July 2, 2023 | Tax Audits
What to Expect With a New York State Tax Audit
No one wants to be selected for a tax audit. Even if you filed a correct return, sending in documents and talking with the auditor can take a lot of time. And if you filed an incorrect return or made a lot of estimates, the process can be a lot more harrowing.
Facing an audit? Worried about an audit? Then, you’re in the right spot. This guide explains what to expect. Note that this post specifically covers audits on New York State taxes. If you’re looking for information about an IRS audit, check out our resource on your rights during an IRS audit.
To get help now, contact us today. We will help you get through state or federal tax audits as easily as possible.
What Is a New York State Tax Audit?
A state tax audit is when the Department of Taxation and Finance (DTF) reviews your tax return and asks for documents to support the claims on your return. The auditor may examine a range of financial details to ensure your return was completed accurately.
To give you an example, imagine that the DTF selects your business tax return for an audit, and they want to check that you reported your revenue correctly. They may ask to see your point-of-sale records and customer invoices. But then, to ensure that you aren’t sweeping any income under the rug, they may also want to look at bank account statements or even come to your place of business and watch how you handle sales.
Types of NYS Audits
The DTF may audit information from any return filed with the agency. This includes:
- Personal income tax returns
- Sales and use tax returns
- Withholding tax returns
- Corporate income tax returns
The auditor may do a correspondence, desk, or field audit. Correspondence audits happen through the mail or your online account. A desk audit is when you come to the auditor’s office.
Field audits happen at your place of business or much more rarely at your home. Generally, the auditor notifies you 15 days in advance. If needed, you can get a 30-day extension with a verbal request, but if you need more time than that, you must submit a written request for an extension.
NYS Audit Triggers
Why were you selected for an audit? The DTF selects returns that appear to have issues, but it also selects returns randomly. There are many different elements that can trigger an audit including the following:
- Matching discrepancies — The information reported on your tax return varies from the information submitted to the DTF by a third party.
- Unfiled returns — If the DTF sees that you haven’t filed all of your tax returns, they may select your account for an audit.
- Unusual income or revenue amounts based on your location, industry, or other factors.
- Excessive credits
- Misuse of exemption certificates.
- Random selection
In 2022, the agency also started paying very close attention to residency issues. That means that if the DTF is auditing people that claim to live in another state full-time or part-time. This is called a residency audit, and you may be selected in the following situations:
- You file as a part-time resident.
- You file as a non-resident who works in the state.
- Your state tax return shows less NY-based income than the previous years.
If you’re selected for a residency audit, you will need to prove that you have reported your income correctly based on where you live, and you may have to prove that you don’t live in New York. This can be an expensive audit to fail as New York State has a significantly higher income tax than most surrounding states.
What to Expect During an NYS Audit
After you receive the audit notice, you will schedule an opening conference with the auditor. This typically happens over the phone, but it may be in person. The auditor will describe the scope of the audit and your rights to appeal.
They will also let you know which of the following audit methods they are using:
- Detailed audit — You provide detailed information about multiple elements on your tax return.
- Test period audit — The auditor looks at the records and tax reports for a sample period of time.
- Statistical sampling — The auditor looks at a sampling of information to look for errors or aberrations that suggest problems with more details.
Once the meeting is over, you will start gathering documents and records for the auditor. They will request more documents or ask additional questions as necessary.
In some cases, the scope of the audit can change. For instance, if the auditor finds significant mistakes with one type of tax that is likely to indicate issues with another type of tax, they may decide to audit more of your returns.
After the auditor reviews all of the information, they will draft the audit findings. If they don’t make any changes, they will send you a no-change letter. If they make changes, they will send you a list of the changes along with details about the analysis methods used during the audit.
Most changes lead to tax liabilities, but they can lead to a refund. If the changes were due to bookkeeping errors or misinterpretation of the tax code, the auditor should explain the tax code or give you advice on changing your bookkeeping process. If you agree with the changes, you should return the proposal with full payment or talk with the DTF about other arrangements. If you disagree with the changes, you can appeal.
