It’s a letter that no one looks forward to—a notice of determination (also sometimes called a “Notification of Audit Results,” “Notification of Exam Results,” or “Notice of Tax/Fee Due”) from the Texas Comptroller of Public Accounts (the “Comptroller”) saying that you or your business owe tax. How do you respond?
There are options.
Who’s the Comptroller?
The Comptroller is the official in Texas who is responsible for collecting most state (and some local) taxes.[1] These taxes include:
- state and local sales and use tax;[2]
- franchise tax;[3]
- motor vehicle sales, use, and rental tax;[4]
- motor fuels tax;[5]
- oil and gas severance taxes;[6]
- insurance taxes;[7]
- public utilities gross receipts tax;[8]
- mixed beverage gross receipts tax and mixed beverage sales tax;[9]
- cigarette, cigar, and tobacco taxes;[10]
- state hotel occupancy tax;[11] and
- oil well servicing tax.[12]
What’s a Notice of Determination?
Now, say the Comptroller thinks you haven’t paid the correct amount of one of these taxes. The Comptroller can then determine that amount based on any available information.[13] The Texas Tax Code calls this a “deficiency determination.”[14] At this point, the Comptroller is required to send the taxpayer by mail, electronic means, or personal service a notice of determination that sets out the amounts of tax, penalties, and interest the Comptroller believes are due.[15]
It’s important not to sleep on a notice of determination if you disagree with it, because a) this is point in the process where you have the most options, and b) the notice is time-sensitive. If you don’t respond to the notice by the date set out on the letter, the determination becomes final, meaning you’ll have to pay up or the Comptroller office will start trying to collect.[16]The timeframe for responding to a notice of determination is usually 60 days after the date the notice is sent out.[17]However, if the Comptroller has made a jeopardy determination (meaning basically that the Comptroller is worried that the state isn’t going to get paid), a response to the notice must be returned within 20 days after the notice is sent out.[18] In either case, this response is called a petition for redetermination.[19]
What’s a Petition for Redetermination?
A petition for redetermination is a written request for a redetermination hearing and a statement of grounds for why the deficiency determination is wrong.[20] The statement of grounds must identify the contested items or state general contentions that identify categories of contested items.[21] The statement of grounds also must include the factual basis and legal grounds supporting the taxpayer’s position with regard to each contested item or general contention and must be signed either by the taxpayer or by the taxpayer’s authorized representative.[22]
The petition for redetermination starts an administrative hearing process, which is the only prepayment forum for a taxpayer to dispute a deficiency determination in Texas. This means that a taxpayer doesn’t have to pay the tax, penalties, or interest assessed by the Comptroller unless and until the dispute over the deficiency determination is resolved against the taxpayer.[23]
After receiving a petition for redetermination, the Comptroller typically will review the deficiency determination in-house, giving taxpayers an opportunity to provide additional information to try and get everything cleared up.[24] If this is unsuccessful, the Comptroller will transfer the hearing to the State Office of Administrative Hearings (“SOAH”), where an administrative law judge (“ALJ”) will propose a decision to resolve dispute.[25]
Note the word “propose.” That’s because the ALJ’s proposal for decision is not binding on the Comptroller. The Comptroller is free to completely disregard the proposal for decision in making a final decision, meaning that a taxpayer could win with the ALJ and still lose in the end.[26] If the taxpayer loses the administrative hearing and a motion for rehearing is denied, the taxpayer can take the fight to Travis County district court.[27] However, the taxpayer will have to pay any taxes that are not in dispute as the cost of entry.[28]
What if You Disagree with the Notice of Determination but Don’t Want to or Can’t File a Petition for Redetermination?
There are other options for challenging a deficiency determination, but they require that the taxpayer pay something.
