Tax audits can be a daunting experience for taxpayers, raising concerns about potential financial and legal consequences. While the Internal Revenue Service (IRS) is responsible for auditing federal tax returns, state taxing authorities can also conduct audits of state tax returns. Understanding the differences between state and federal tax audits is crucial for taxpayers facing an audit.
State Tax Audits
State tax audits are conducted by a state’s Department of Revenue to verify the accuracy of state tax returns. These audits focus on state-specific tax laws and regulations, which may differ from federal tax laws. Common reasons for state tax audits include:
- Discrepancies in reported income or deductions
- Failure to file a state tax return
- Nexus issues for businesses operating in multiple states
Federal Tax Audits
Federal tax audits are conducted by the IRS to examine the accuracy of federal income tax returns. The IRS uses various methods to select tax returns for audit, including:
- Random selection
- High-income earners
- Taxpayers claiming certain deductions or credits
- Suspected tax fraud or evasion
Can a State Audit Trigger an IRS Audit?
While state and federal tax audits are separate processes, there is a possibility that a state audit could lead to an IRS audit. This is more likely to occur if the state audit reveals significant errors or discrepancies that raise concerns about the taxpayer’s overall tax compliance. The IRS and state taxing authorities often share information, and large mistakes or intentional falsehoods on state tax returns may prompt the IRS to initiate an audit.
Representation in State and Federal Tax Audits
Taxpayers facing a state or federal tax audit have the right to representation. In a federal audit, the following individuals can represent taxpayers:
- Attorneys
- Certified Public Accountants (CPAs)
- Enrolled Agents (EAs)
- Non-credentialed tax preparers who have completed the IRS’s Annual Filing Season Participant Program (only if they prepared the tax return)
Most states have similar guidelines for representation in state tax audits, but it’s important to check the specific requirements of the state where the audit is being conducted.
Criminal Charges in State and Federal Tax Audits
Although tax audits are primarily focused on verifying the accuracy of tax returns, they can lead to criminal charges in cases of tax fraud or evasion. Both state and federal authorities have the authority to prosecute taxpayers for criminal tax offenses. However, it’s important to note that criminal charges are relatively rare outcomes of tax audits.
State and federal tax audits are distinct processes with different authorities and procedures. While a state audit does not automatically trigger an IRS audit, significant errors or intentional falsehoods on state tax returns can increase the likelihood of an IRS audit. Taxpayers facing an audit should seek professional representation to ensure their rights are protected and to minimize the potential consequences.
What the IRS is actually looking for that could trigger a tax audit
FAQ
Does IRS see state taxes?
What triggers a state income tax audit?
Does the IRS share tax information with states?
How far back can a state tax audit go?
Does the IRS do a tax return audit?
Most of the audits are “correspondence” audits, not “field” audits too. So it just means mailing some forms in or having your tax preparer do so. However, the IRS is not the only entity that does tax return audits. States can also do audits, and the more states you file in, the more likely you are to be audited.
Can a state tax audit trigger a federal audit?
However, a blemish on your state tax return can impact your federal return, and vice versa, which can trigger an audit . If you are worried about being audited, it’s best to be prepared and have
Does the state audit your tax records?
States and the federal government communicate with each other. However, this doesn’t mean the state will notify the IRS that they’re auditing your tax records. But, if the state requires you to make a change to your return, it can have an impact on your federal tax return. If those changes aren’t adjusted, the IRS might notice and conduct an audit.
Do you get audited by the IRS?
Although the IRS audits only a small percentage of filed returns, there is a chance the agency will audit your own. The myths about who or who does not get audited—and why—run the gamut. The looming myth out there suggests the audit process is something to be desperately feared.