Records Requested During Audits
The records you need to provide vary based on the type of audit, the scope of the audit, and the methodology used. For example, if the auditor is looking at your sales tax returns, they will request information about your taxable business sales. If they’re auditing your personal income tax return, they will ask for many different records.
You have the right to ask why the department is requesting your records. You can also ask about the consequences of not providing the records. If you’re uncomfortable with a request, reach out to the Taxpayer Rights Advocate. They are an independent part of the Department, designed to help when your rights aren’t being respected or you can’t resolve issues through regular channels. Or contact an audit attorney.
Penalties for Failing an Audit
If the auditor makes changes to your return that lead to a tax liability, they may also assess penalties. You can receive a penalty for overdue taxes, underpayment of estimated taxes, understatement of taxes, or fraud. If the auditor discovers that you didn’t file on time, they may assess a late filing penalty whether or not they make changes to your return.
What If You Can’t Pay Your Bill After a State Tax Audit
Agree with the audit? But can’t afford to pay? This happens a lot. Even if you were prepared for your tax bill, you may have not been prepared for an audit bill. Contact the NYS DTF and request a payment plan, an offer in compromise, or hardship status.
Generally, the DTF will let you set up payments if you owe less than $20,000 and you can pay off the balance in three years. But approval varies based on the situation.
If you don’t agree with the changes on the audit proposal, you should note why you disagree and return the proposal to the auditor. You can also request a meeting with the auditor’s manager.
The auditors will review your concerns and make a decision. Then, if you owe a tax liability, they will send you a Notice of Determination or Notice of Deficiency. Once you receive that letter, you can appeal the results of the audit.
You only have 90 days to appeal. You can appeal through the Bureau of Conciliation and Mediation Services or the Division of Tax Appeals. When you contact an experienced audit attorney, they can let you know which option is best for your situation.
FAQs About DTF Audits
A residency audit is when the DTF asks you to prove that you don’t live in New York or that you only live in New York part-time. The DTF uses these audits to find people who are trying to avoid New York State taxes by claiming they live some or all the time in other states.
To assess if you live in the state, the DTF will look at numerous factors including your STAR exemption, Manhattan parking exemption, rent control, or rent stabilization.
How long does a New York tax audit take?
Audits can take anywhere from a few weeks to over a year. The auditor may be able to give you an estimated timeline, but it really depends on the scope of the audit and any issues that arise during the process.
How long can the DTF go back to audit returns?
The DTF may audit a single return, but the agency often audits three years’ worth of returns. Under state law, the DTF can go back three years after a return was filed. However, in the cases of unfiled or false returns, the department can go back an unlimited amount of time.
What are the penalties for failing an audit in New York?
The penalty for incorrectly calculating your tax is 10% of the unreported tax. For instance, if your return shows that you owed $5,000, but the auditor says you owe $6,000. Your penalty will be 10% of the $1,000 difference which is $100.
If fraud is involved, the penalty is two times the unreported tax. For instance, if your return understated your tax due by $1,000, the penalty will be $2,000.
What if the auditor knows me personally?
State tax auditors can’t audit the returns of people they know personally. That also includes your family and employees. So, if you find out that the auditor assigned to your case is the aunt of an employee or a friend of your parents, you should alert the DTF and request a new auditor.
What if I underpaid state tax but haven’t been audited yet?
If you underpaid tax, you may want to reach out to the DTF through New York’s voluntary disclosure programs. This program minimizes penalties and other consequences when taxpayers come forward voluntarily. However, you can only qualify if you haven’t already been selected for a state tax audit.
Get Help With a New York State Tax Audit
Facing a tax audit. If so, we can help. At Timothy S. Hart Law Group, P.C., we have successfully helped many clients navigate state audits on their personal and business tax returns. We have extensive experience dealing with the DTF, and we work hard to simplify the process for our clients. To talk, contact us today.