Can a Federal audit be triggered by a State audit?

Can a Federal audit be triggered by a State audit?

Can a Federal audit be triggered by a State audit?

No one looks forward to getting a notice 0f a federal audit from the IRS. Apart from the fact that they can be demanding and time-consuming, they are a great inconvenience and can cost a lot in time and resources.

A tax audit simply refers to a process that the IRS or your State’s Department of Revenue goes through to check the accuracy of your returns and deductions. If you get an audit notice, it means that the Internal Revenue Service (which is the federal taxation body) or the state’s department of revenue will go through your federal or state tax returns to see if there are any discrepancies between the true state of affairs and what was reported on your tax return. This is achieved by checking the accuracy of your income statement and business deductions.

There are only two possible outcomes of an audit:

  1. Your tax return is found accurate and you are free to go.

Or

  1. Discrepancies are found in your tax returns and you are fined or jailed. Depending on the level of inconsistencies reported on your tax return, you can be given a penalty, a fine, or even a jail term.

 

A tax audit notice from either your state or the IRS is significant and should be taken seriously. When you get a tax audit notice, the last thing you need is fear and panic. An audit notice does not mean that you are a criminal and are about to be sent to jail. It only means that the IRS will like to look into your tax return to get some much-needed clarification. You should immediately begin to prepare for the audit by putting all your documents in place, and getting ready to prove any claims you have reported on your tax return. Get familiar with the areas that will likely be pointed out and be ready to defend them.

What is the difference between a Federal and State Tax audit?

The major difference between a federal and a state tax audit is the body that conducts it. A State tax audit is conducted by the particular state’s department of revenue while a federal tax audit is conducted by the Internal Revenue Service (IRS). These are two separate bodies.

If you are being audited by the state’s department of revenue, you may be concerned and worried about whether or not it can trigger a federal tax audit.

This concern is valid, seeing that the Internal Revenue Service and the state’s department of revenue share information. Also, the process of going through an audit is already tiring, no one wants to go through one audit and be tortured with the knowledge of another one coming.

 

Can a State tax audit trigger a Federal tax audit?

The answer to that question is a No and a Yes. Let us explain…

If a state tax audit goes well and no variation or inconsistency is found, it is not likely to trigger a federal tax audit.

However, if flaws are found in your state tax returns, it can affect your federal tax returns and vice versa.

Generally, a federal tax audit  can be triggered by:

  1. Random selection: The IRS may randomly select accounts to audit and you may just be one of them.
  2. Discrepancies: If something on your tax return raises an eyebrow, it can trigger a tax audit.
  3. Related examinations: If you have transactions with other taxpayers who were selected for an audit, your account may be selected too.

Facing a Federal or State tax audit? We can help!

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