Every company that operates in Texas with an annual turnover in excess of $1.23 million could be subject to the franchise tax. This corporate tax is handled on a state level by the Texas Comptroller’s office rather than the IRS, but it can still be subject to various audits under local tax law, just like its federal equivalents.
Many years can pass without a tax audit, but every business that pays franchise tax can be subject to one, even if only chosen at random. Receiving notification of an unexpected audit at your company can be stressful, time-consuming, and, in some cases, costly.
For many businesses, it makes sense to appoint a tax attorney to assist in dealing with an upcoming audit. In these cases, a tax attorney can be more than a legal representative, working to protect a corporation’s income and assets. They can also provide guidance and help a client to make sense of tax law when dealing with the state.
In even the most simple cases, it is often highly advisable to appoint a tax attorney at the earliest possible convenience. They can help to make sense of why the audit takes place, the steps to take in response, and monitor potential outcomes and opportunities on behalf of the client.
If you have received notice of an upcoming audit from the Tax Comptroller, our experienced tax attorneys are standing by to take your call and to help you understand what to do next.
Preparation and timeliness are crucial to any successful defense and our tax attorneys are standing by to handle your case to the fullest extent of the law. Call Ronald Arthur Stearns Sr. PLLC now at 210-853-2135 to speak to an adviser and unlock our decades of experience and legal expertise.
Texas Comptroller Audits
The goal of any audit undertaken by the Texas Tax Board is to confirm that any business operating in the state has properly collected, reported, and paid business taxes.
Fortunately for such businesses, the audit process works both ways in that the board seeks to assess whether a business has underpaid or overpaid tax.
An auditor will seek to determine whether the business in question has:
- Met all relevant Texas tax laws
- Neither intentionally nor accidentally committed tax evasion
- Limited bookkeeping processes that may fall foul of tax law in the future
Why You Might Be Audited
Not all businesses in Texas undergo an audit each tax year. Indeed, some corporations are more likely to receive a visit from the Tax Comptroller’s agents based on size alone.
A business is most likely to attract further investigation if they fall into any of these categories:
- They are a Priority One Account – Texas businesses that pay the most sales tax each year generally undergo tax audits as a matter of course
- They have significant outstanding tax payments – Businesses that were previously audited and found to owe $25,000 or more in taxes can expect regular ongoing audits
- Random selection – Some audit targets are chosen randomly by a computer, with the state often seeking to carry out a random tax audit on multiple companies across various industries
- Cross-state information sharing – Tax law enables data sharing across state lines and through the Internal Revenue Service and corporations that have been audited elsewhere may come under scrutiny after they file tax returns in Texas
- Public leads – The Tax Board’s overall goal is to protect taxpayers and they will often act on tips from the general public and local business community
The Difference Between the IRS and The Texas Comptroller
The Texas Tax Board operates solely on a state level, while the Internal Revenue Service covers federal taxes. They fulfill similar purposes, and it’s possible for a Texas company to receive an audit from both in the same year if they face tax issues.
For example, the IRS is responsible for income tax. Errors in any submission may result in a visit from an IRS agent and a subsequent IRS audit. Should these issues uncover tax crimes, it may result in a criminal referral to federal prosecutors.
Meanwhile, the franchise tax is handled solely by the state. It’s payable by most businesses operating within the state, even if they register net operating losses.
Key Franchise Tax Concerns for Texas Corporations
Even those experienced in completing their personal income tax returns, for example, may struggle with the various requirements of Texas franchise tax law. In the case of an audit, your tax attorney can help navigate the more complex issues and potentially even use the rules around corporate taxation to arrange refunds for tax overpayment.
Annual franchise taxation is based on the entity’s margin. There are four different ways to establish a margin:
- 70 percent of total revenue
- Total revenue after the deduction of the cost of goods sold (COGS)
- Total revenue without compensation
- A business’s total revenue minus $1 million
The total revenue used as part of the above calculations equates to the amount reported to the IRS as income tax, minus any statutory exclusions. These exclusions may include:
- Interest and dividends assigned to the business through federal obligations
- Foreign dividends and royalties
- Other exclusions specific to different industries and sectors
Cost of Goods Sold (COGS)
The cost of goods sold generally refers to any expenditure during a tax year that enables the company in question to produce or acquire its products for sale. The standard COGS guidelines apply to most businesses that sell physical products, with further allowances available in certain industries.
The COGS regulations apply explicitly to tangible items. As such, service businesses will rarely qualify for this type of deduction.
