Texas Franchise Tax Audit Defense & Representation
Led by a former Texas tax auditor and former state tax partner at a large CPA firm
Businesses facing a Texas franchise tax audit need someone with strong technical knowledge — not generic SALT support. Every project at State Tax Resources is led by a practitioner with deep experience on both sides of the audit process. Many firms list former sales tax auditors on staff. All of our franchise tax engagements are led by a person who was a Texas franchise tax auditor for the Comptroller’s Office and has many years of experience leading Texas franchise tax compliance, audit assistance, and refund review engagements in large accounting firms. If your business is instead facing a Texas sales tax audit, our Texas Sales Tax Audit Defense & Representation team offers that same depth of experience.
Preparing for a Texas franchise tax audit requires a systematic approach. This includes reviewing your initial notice, organizing your records for a 4-year lookback period, validating your COGS or compensation deductions, and auditing your apportionment calculations. Review our comprehensive pre-audit checklist below, which has been developed and structured by a former Texas Franchise Tax auditor.
Texas Franchise Tax Audit Guide: A Pre-audit Checklist
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Don’t Panic: There is no reason to panic but it is very important to not ignore the notice. An audit could have been generated on your company for a number of different reasons but that does not automatically mean that you will end up owing additional tax. There are some situations where you might even be entitled to a refund.
Read the Notice to Verify the Audit Period: Texas has a 4-year statute of limitations so the audits normally cover 4 years.
Respond Timely: Missing the requested return due date could cause increased scrutiny.
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All Public Information Reports (PIR) or Ownership Information Reports (OIR)
All original franchise tax reports and supporting workpaper including apportionment schedules
Copies of Federal Income Tax returns for each year under audit. (Note: Texas refers to report years rather than normal tax years. For example, the 2026 franchise tax report is based on the taxpayer’s 2025 activity.)
General ledgers and trial balances
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Cost of Goods Sold (COGS): If COGS was used, review the Comptroller’s guidance and Rule 3.588 to confirm qualification for this method and ensure costs used in the COGS deduction were calculated correctly. Follow this link (Franchise Tax COGS FAQ) for the Comptroller’s FAQ’s on COGS. See our related update on the 2026 bonus depreciation conformity change for how this affects prior-year COGS calculations.
Compensation Deduction: If the compensation deduction was used, review the Comptroller’s guidance in Rule 3.589 to make sure all qualifying compensation expenses were included and that there were no deductions above the applicable compensation limit for each year. See the Comptroller’s FAQ’s on the compensation deduction for more information.
Apportionment: Review apportionment schedules to confirm the calculation is correct and consider special rules for services and certain industries. See Rule 3.591 for more detailed information.
Reduced Tax Rate: Taxpayers primarily engaged in retail or wholesale trade can use a reduced tax rate. The qualification to use the reduced tax rate has been expanded to include certain types of rental companies. However, some other changes make it more difficult to qualify for the reduced rate for companies that use third parties to manufacture their products. See Rule 3.584 for additional information.
Combined reporting: Combined reporting is required for members of a group that meet the ownership requirements and meet the Texas definition of a unitary business. See the Comptroller’s FAQ’s on combined reporting and the relevant rule (Rule 3.594).
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Appoint a single point of contact.
Make sure a Power of Attorney is completed for anyone outside the company that may need to interact with the auditor.
Ask the auditor to direct all questions to the single point of contact and also ask employees within the company to defer to the point of contact if the auditor asks them any questions.
Respond as quickly as possible to requests from the auditor. It is preferable that you are waiting on the auditor rather than the auditor waiting on you.
Remember that auditors are people too!! Be respectful and helpful to the auditors and you will have a better audit experience. Auditors meet regularly with their supervisors and one topic is aged audits. Auditors want to close the audit as quickly as you do.Item description
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Taxpayers generally deal with a Texas franchise tax audit once every four years. Experienced state & local tax professionals often have handled hundreds of franchise tax audits for clients.
It is not unusual for taxpayers to turn to their tax compliance firm but make sure that firm has someone with significant experience with Texas franchise tax audits. Companies often select a firm for tax compliance based on the lowest fee which does not give that firm much flexibility to research issues and consider alternative filing positions. You do not have to use your tax compliance firm for franchise tax audit assistance. It is often good to have someone else take a fresh look at your returns.
Texas audit notices are public record which results in some firms aggressively calling companies under audit. Consider evaluating several experienced firms rather than going with the first firm that calls you.
Need Help Preparing for Your Audit?
If you have received a notice or want an expert, independent review of your filings before the auditor arrives, let's talk.
John.laborde@statetaxresources.com
Phone: 713-367-1932
https://www.statetaxresources.com/
Facing a Texas sales tax audit instead? See our Texas Sales Tax Audit Assistance page
Why Businesses Choose State Tax Resources
Extensive Texas Franchise Tax Audit Experience
Many years of experience providing Texas franchise tax audit assistance, including pre‑audit planning, document organization, and representation throughout the audit.
Technical Expertise That Stands Up to Audit Scrutiny
Strong understanding of federal income tax concepts that affect the franchise tax
Extensive experience analyzing cost of goods sold (COGS) to support eligibility, maximize deductions, and defend positions during Texas Comptroller audits
Deep understanding of Texas apportionment rules, including policy changes, sourcing of service revenue, and audit impacts across multiple periods
Authority on Texas Franchise Tax Law and Policy
Strong knowledge of how court cases, Comptroller hearings, and policy updates affect the franchise tax calculation and audit outcomes
Experience supporting refund positions involving industry‑specific revenue exclusions
Combined Reporting and Complex Structures
Significant experience with combined reporting, including affiliate inclusions/exclusions, unitary determinations, and intercompany eliminations
Audit Defense and Issue Resolution
Extensive experience addressing common audit adjustments made by Texas Comptroller auditors — and how to challenge them effectively
Strong track record resolving audit issues, representing clients during Independent Audit Reviews (IARs), and managing the redetermination process
Introductions to Trusted Tax Attorneys When Needed
Established relationships with Texas tax attorneys for matters requiring legal representation, ensuring seamless referrals
FAQ’s
What is a Texas franchise tax audit?
The Texas Comptroller’s Office audits to confirm taxpayers are following the combined return rules, qualify for the reporting method that was used, qualify for the reduced tax rate if claimed, and have calculated apportionment correctly.
Is the Texas COGS calculation the same as COGS for federal income tax?
The core of the COGS calculation is generally the same but Texas has some specific provisions that are different from the Internal Revenue Code.
How does apportionment work for Texas franchise tax?
Texas only uses a receipts factor for apportionment. Sales of tangible personal property are sourced to Texas if the goods are delivered to a customer in the state or picked up by a customer in the state. Most services are sourced based on the location where the services are provided but some services fall under the Internet hosting provision of the franchise tax law and are sourced based on the location of the customer.
Schedule a Free Initial Consultation
Get guidance from a former Texas Comptroller auditor with deep technical experience in franchise tax audits, refund claims, and audit defense.
| Issue | Comptroller Rule | Key Consideration |
|---|---|---|
| Cost of Goods Sold | Rule 3.588 | Confirm qualification and that costs are calculated correctly |
| Compensation Deduction | Rule 3.589 | Confirm qualifying expenses and compensation limits |
| Apportionment | Rule 3.591 | Confirm calculation and check special industry rules |
| Reduced Tax Rate | Rule 3.584 | Confirm retail/wholesale qualification |
| Combined Reporting | Rule 3.594 | Confirm ownership and unitary business requirements |