The main difference between a state audit and a federal audit is who performs them. Federal audits focus on federal tax returns and are carried out by the IRS. State audits focus on state tax returns and are carried out by a state's Department of Revenue. There are two different types of tax audits that you might need to worry about.
The IRS may choose to audit your federal tax return or your state may choose to audit your state return, or both. Here's the most recent data on where federal and state tax audits are most common. Typically, what triggers a state tax audit is a tax return with an error or discrepancy. Some of the most common are mathematical errors, incomplete information, and mismatches between what the taxpayer declared and the data the government has in its database.
In addition, the tax department can mark a return for later review because the taxpayer belongs to a certain category or situation where, statistically, there tend to be more errors or fraud, such as being a sole proprietor, having a high income, requesting excessive deductions, and other problems. When it comes to identifying tax returns for auditing, state tax departments rely heavily on technology. In New York, the software used to select returns is known as the Case Identification and Selection System (CISS). Let's say you work herding sheep for Farmer Joe and make a little extra money writing articles for a publication about sheep shearing as a freelancer.
You may be tempted to submit only the W-2 form for your job as a pastor and to keep secret the self-writing income listed on your 1099 form. Form 1099 reports non-wage income from activities such as independent work, stock dividends, and interest. One type of 1099, the 1099-NEC, typically reports amounts paid to independent contractors. Well, guess what? The IRS already knows the income listed on your 1099 form because the publication sent you a copy, so it's only a matter of time before you discover your omission.
Property and casualty insurance services are offered through NerdWallet Insurance Services, Inc. OK9203 Property & Casualty Licenses. The law requires that you keep all the records you used to prepare your tax return for at least three years from the date you filed it. An IRS audit involves examining or reviewing your information and accounts to make sure that you declare things correctly, in accordance with tax laws, and that the amount of tax reported is correct.
If your calculations are a bit shaky, using good tax preparation software or a nearby tax preparer can help you avoid unfortunate mistakes that could lead to an IRS audit. When faced with tax problems, you need advice from a law firm that focuses its practice solely on resolving tax disputes. If you are audited, a tax attorney can help you present the strongest arguments to resolve your tax problems.