Look Out For State Tax Audits

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The thought of being audited by the Internal Revenue Service gives most taxpayers pause, and with good reason.  No one wants to go through the hassle of providing documentation and proof for every single tax credit, exemption, and deduction on their income tax return.  We breathe a sigh of relief knowing that we haven’t been chosen by the Internal Revenue Service for an audit.

That relief might, however, be premature.  Most of us have forgotten that the state in which we live and to whom we also pay taxes has the power of audit, as well.  In fact, it is predicted that state tax audits will be on the rise.  This is because most of the states of the union have hit precarious financial times.  They, like the Internal Revenue Service need to find any tax money that is lying around out there.

As an example, we could take California and its $24 Billion deficit, but let’s use Arizona instead.  Arizona recently reported that its tax revenue for July of 2009 was 10% lower than its tax revenue for July 2008.  This was the culmination of eighteen straight months of reduced tax revenues.  Most states are not fairing much better and some, like California, are doing even worse.  When you are losing that much tax revenue, you have to go out and find some.  This is why it is believed that state tax audits are going to increase.

This is not good news for businesses or individuals.  You must take steps to avoid a state tax audit, like you take steps to avoid an Internal Revenue Service audit.  Make sure that your state taxes are filed correctly and on time.  Do not claim any unwarranted tax credits, deductions, or exemptions.  Make sure that you have documentation of all your reported expenses and deductions.  Keep good, thorough tax records.  If you are unclear as to whether you qualify for a tax credit, exemption, or deduction, take the matter up with a tax professional

You are probably already aware that no one is exactly certain as to what triggers an Internal Revenue Service audit.  So, you might not be surprised to find that people are even less certain about what might trigger a state tax audit.

The main problem is that there are fifty states with fifty different sets of laws and tax codes.  So be vigilant, and be aware that a state tax audit is an increasing possibility for many taxpayers.

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