be prolonged by the state.
Proposed Rule
Separate from the statute, the Comptroller's Office has set forth a proposed rule, 34 TAC Rule Section 3.282, and a managed audit plan. These documents outline specifically the approval process, performance of field work by the taxpayer, review of that work by the Comptroller, determination of penalty and interest, option for a Dispute Resolution Officer ("DRO") conference, processing of the audit, and administrative remedies.
Approval Process
The approval process requires a written request by the taxpayer to the Manager of the Audit Division. An auditor is assigned to the case and a preliminary meeting is held. The preliminary meeting includes discussions of specific areas or categories of sales and/or purchases to be included; development of audit procedure guidelines for approved areas; verification that the taxpayer qualifies for the program; and the grant of formal approval.
The Audit Itself
Performance of field work by the taxpayer is required to be completed within the timeline established in the Audit Plan Summary. Various steps along the way require Comptroller approval, as outlined in the Audit Plan Summary. The Comptroller then reviews the field work and provides preliminary results to the taxpayer. As noted above, penalty may not be assessed except in the case that a taxpayer has engaged in fraud or willful evasion of tax, the agreement becomes null and void, and the waiver of penalty would not apply. As with penalty, interest may be waived on any deficiency at the discretion of the Comptroller, barring the existence of fraud, willful evasion of tax, or tax collected but not remitted. If the net adjustment is a refund, by separate statute, interest is required to be paid by the Comptroller on such refund.
The Audit Concludes
Any unresolved issues can be presented to a DRO in a conference to discuss taxability and procedural issues. This remedy is offered as a method of resolving as many matters as possible at the audit, rather than at the hearing level. The audit is then processed. Managed audits, once approved, have the same administrative remedies available as any other audit.
Audit Plan Summary
An additional "Audit Plan Summary" lists the required information for each identifiable business segment. Categories for review first must be identified (sales, purchases, fixed assets, expenses, other). A determination must then be made as to whether there will be a detailed review versus sample and projection. Any categories to be sampled must be presented and approved according to the Comptroller's sampling guidelines. If sampling is chosen, a sampling approach must be selected. This step requires identification of the populations and accounts of interest, verification of population bases, selection and analysis of samples, and issuance of the Comptroller's Notification of Sampling. Finally, a detailed time-line for completion of each step must be established.
Benefit to the Taxpayer
The benefit to the taxpayer of taking advantage of the managed audit option is that the taxpayer controls the process, and more importantly, the time frame for completion. A cost is the manpower required to perform the audit; however, many taxpayers would concede that the time investment for a conventional audit could be just as much. In addition, the managed audit yields the natural inclusion of overpayments of tax that are often overlooked in an auditor's review. Finally, the benefit of waiver of penalty and potential waiver of interest can be substantial.
1. Cal. Rev. & Tax Code § 7076, Stats. 1997, c. 686, Sec. 1, effective January 1, 1998.
2. 1999 Conn. Pub. Acts 173, §§ 60-62, as amended by 1999 Conn. Pub. Acts 1, § 42, effective July 1, 1999.
3. The Ohio Department of Taxation's Sales & Use Tax Division began a managed audit program in 1993.