State Tax Audit

Most people are not overly concerned about being selected for a state tax audit. However, it pays to be careful. There are ways to ensure that one’s tax return does not come under state tax audit. Those who work from home should remember that the Internal Revenue Service (IRS) tends to focus on home office deductions. People who qualify for home office deductions operate their offices as principal places of business that are in regular and exclusive use for business. In other words, a home office should be the place where one spends most of one’s time and make the majority of one’s income.

To avoid a state tax audit, one must keep deductions that one wishes to take at a reasonable level. One should retain receipts for all deductible expenses, and this includes food, entertainment, travel, and auto costs. The IRS tends to put such deductibles under high scrutiny. It is important to keep one’s expenses in a log, and to mention certain information. For instance, one’s income should be consistent with the average income of others living in a particular locality. Those who live in a very high-income area and claim to have earned amounts inconsistent with the area’s averages are liable to be red-flagged for state tax audit. The IRS also becomes interested when someone’s income is much lower than the previous year’s taxable income. This would indicate that the person is hiding money and may result in a state tax audit.

While filing income tax returns, one should avoid inconsistencies that the IRS will notice. It is important to file the same information on one’s federal taxes that one has filed on state returns. Mathematical mistakes can result in a state tax audit, too. The IRS’s computer system can pick these up on tax return forms and will send someone to look at those returns personally. Nobody likes to spend so much attention on tax forms, so avoiding inconsistencies and mathematical errors is important.

Neatness while filing a tax return is vital. It is often advisable to either type up or e-file one’s returns. In cases where returns are hard to read, the person who has filed them might have to translate the returns over the phone or in person.

It is important to report one’s income in its entirety, no matter how tempted one is to be dishonest. The government is invariably aware of what one has earned, and one should report the right amount on taxes to avoid a state tax audit. Filing tax returns well in time can also help avoid a state tax audit. The last date for filing a return or requesting a four-month extension of time to file is April 15. Asking for an extension gives the person until August 15. One should not assume that such an extension of time to file equals an extension of time to pay. However, taxpayers need not make a payment to get an extension.

State tax audits can be arduous and humiliating, and can result in heavy fines and penalties. It is wise not to file one’s returns alone if any doubt or ambiguity exists. The services of a qualified chartered accountant, along with the advice such a professional give, go a long way in avoiding state tax audits.