Report: states are stepping up audits

May 2nd, 2011 by Joe Kristan

Iowa, like other states, has rarely audited personal income tax returns on its own, prefering to piggyback on IRS exams. That may be changing in other states, reports Arden Dale:

Tax advisers say audits have increased in California, New York, New Jersey and Iowa. The Illinois Department of Revenue recently added 50 auditors, in part to help a group of 136 others work on individual and corporate income tax audits.

What triggers a state exam?

State audits tend to begin with red flags including a change of residence, out-of-state property holdings, real estate in general, and trusts or partnerships that hold different kinds of assets. Stock options also now get a lot of attention, according to AmyLynn Flood, partner, global human resource services at PriceWaterhouseCoopers.
Each state has its own set of taxes and its own pet issues. New York, for example, has gone after people who live in a neighboring state but spend time in a Manhattan pied-a-terre or upstate hideaway. Anything that suggests a contact or former contact with New York by someone who now claims to live out of state is a red flag, according to Stephen Breitstone, a partner at Meltzer Lippe, Goldstein & Breitstone, LLP in Mineola, N.Y.

Iowa has always gone after people who it feels should be paying taxes — people who claim residence in another state, for example, or non-residents who the state believes are not reporting Iowa-source income. If Iowa ever stops wasting its audit resources on information that it should be gathering in the return-filing process, it will probably increase its examination activity too.

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