Delaware Franchise Tax Audits: What You Need to Know
Occasionally, you may find your entity under a Delaware Franchise Tax Audit. If Discern notifies you that we’re unable to file your Delaware Annual Report and Franchise Tax because your entity is under audit, it’s important to take action promptly. Until the audit is resolved, the state will not allow franchise tax filings or payments to be completed.
What Does a Delaware Franchise Tax Audit Mean?
A Delaware Franchise Tax Audit occurs when the Delaware Division of Corporations or the Department of Finance reviews your entity’s Annual Report and Franchise Tax filing to verify accuracy, compliance, and correct payment.
In most cases, an audit indicates that the state has identified discrepancies between your filings and their records. These discrepancies commonly relate to:
The number of authorized shares
The calculation method used (such as the Assumed Par Value Capital Method)
Reported assets or other required financial details
What Can Trigger a Delaware Franchise Tax Audit?
A common reason you can be under Franchise Tax Audit is if there is a question about the gross assets you've reported on a recent Franchise Tax report. As an example, this can occur when there is a significant change from the gross assets reported in the prior year. If the gross assets reported require review, the Delaware Division of Corporations will likely request a copy of your Form 1120 (Schedule L) to verify.
Immediate Consequences of a Franchise Tax Audit
Being under audit can have real and immediate impacts on your business:
Loss of Good Standing: Your entity may lose its “Good Standing” status, preventing you from obtaining a Certificate of Good Standing. This certificate is often required for financing, banking, or business transactions.
Accrued penalties and interest: Underpaid or late franchise taxes may result in penalties and interest accruing until the audit is resolved.
Blocked transactions: Mergers, dissolutions, financings, or other corporate actions may be delayed or halted while the audit remains open.
What Happens If the Audit Is Not Resolved?
If left unresolved, failure to pay Delaware franchise taxes for three consecutive years can result in the entity being administratively voided (canceled) by the state.
When an entity is voided:
Its legal standing is terminated
The liability shield may be compromised
Owners could be exposed to personal liability for company obligations
How Do You Know If You’re Under Audit?
Discern will notify you directly if your entity is under a Delaware Franchise Tax Audit. You may also identify an audit by attempting to pay outstanding franchise taxes through Delaware’s online system. If an audit is in place, the system will display a notice indicating that payment cannot be completed until the issue is resolved.
How Discern Can Help
If your entity is under audit, Discern will guide you through the next steps and help identify what information or corrections are required to resolve the issue as efficiently as possible.
If you have questions, concerns, or would like help reviewing your situation, please reach out to [email protected]. Even if you’re unsure where to start, our team is here to help.