Managed Audit

Although the taxpayer performs much of the review, the taxing authority retains discretion to approve the arrangement, verify the results, and examine records before finalizing the audit. In practice, a sales tax managed audit can help a business resolve liabilities and overpayments more efficiently than a fully state-run examination.

How the Managed Audit Process Works Step by Step

• Step 1: The managed audit process begins when the taxpayer submits a request to the field office manager, generally within 60 days of receiving the audit notification and before fieldwork starts.
• Step 2: The state reviews eligibility factors, including prior audit history, compliance record, available resources, and Texas tax knowledge related to sales and Use Tax matters.
• Step 3: An entrance conference is held between the auditor and taxpayer to discuss audit procedures, timelines, sampling methods, and expectations.
• Step 4: The taxpayer submits electronic records within 45 business days so the auditor can verify that the data is accurate and complete.
• Step 5: The taxpayer provides the managed audit package, including the signed agreement, CPA audit plan, timeline, and statute waiver documents.
• Step 6: After approval, the taxpayer completes the managed audit process according to the agreed schedule. Missing deadlines may lead to interest assessments or cancellation of the agreement.

Managed Audit vs. State-Initiated Audit: Key Differences

In a managed audit vs state audit comparison, the central distinction is who performs the detailed review. In a managed audit, the taxpayer conducts the analysis subject to government oversight; in a traditional audit, the state auditor performs the examination directly.

Managed audits may offer procedural benefits. Texas rules provide that, absent fraud or willful evasion, penalties may not be assessed and some or all interest may be waived on amounts found due, except for tax collected but not remitted. Refunds of overpayments disclosed by the managed audit may also be available, subject to applicable refund limitations.

Which Businesses Should Consider a Managed Audit?

Businesses with complex, high-volume transactions often benefit most. Texas guidance indicates managed audits are more likely to be considered where prior audits were resource-intensive, records are available, and the taxpayer has personnel with sufficient tax knowledge and time to complete the work.

This may include businesses with multistate operations, significant exempt purchase activity, recurring issues involving Taxable Services, direct pay procedures, or changing obligations tied to Economic Nexus. A managed audit is different from a Voluntary Disclosure Agreement; the former addresses liability through an agreed audit framework, while the latter generally concerns voluntary resolution before formal enforcement.

Common Findings and Outcomes of a Managed Audit

Common findings include under-accrued tax on purchases, exemption certificate issues, sourcing errors, overpaid tax, and reporting mistakes in sampled populations. The taxing authority may reject incomplete support, require corrections, or revoke the arrangement if timelines are not met.

Possible outcomes include an assessment, a refund, partial interest relief, or closure of the reviewed periods. The taxing authority still verifies the work and may examine additional records before finalizing the result.

FAQ

Who typically oversees a managed audit?
The taxpayer performs the detailed review, but the taxing authority oversees the engagement. In Texas, the comptroller or assigned auditor reviews procedures, may approve sampling, examines records needed to verify results, and decides whether the audit will be accepted and finalized under the written agreement.

Can a managed audit be requested at any time, or only during an active inquiry?
In Texas practice, it is generally requested after an audit notification but before fieldwork begins. Guidance states requests should usually be made within 60 days of the audit notice, and requests are denied once fieldwork has started.

Does completing a managed audit eliminate the risk of a future state audit?
No. A managed audit resolves the agreed period and scope, but the taxing authority retains verification rights and may review records before finalizing the audit. The authorities do not state that future audits are barred for other periods, issues, or taxes not covered by the agreement.

What types of records and transactions are reviewed during a managed audit?
Managed audits commonly review invoices, checks, accounting records, exemption documentation, purchase and sales data, and sampled transactions. Depending on scope, the review may cover sales of taxable items, asset purchases, expense purchases, direct pay transactions, and other categories identified in the written agreement.

In sum, a managed audit is a structured, taxpayer-performed review conducted under government supervision, with potential benefits in efficiency, penalty relief, and identification of both liabilities and refunds, but only within the scope and procedures approved by the taxing authority.

How BT Can Help

For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact DiAndria Green, Partner in Bennett Thrasher’s State and Local Tax (SALT) practice, or call us at 770.396.2200.