‍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.

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

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.

‍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).Description text goes here

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

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.