How to Handle a Texas Tax Audit: Fieldwork, Appeals, and Programs

To handle a Texas tax audit, respond to the Comptroller’s notification promptly, assemble complete records before fieldwork begins, keep a representative involved, and use the informal review steps before the 60-day deadline to file a formal petition. The Comptroller administers more than 100 taxes and fees, and audits are the agency’s main tool for verifying what businesses report.¹ A standard audit covers four years and can add a 10 percent penalty plus 7.75 percent annual interest for 2026 on top of any unpaid tax.² How you handle each stage determines how much of that you end up paying.

Respond Carefully to the Audit Notification

Your first contact is an Audit Notification Letter in the mail, along with a request to complete the Audit Questionnaire (Form 00-750).³ The questionnaire covers your business activities, accounting software, where your records are kept, and who handles your tax filings. It has to be signed by someone with authority to bind the company, meaning a corporate officer, partner, or owner.⁴

Fill it out carefully. Vague or inaccurate answers invite broader scrutiny, while precise answers help narrow the scope. This is also the moment to decide whether to bring in a CPA, attorney, or other tax representative. You have the right to one at every stage of the audit, including this early paperwork.⁵

Gather Your Records Before Fieldwork Starts

Texas law requires you to keep and produce records that let the Comptroller verify your liability, including invoices, vouchers, checks, shipping records, contracts, and electronic equivalents.⁶ For a sales tax audit, the practical list is broader. Pull together the following and organize it by reporting period:

Sales journals, register tapes, and invoices showing gross receipts.
Purchase invoices, especially from out-of-state vendors where use tax may apply.
Resale certificates, exemption certificates, and direct-pay permits for every sale you did not tax.
General ledgers and financial statements the auditor can reconcile against your reported totals.
Federal tax returns, which the Comptroller uses to cross-check reported gross receipts.

Administrative rules require records covering total gross receipts, total purchases of taxable items, and documentation for every claimed deduction or exclusion.⁷ If you cannot produce adequate records, the Comptroller can estimate your liability from other sources, including your suppliers’ records. Those estimates almost always run higher than what good records would show.

What Happens at the Entrance Conference and During Fieldwork

After the Comptroller receives your questionnaire, the auditor schedules an entrance conference. The meeting covers the tax periods under review, the records needed, and the audit methods planned.⁸ Bring your representative. This is also where the auditor may ask you to sign an Agreement to Extend the Period of Limitation. Signing is voluntary. Refusing can push the auditor to rush or narrow the review in ways that may miss overpayments working in your favor, so weigh it carefully; if you do sign, insist on a defined extension period rather than open-ended language.

During fieldwork, the auditor verifies that the tax you collected and remitted matches your actual taxable activity, checks that you applied the right rate, confirms exempt sales are properly documented, and looks for use tax owed on purchases where no Texas sales tax was charged. The auditor also looks for overpayments; any credit found offsets what you owe.

The quality of your records drives how long fieldwork takes. Books sorted chronologically with exemption certificates tied to specific invoices can cut the on-site time significantly. Disorganized records push the auditor toward estimation methods that tend to inflate the assessment.

Pay Close Attention to Sampling

When your records are too voluminous for a line-by-line review, the Comptroller has statutory authority to audit using sampling.⁹ The two common approaches are statistical sampling, which projects errors across the full audit period using random selection and formulas, and time-period sampling, which examines specific months or quarters and projects outward.¹⁰ The auditor must notify you in writing of the method before using it.

Sampling is often where disputes are won or lost. If a transaction in the sample is not representative of normal operations, the auditor must pull it out and assess it separately. If the sampling method itself fails to follow generally recognized techniques, the projected portion gets thrown out entirely and the Comptroller must start over on that portion. If your sales mix shifts by season, or an unusual one-time transaction fell inside the sample window, raise it on the spot.

What the Assessment Adds to Your Tax

When an audit finds unpaid tax, the Comptroller adds penalty and interest. The standard penalty is 5 percent of the tax due, with another 5 percent if the tax is unpaid more than 30 days past the due date, giving a 10 percent combined penalty on most assessments.¹¹ Interest for 2026 runs at 7.75 percent annually, calculated as the prime rate plus one percent, and starts accruing 61 days after the original due date.²

Fraud changes the exposure dramatically. If the Comptroller determines the underpayment resulted from fraud, intent to evade, or deliberate destruction or alteration of records, a 50 percent penalty replaces the standard 10 percent.¹¹ The fraud penalty also eliminates the statute of limitations, so any period can be opened regardless of age. The normal four-year assessment window also disappears for unfiled returns and for gross errors where the corrected tax exceeds reported tax by 25 percent or more.¹²

Push Back at the Exit Conference

At the end of fieldwork, the auditor holds an exit conference and walks through an Audit Adjustment Report showing each error and the proposed tax, penalty, and interest.¹³ Every printout at this stage is marked draft because numbers can still change during regional review.

This is your first real chance to push back. If the auditor mischaracterized a transaction, missed an exemption certificate, or used a skewed sample, raise it here with documentation. The auditor will also explain your rights to further review. If you agree with the findings, you can accept and pay. If not, the audit continues through supervisor and regional processing, after which you receive a formal Notification of Audit Results. That notification starts the clock on your appeal deadlines.

Use the Informal Review Options

You have two informal options before escalating to a formal hearing, and both are worth using because they resolve disputes faster and more cheaply.