If a taxpayer can pay the deficiency determination but wants to dispute the determination in district court rather than going through the administrative hearing process, the taxpayer can submit payment to the Comptroller accompanied by a properly drafted protest letter.[29] The protest letter needs to explain fully and in detail why the tax is unlawful or why the Comptroller is not legally allowed to collect the tax.[30] The protest payment also must be made by the later of four years after the tax was due and payable or six months after a jeopardy or deficiency determination becomes final.[31] After submitting the protest letter, the taxpayer will have a 90-day window to file suit in Travis County district court seeking recovery of the payment based on the grounds contained in the protest letter.[32]
Under very rare circumstances, the Comptroller also may be willing to do a “courtesy audit” to review a deficiency determination after it becomes final. It’s called a “courtesy audit” because the Comptroller has no legal obligation to do it, and short of bringing a court action, the taxpayer is without recourse if the Comptroller ends up disagreeing with the taxpayer. The Comptroller typically requires that the taxpayer pay up-front a certain percentage of the amount that would be due if the Comptroller agrees with the taxpayer as a result the courtesy audit. Again, since the Comptroller is not required to provide a courtesy audit, you really shouldn’t count on it being an option.
What if You Don’t Do Anything in Response to a Notice of Determination?
Again, if you don’t submit a petition for redetermination by the required date, the deficiency determination becomes final.[33]In the case of a normal deficiency determination, the amount of the determination then becomes due and payable 10 days after this date.[34] If you don’t pay by that point, a 10 percent penalty is automatically assessed.[35]
In the case of a jeopardy determination, the deficiency becomes due and payable immediately upon the issuance of the notice of determination.[36] If you don’t pay the amount of the determination by the date specified for submitting a petition for redetermination, a 10 percent penalty is automatically assessed.[37]
What if You Pay a Deficiency Determination and Later Find Out that it Was Wrong?
Let’s say you pay the amount of the determination. That’s not necessarily the end of the story. If a taxpayer later determines that they didn’t really owe the tax that they paid, and assuming the statute of limitations hasn’t expired, the taxpayer may be able to file a refund claim.[38] As with a protest payment, the statute of limitations for filing a refund claim is the later of four years after the tax was due and payable or six months after a jeopardy or deficiency determination becomes final.[39]
The refund claim must be submitted with the Comptroller in writing and must fully detail the reasons why the tax was unlawfully or erroneously collected.[40] After an informal review, the Comptroller will decide whether to accept or deny the refund claim.[41] At this point, the taxpayer is given 60 days to choose between two options.[42]
First, the taxpayer could request a hearing on the refund claim.[43] As with a petition for redetermination, a request for a refund hearing initiates an administrative proceeding that ultimately will be transferred to SOAH, where an ALJ will make a proposal for decision, which, again, the Comptroller can decide to accept or reject.[44] If as a result of this hearing, the refund claim is denied as is a motion for rehearing, the taxpayer then has a 60-day window to file suit in Travis County district court seeking recovery of the amount of the claim.[45]
Alternatively (and this is brand-new as of September 1, 2021), the taxpayer could file with the Comptroller a notice of intent to bypass the administrative hearing.[46] The Comptroller then has thirty days to require the taxpayer to participate in a conference to discuss the issues involved in the refund claim.[47] After this conference, the taxpayer has 60 days to file suit in Travis County district court.[48] If the Comptroller doesn’t require a conference, then the taxpayer has 90 days to file suit.[49]
Final Thoughts?
Figuring out how to respond to a notice of determination from the Comptroller can be complicated, but you don’t have to go through it alone. We’re here to help. Don’t hesitate to contact us for a free consultation.
Freeman Law aggressively represents clients in tax litigation at both the state and federal levels. When the stakes are high, clients rely on our experience, knowledge, and talent to help them navigate all levels of the tax dispute lifecycle—from audits and examinations to the courtroom and all levels of appeals. Schedule a consultation or call (214) 984-3000 to discuss your tax needs.
