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How to prevent a State Tax Audit

How to prevent a State Tax Audit

A tax audit can be such a draining activity in all aspects for taxpayers – mentally, financially, and even physically. After receiving a notice for a state tax audit, most taxpayers go through the mental stress of trying to understand why their state tax returns are being audited by the State Department of Revenue and what could have gone wrong. Then they begin the physical activity of running around, trying to gather the necessary receipts, bills, and financial documents needed as an audit trail for the tax audit defense. Finally, in comes the financial implication of getting good financial or legal representation for the audit defense. with all these in mind, it is no wonder that taxpayers DREAD the mention of a tax audit.

Instead of running helter-skelter when you receive the news of an impending audit, it is more advisable to understand how to look out for red flags and tax situations that can trigger a state tax audit and avoid them. Prevention, they say, is always better than cure, and in a tax audit situation, there is hardly anything that could be more true. It is better to prevent getting a state tax audit completely than to learn how to deal with an audit when you do get one. Preventing a state tax audit won’t cost you a fraction of what it will cost you to deal with a tax audit.


Ways to prevent a state tax audit

  1. Avoid Errors:

One of the most important ways to avoid any tax audit is to always calculate and report taxes correctly and accurately. One of the major reasons for a state tax audit is due to errors and mathematical mistakes in the calculation of sales and use tax, errors in transactions, blunders in invoice charges, etc. All these inaccuracies give the state auditor a real reason to dig deeper into your records. To avoid this, hire a good tax preparer to handle your taxes or learn the tax laws for your state, the tax requirements, and the state’s tax rates you’ll require for a proper tax calculation before filing your tax returns. The required information can be found on the website of your State’s Department of Revenue.


  1. Explain Tax Exemptions:

Exemptions on filed tax returns usually stand out to state auditors and they usually need to verify why you have a tax exemption. This red flag usually is to verify the claim of most taxpayers that claim tax exemption for one liability or the other. If an exemption will be claimed, one needs to clearly state the reason for the tax exemption and not just leave the tax exemption unexplained, or else, the individual can expect some probing of the tax return to be carried out by the State Department of Revenue.


  1. Use an automated filing method:

Making use of a manual or handwritten method of filing tax returns will mostly lead to errors and miscalculations on tax returns due to human errors. Most of these errors can easily be avoided when a software program is being used to input tax returns, thereby giving a more accurate, neat, and organized tax return. Many software that help in tax calculation, record keeping, and ensure accuracy can be found online for use. The more accurate your tax returns, the less chance you have of being flagged for a state audit.


  1. Pay use tax when necessary:

A use tax is a tax paid for the use of storage of equipment or tangible property on which a sales tax was not paid. Most taxpayers do not understand a use tax or its necessity after inventory transfer or a charity donation, and they do not bother filing for it on their tax returns. Due to this ignorance, most tax auditors see this avenue as a quick target point when going through your records. Since most taxpayers do not fully understand the concept of use tax and how to manage it, especially due to differences in states tax rules, it is advisable to get a tax preparer for financial advice on how to go about paying and managing use tax properly to prevent being audited by the state.

  1. Avoid continuous late filing of state tax returns:

Continuous late filing of state tax returns will probably draw unnecessary attention to your tax returns and give room for probing by state auditors which can later lead to a full-blown audit. Try to always file your state tax returns on time to prevent unnecessary scrutinizing.


  1. Requesting for large tax refunds or claiming tax credits:

Ensure you have all your calculations right and documents complete when you request for a large tax refund or tax credits. Even if your claim is legit, state auditors will still scrutinize your records to ensure there is nothing out of the ordinary in your financial reports. Calculating your refunds and tax credit is necessary because a little error can lead to a state tax audit.


Preparation for a state tax audit

It should be understood that no matter how careful and intentional you are about paying your taxes and filing your tax returns, you could still get a notice for a state tax audit anyway.

Being notified of a state tax audit doesn’t necessarily mean you did something wrong, sometimes, you might just be the individual lucky enough to be randomly selected for a state tax audit. Therefore, every taxpayer needs to be adequately prepared in case of a state tax audit. Know what to expect and deliver what is expected of you.

There are 3 essentials for a state tax audit:

  1. Keep proper documentation and records to give an excellent audit trail. This involves all of your exemption certificates, receipts, bills, transaction records, sales records, medical records, etc. Basically every document that can stand as proof for any financial report filed in your state tax return is essential.


  1. Be cooperative with the state auditors, be polite, and be professional during an audit.


  1. Have a tax preparer or a legal representation as a tax audit defense in case you encounter a problem that is beyond your understanding.

Need help filing your state returns correctly to reduce your chances of being audited by your state’s taxation authorities? Reach out to us today!

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Internet subscribers, users, and online readers are advised not to act upon this information without seeking the service of a professional accountant. Any U.S. federal tax advice contained in this website is not intended to be used for the purpose of avoiding penalties, of any kind, under U.S. federal tax laws.