Why Would I Get Audited by the State?

Understanding State Tax Audits

A state tax audit is an examination of your state tax return by your state’s Department of Revenue. It is conducted to verify the accuracy of your reported income and deductions. Similar to an IRS audit, a state tax audit can result in financial and legal consequences if discrepancies are found.

Triggers for a State Tax Audit

Several factors can increase the likelihood of triggering a state tax audit. These include:

• Errors or omissions: Mistakes in your tax return, such as incorrect income reporting or excessive deductions, can raise red flags.

• Nexus: If your business operates in multiple states, you may be subject to audits in each state where you have a physical presence or conduct business.

• Unreported income: Failing to report all sources of income, including self-employment, rental, or investment income, can trigger an audit.

• Use tax: If you purchase taxable items in one state but use them in another, you may be required to pay use tax in your home state. Failure to do so can result in an audit.

• Being a sole proprietor: Individuals who file their own tax returns as sole proprietors may be perceived as more likely to make errors.

Other Common Reasons for State Audits

• Misreporting data
• Math errors
• Incomplete state tax forms
• Excessive deductions
• Failure to file your state tax return on time

Will a State Tax Audit Automatically Trigger an IRS Audit?

While there is no guarantee, a state tax audit can increase the chances of an IRS audit. This is because state and federal taxing agencies often communicate with each other. Significant errors on your state return may prompt the IRS to review your federal return as well.

Consequences of a State Tax Audit

The outcome of a state tax audit can vary depending on the severity of the discrepancies found. Possible consequences include:

• Acceptance of your return with no further action
• Taxes and penalties owed
• Requirement to amend your state return, which may impact your federal tax return
• Legal action in cases of fraud or evasion

Seeking Professional Help

If you are facing a state tax audit, it is advisable to seek professional representation from an accountant or tax attorney. They can guide you through the process, dispute audit findings, and negotiate a settlement if necessary.

Understanding the potential triggers for a state tax audit and its consequences is crucial for taxpayers. By ensuring accuracy in your tax filings and addressing any potential issues proactively, you can minimize the risk of an audit and protect your financial well-being.