Help with State Income Tax Audits

Just as the IRS conducts tax audits, so do the states. If you become involved in a state tax audit, keep in mind that Internal Revenue Code Section 6103 authorizes the IRS to share tax information with state governments for tax administration purposes. Among the information exchanged between the IRS and state taxation authorities is individual and business return information. One of the procedures that state taxing authorities use in selecting returns for audit is comparing the information (or the lack thereof) reported on an individual's federal income tax return with what is reported on their state income tax return.

With this in mind, one of the first steps in dealing with a state income tax audit is to gather all information on your account with the IRS. Basic information is readily available on a taxpayer's tax return transcript, a copy of which can be easily obtained through the IRS's Get Transcript webpage. Keep in mind that it will take around 10 days to receive your transcript. As mentioned below, this could potentially be different than the information on your tax return.

Once you have a copy of your IRS transcript, compare income and expense items with the corresponding items under review by your state tax commission. Many states use federal AGI as a key figure in the calculation of state income tax liability, so a difference in federal AGI reported by the IRS and federal AGI reported on your state income tax return could have triggered the audit.

If there are discrepancies, consider why that might be the case. Did you file your federal return but forget to file your state return (or vice versa)? Did the IRS make changes to your tax return? I've even seen a case of a false IRS return filed by a third party engaging in federal refund fraud that triggered a state income tax audit. Of course, you should always talk with a tax professional at the very earliest sign of an audit. With the right information and good advice, you can make any necessary changes to your returns and arrive at a fair resolution of your state income tax audit.


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