Reconciliation Conference

You can request a reconciliation conference with the auditor’s supervisor or manager at any point. It can take place at your business or at the audit office, and it lets you present additional records or argue that the auditor misapplied a rule.¹⁴ Factual disputes often resolve here.

Independent Audit Review

If the reconciliation conference does not solve it, you can request an Independent Audit Review Conference. A reviewer not involved in the original audit meets with both you and the auditor to evaluate the contested findings. Only one IAR conference is allowed per audit, and it must happen before the case is turned over to the Comptroller’s General Counsel for a formal hearing.³

File a Petition for Redetermination Within 60 Days

If informal steps fail, you must formally challenge the assessment within 60 days of the date on the Notification of Audit Results. Miss that window and the assessment becomes final and legally collectible with no further administrative remedy.¹⁵

The petition must include a Statement of Grounds explaining exactly why you disagree. The Comptroller’s Rules of Practice and Procedure govern the format.¹⁴ Be specific. A general objection goes nowhere. Identify each disputed item, cite the legal authority behind your position, and attach documentation the auditor did not consider.

Once the petition is accepted, you are entitled to a hearing with at least 20 days’ notice before it is scheduled.¹⁵ A hearing officer issues a decision. You can file a motion for rehearing, and after exhausting the administrative process you can appeal to a Travis County district court, which generally only makes sense for large assessments with a genuinely contested legal issue.

If You Cannot Pay in Full

Payment arrangements go through the Comptroller’s Enforcement Division, not the auditor. The auditor should refer you to the Enforcement Office in your area.¹³ Interest keeps accruing while you pay down the balance. If you do not pay or contest after receiving the Notification of Audit Results, the assessment becomes final after 60 days and full payment is due within 10 days after that.¹⁴

Two Programs That Can Change the Outcome

Managed Audit Program

If your records are extensive, you may qualify to conduct a managed audit, performing much of the examination yourself under Comptroller supervision. On a first managed audit, penalty and interest are generally waived if your work meets quality standards.¹⁶

You must request it within 60 days of the Audit Notification Letter, and requests are denied once fieldwork has started. The Comptroller looks at whether a prior audit took more than 120 hours; without a prior audit, you must show that a self-audit will save state resources and that you can deliver quality work. You also need a clean compliance history, no outstanding tax liabilities, no bankruptcy filings, and the ability to pay any resulting assessment.¹⁶ On a second consecutive managed audit, an error rate above 25 percent can trigger denial of the interest waiver if you do not correct the errors after notice.

Voluntary Disclosure Agreements

If you find unpaid tax liability before the Comptroller contacts you, a Voluntary Disclosure Agreement can shrink your exposure. You cannot have been previously contacted about the liability or received an audit notification.¹⁷ The program covers all taxes and fees the Comptroller administers except those under the International Fuel Tax Agreement.

The main benefit is a limited lookback. For taxes other than those you collected from customers but failed to remit, review is limited to returns due within four years of your initial contact. There is no lookback limit on collected-but-not-remitted taxes because the state treats that money as already its own. A Fast-Track option is available if you calculate the tax upfront and submit a spreadsheet by reporting period.¹⁷ A VDA does not provide blanket immunity: covered periods stay open to future audit within the normal statute of limitations, and the Comptroller can void the agreement if you break program rules.

One Boundary: Buying a Business

If you are buying a Texas business rather than running one you already own, successor liability is a separate issue the audit process does not solve on its own. Texas law requires a purchaser of a business, its inventory, or its name and goodwill to withhold enough of the purchase price to cover any taxes, penalties, and interest the seller owes, with your liability capped at the total purchase price including assumed debt.¹⁸ The only way to avoid it is a receipt from the seller showing all taxes paid, or a Certificate of No Tax Due from the Comptroller before closing. Your purchase agreement’s language about tax responsibility will not override this; the Comptroller will come to you.

1
Texas Comptroller of Public Accounts. Texas Taxes
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Texas Comptroller of Public Accounts. Interest Owed and Earned
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Texas Comptroller of Public Accounts. The Auditing Process
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Texas Comptroller of Public Accounts. Auditing Fundamentals – Chapter 2 – Pre-Audit Research
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Texas Comptroller of Public Accounts. Taxpayer Bill of Rights
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State of Texas. Texas Code TAX 111.0041 – Records Burden to Produce and Substantiate Claims
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Cornell Law Institute. 34 Texas Administrative Code 3.281 – Records Required; Information Required
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Texas Comptroller of Public Accounts. Auditing Fundamentals – Chapter 4 – Entrance Conference
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Texas Statutes. Texas Tax Code 111.0042 – Sampling in Auditing
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Texas Comptroller of Public Accounts. Auditing Fundamentals – Chapter 7
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Texas Statutes. Texas Tax Code 111.061 – Penalty on Delinquent Tax or Tax Reports
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Cornell Law Institute. 34 Texas Administrative Code 3.339 – Statute of Limitations
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Texas Comptroller of Public Accounts. Auditing Fundamentals – Chapter 8 – Exit Conference and Administrative Remedies
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Texas Comptroller of Public Accounts. Contesting Disagreed Audits, Examinations and Refund Denials
15
State of Texas. Texas Tax Code 111.009 – Redetermination
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Texas Comptroller of Public Accounts. Managed Audit Program
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Texas Comptroller of Public Accounts. Voluntary Disclosure Program
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Texas Comptroller of Public Accounts. Buying an Existing Business