[1] See Tex. Tax Code §§ 111.001 (requiring the Comptroller to collect the taxes imposed under Title 2 of the Texas Tax Code, entitled “State Taxation”), 321.301 (requiring the Comptroller to collect any sales and use tax imposed by a municipality), 322.201 (requiring the Comptroller to collect any sales and use tax imposed by a special purpose taxing authority), 323.301 (requiring the Comptroller to collect any sales and use tax imposed by a county); Tex. Ins. Code § 201.051(a) (requiring the Comptroller to collect taxes and certain fees imposed under Title 3 of the Texas Insurance Code); Tex. Util. Code § 16.004 (requiring the Comptroller to collect the assessment imposed by section 16.001 of the Texas Utilities Code on the gross receipts of “each public utility, retail electric provider, and electric cooperative within the jurisdiction of the [Public Utility Commission] that serves the ultimate consumer, including each interexchange telecommunications carrier.”); see also Tex. Gov’t Code § 403.011(a)(11) (stating that one of the Comptroller’s duties is “examine and settle the account of each person indebted to the state, verify the amount or balance, and direct and supervise the collection of the money . . . .”).
[2] See Tex. Tax Code §§ 151.051, 151.101, 321.301, 322.201, 323.301.
[3] Id. § 171.001(a).
[4] Id. §§ 152.021, 152.022, 152.026.
[5] Id. §§ 162.351, 162.352, 162.354.
[6] Id. §§ 201.051, 202.051.
[7] Tex. Ins. Code § 201.051(a); see also 34 Tex. Admin. Code §§ 3.809-3.835.
[8] Tex. Util. Code §§ 16.001, 16.004; see also 34 Tex. Admin. Code § 3.511.
[9] Tex. Tax Code §§ 183.021, 183.041.
[10] Id. §§ 154.021, 155.021, 151.0211
[11] Id. § 156.051.
[12] Id. § 191.082(a).
[13] Id. § 111.008(a); see also id. § 111.0021 (stating that the provisions of Chapter 111 of the Texas Tax Code apply to any tax or fee that the Comptroller is required collect).
[14] Id. § 111.008 (caption).
[15] Id. § 111.008(b).
[16] Id. § 111.009(b), 111.022(b). Note that when the Comptroller issues a deficiency determination (explained later in this paragraph and in more detail towards the end of this post), the Comptroller will usually begin collection action (generally filing state tax liens) immediately, since the amount of the determination is required to be paid upon the issuance of the notice of determination. See id. § 111.022(a).
[17] Id. § 111.009(b).
[18] Id. § 111.022(b).
[19] Id. §§ 111.009, 111.022(b).
[20] 34 Tex. Admin. Code §§ 1.10(a)(1); 1.11(a).
[21] Id. § 1.11(a).
[22] Id. § 1.11(a), (b).
[23] Tex. Tax Code § 111.0081(c). Things are a little different with a jeopardy determination since this kind of determination becomes due and payable upon the issuance of the notice of determination. Id. § 111.022(a). Thus, a taxpayer that receives a jeopardy determination technically is required to pay the tax immediately even if they file a petition for redetermination. If the taxpayer files a petition for redetermination, however, the Comptroller often will limit collection action to filing state tax liens against the taxpayer until the dispute is resolved.
[24] 34 Tex. Admin. Code § 1.11(f).
[25] Id. §§ 1.20(b), (c), 1.33.
[26] Id. § 1.34.
[27] Tex. Tax Code § 112.201(a).
[28] Id. § 112.201(b).
[29] Id. § 112.051.
[30] Id. § 112.051(b).
[31] Id. § 111.104(c)(3), 111.201, 112.051(c).
[32] Id. § 112.052.
[33] Id. § 111.009(b), 111.022(b).
[34] Id. § 111.0081(a).
[35] Id.
[36] Id. § 111.022(a).
[37] Id. § 111.022(c).
[38] Id. § 111.104(b).
[39] Id. § 111.104(d).
[40] Id. § 111.104(a), (b), (c).
[41] Id. § 111.1042.
[42] See id. §§ 111.105(a), 111.106(a).
[43] Id. § 111.105.
[44] Id. § 111.105; 34 Tex. Admin. Code §§ 1.1(b), 1.20(b), (c), 1.33, 1.34.
[45] Tex. Tax Code § 112.151.
[46] Id. § 111.106(a).
[47] Id. § 111.106(c).
[48] Id. §§ 111.106(b)(1), 112.151.
[49] Id. §§ 111.106(b)(2), 112.151.
