Receiving an assessment from the Texas Comptroller can be overwhelming, and not just from a financial perspective. To a taxpayer with little to no experience in dealing with the Comptroller’s office, even knowing how to properly respond is not a simple task. In an effort to simplify this, below I’ve laid out the general steps for challenging a Comptroller assessment through the administrative hearings process:
Step 1 – Audit of Records
Generally, the Comptroller will not issue an assessment without performing some form of examination or audit of the taxpayer’s books and records. In certain cases, such as where the taxpayer has a history of failing to file tax returns when due or where the taxpayer is nonresponsive to audit notices, the Comptroller may issue an assessment based on estimated amounts, but this is the exception, not the norm.
Under the Texas Tax Code, the Comptroller has a right to examine the books and records of any taxpayer permitted to do business in Texas, [1] and taxpayers are required to produce those records upon request to substantiate transactions. [2] Refusal to allow the Comptroller to examine your books and records may result in the forfeiture of your corporate charter. [3] Not only that, but the Tax Code requires taxpayers to keep records going back at least four years.
Step 2 – Assessment and Challenging
If the Comptroller’s audit or examination results in no additional tax due, congrats – you’re done! However, if the Comptroller alleges that you do owe additional tax, the office will issue an assessment. This typically comes in the form of a Texas Notification of Audit Results (or Exam Results), and the issuance begins the clock on a 60-day window to challenge the Comptroller’s assessment on a pre-payment basis (i.e., without paying the tax first). [4] In some cases, where the Comptroller determines the payment of tax is in jeopardy for some reason, the office may issue a Jeopardy Determination. [5] The primary difference here is that the window for challenging the assessment is substantially shortened – to 20 days rather than 60. [6] As such, being aware of the type of assessment issued and the deadline for challenging the assessment is crucial.
If you miss your window for challenging the Comptroller’s assessment on a pre-payment basis, or if you would rather avoid the hassle of dealing with the Comptroller’s administrative hearings process, there may be another option – to pay the tax due and file a refund claim. However, this comes with its own time frame for doing so in the form of a statute of limitations. This is discussed further in a recent blog post, which can be found here.
Step 3 – 90-Day Period and Providing Certificates
If you timely challenged the Comptroller’s assessment, you’ll receive a letter from the Comptroller’s office indicating that your challenge has been received. The letter will also provide a 90-day window for providing additional documents in support of your challenge. This 90-day window is extremely important as it relates to providing resale or exemption certificates in connection with a Texas sales and use tax assessment. While certain documents can be provided later on in the hearings process, any certificates not provided by the end of this 90-day period will be rejected entirely. [7]
Ideally, documents or information provided during the 90-day period will aid in resolving some of the outstanding issues in the assessment. To the extent not resolved, any remaining issues will be transferred to the Comptroller’s Administrative Hearings Section after the end of the 90-day period.
Step 4 – Administrative Hearings
Once your matter has been transferred to hearings, it will be assigned to a hearings attorney on behalf of the Comptroller’s office. The assigned attorney will issue an introductory letter, and will follow up with a formal Position Letter. [8] The Position Letter should set out the Comptroller’s arguments on the assessment items that were challenged by the taxpayer. [9]
The issuance of the Position Letter also starts a 45-day deadline for responding via the preparation and filing of a Reply. [10] The Reply represents the taxpayer’s last opportunity to amend their arguments, so any challenges not included in the Reply cannot be raised at a later date. [11]
After reviewing the Reply, to the extent there are still unresolved issues, the Comptroller will issue a Response letter containing its position on those issues and any reasons for disputing the arguments in the Reply. [12] If the taxpayer is still in disagreement with the assessment after the Response is issued and wishes to continue challenging the assessment, the matter is then forwarded out of the Comptroller’s jurisdiction and to the State Office of Administrative Hearings (“SOAH”). [13]
Step 5 – SOAH and Final Decisions
At SOAH, the matter will be assigned to an administrative law judge who will oversee the formal hearing on the assessment. The hearing can take place in two forms: (i) oral or (ii) via written submission. This portion of the process represents the actual hearing on the merits, where both parties will present evidence and will request findings of fact and conclusions of law that favor their position.
After the conclusion of the hearing, the administrative law judge will issue a “Proposal for Decision.” [14] The parties will then have 15 days to dispute or request amendments to the proposed decision, referred to as “exceptions.” [15] If either party files exceptions, the administrative law judge will review and issue an order either amending or upholding the proposed decision. [16] The matter will then be transferred back to the jurisdiction of the Comptroller’s office, where the decision can be either upheld or rejected. [17] Notably, taxpayers can get through the entire hearings process and receive a favorable decision from SOAH, only to have the Comptroller’s office reject the decision and uphold the assessment.
Taxpayers still unsatisfied with the result of the administrative hearings process can continue challenging the assessment in district court, but only after (i) fulfilling certain procedural and jurisdictional requirements and (ii) paying the tax and filing a refund lawsuit.
[1] Tex. Tax Code § 111.004(a).
[2] Tex. Tax Code §§ 111.0041(a), (c).
[3] Tex. Tax Code § 111.004(b).
[4] Tex. Tax Code § 111.009(b).
[5] Tex. Tax Code § 111.022(a).
[6] Tex. Tax Code § 111.022(b).
[7] 34 Tex. Admin. Code §§ 3.285(c)(3)(C)(i), (iii); 3.287(d)(4)(A), (C).
[8] 34 Tex. Admin. Code § 1.12(a).
[9] Id.
[10] 34 Tex. Admin. Code § 1.13(a), (c).
[11] 34 Tex. Admin. Code § 1.11(g).
[12] 34 Tex. Admin. Code § 1.14(a).
[13] 34 Tex. Admin. Code § 1.14(b).
[14] 1 Tex. Admin. Code § 155.507(a).
[15] 1 Tex. Admin. Code § 155.507(b)(1).
[16] 1 Tex. Admin. Code § 155.507(c), (d).
[17] 34 Tex. Admin. Code § 1.34(a).