Just as many individuals can benefit from tax credits, certain businesses can do the same. A tax attorney can help businesses understand if they are overpaying on their tax bills and verify if they’re missing out on a credit for which they would ordinarily be eligible.
Corporate tax credits in Texas include:
- Temporary Credit for Business Loss Carryforwards
- Research and Development Activities Credit
- Certified Historic Structures Rehabilitation Credit
The Audit Process
The audit process begins when a company receives a Notice of Intent to Audit Books and Records. This notice could have been generated for any of the reasons outlined above. Still, it is important to keep in mind that the auditor is not necessarily looking to help an entity to get its tax affairs in order.
A tax lawyer can be essential, as the auditor explicitly wishes to discover tax law violations and aims to find opportunities to claim additional taxes, fees, and penalties.
In many cases, the auditor will request a desk or field audit. In the former, they request your presence at their offices, while the latter sees the auditor visiting your place of business.
You are under no obligation to accept either of these proposals. Again, a tax attorney can be immensely helpful here, as they can act on your behalf and request that the audit take place at their law offices.
This is advantageous as it means that auditors lose the ability to “fish” for additional accusations. Your tax attorney can ensure that they continue to operate within the law as part of their investigations, having already ensured you have all the required documentation at hand.
Your attorney will ensure that the auditor is unable to request information and documents they have no legal right to require, and will ensure that the taxpayer is never put under duress to sign documents unless they are legally compelled to do so.
The Importance of Acting Fast
Just as with the IRS, the Texas Comptroller’s office pursues cases of tax fraud and tax audits without delay. As such, any entity subject to a tax audit should take steps to address its tax issues immediately.
Tax can be complex, especially for a small business, and it is vital to retain the services of a tax attorney with experience dealing with tax problems. While no company is legally obliged to hire a tax attorney in the case of an audit, doing so can vastly increase the chances of a successful outcome.
The Attorney-Client Relationship
By appointing a tax attorney as quickly as possible, the attorney-client relationship can begin in earnest, giving the attorney the opportunity to understand the case and look into any tax problems from a legal perspective.
Information and expertise both play a key role in the tax audit process, and the more time a tax lawyer has to understand the case, the better their chance of a successful defense.
The attorney-client privilege means that it’s safe to share confidential or sensitive information. A skilled tax attorney will help clients to get their affairs in order and, where necessary, represent clients in criminal cases.
A state audit can also trigger an IRS audit, and acting fast means that the same tax attorney can assist clients in both cases. That might mean justifying unreported income or that the tax problems result in a criminal investigation for tax fraud. Either way, your attorney can be hugely beneficial.
Naturally, if tax problems result in a criminal case, a tax attorney is essential to a successful defense. Once again, the sooner your tax lawyer can get started on the case, the better they will understand the financial situation and the more they can do to help in avoiding criminal charges.
Why You Should Work With Ronald Arthur Stearns Sr. PLLC
At Ronald Arthur Stearns Sr. PLLC, we understand that every case is different. Whether you’re an experienced tax preparer or your business thrives on other skills, tax law can be complex and there can be numerous reasons for an audit, as outlined above.
We treat every client as our top priority and endeavor to reach the best possible outcome every time. Your tax attorney will keep you informed at every stage and work to ensure that no case ever becomes an unnecessary inconvenience.
That could mean sailing through an audit in a single meeting with the Tax Comptroller’s office. Alternatively, it may result in a criminal investigation. In these cases, your tax attorney will work to settle the case without either party needing to attend court wherever possible.
Our practice boasts over 26 years of extensive experience in the financial litigation sector and knows what it takes to traverse tax law and ensure that every case reaches the best possible conclusion for our clients, no matter how determined the auditor is to find fault.
Above all, we ensure our clients have access to the same expertise and legal knowledge possessed by the auditor. Auditors are trained and tasked with discovering discrepancies, underpayments, and opportunities for increased fees and taxes.
Legal representation from Ronald Arthur Stearns Sr. PLLC ensures that our clients have access to just as much knowledge and experience, but with someone actively working to protect the interests of you and your business.
Contact Your Franchise Tax Defense Lawyer Today
If your company faces an audit, then our tax attorneys are standing by to protect your brand, reputation, and income. One phone call is all it takes to ensure you enjoy the best possible defense against any tax-related allegations.
We’ll also ensure you enjoy the best possible support – your attorney will help you understand the case, the likely outcomes, and what you can do about it at every stage. We work to make a difference for the taxpayer, whether commercial or individual, and we’re standing by to take your call.