Resolving State Tax Audits
Resolving State Treasury Issues Quickly
Not as well known as their federal counterparts, the IRS Audits, your state tax authorities can also audit your returns, creating their own sense of risk to you and your business. Sometimes the IRS and State will find the same discrepancy, and both organizations will audit you simultaneously, but more commonly they look at different things. The Federal Government largely relies on income taxes, while your state government may have a myriad of other things that they tax. If you move to a state like Florida without an Income Tax, your state will never audit your income, but may review your sales tax or other records.
Audits are Scary
We’ll get through them together
Audits are a scary process. Whether it is the IRS reviewing 7 years of records, or the internal audit department at your company reviewing your records, being inspected is a terrifying process. There are two reasons to bring representation to a state tax audit. One reason is that we know the rules and regulations, and we can keep you from getting yourself in trouble from ignorance. The other reason is that because the situation is nerve wracking. Even if you know the rules, the process can be exhausting, and distract you from your main business. Letting us handle your audit representation can reduce these risks.
State Tax Audits
How do they work?
Unfortunately, that’s too broad of a question to answer. Each state’s revenue departments are setup differently, and the rules vary. However, the process is going to be similar to the IRS process, where they will request records that we supply. State revenue departments are often a little less structured than the IRS, and the field agents often have more flexibility. They also are likely to be more sympathetic to local conditions that may cause problems. The most common issue will be your state’s equivalent of the IRS CP2000 Notice, but a variety of issues and notices can pop up. However, the situation remains the same, you want to comply with your state audits, while giving them no additional information than what they request to avoid starting a fishing expedition.
Other State Audits?
What non-income Audits Exist?
The most common are going to be state income taxes, which are similar to IRS audits, or Sales Tax Audits. Those are the main sources of revenue at the state level, and the primary sources that require your records to verify. For most businesses, your other taxes are more straightforward. Property taxes may have an appraisal and appeal process, but never have an audit process as the information is calculated by the state, county, or city office. If you have a more obscure audit, like a document stamp or liquor stamp tax, you’ll need a local expert in your state’s audit procedures.
Representing in State Audits
Proudly Representing our Clients
We represent our clients in audits regarding state income and state sales taxes. The most common challenges are filing discrepancies, electronic record disputes, and the occasional domicile challenge. As people move to lower tax states, the state revenue departments have gotten aggressive in challenging domicile moves. Keeping meticulous records regarding your move will help protect you. If you have not created strong records, we can work with you, your bank statements, and your other documents to establish your domicile.
State Tax Audits FAQs
What is a state tax audit and why was I selected?
A state tax audit is a review of your returns and records to verify income, sales/use tax, payroll, and other state taxes. Triggers include mismatched 1099s, nexus changes, high refund claims, late filings, or data shared by the IRS.
How is a state tax audit different from an IRS audit?
The IRS focuses on federal income tax. States also examine sales and use tax, payroll withholding, unemployment, franchise, excise, and residency/domicile. Procedures are similar, but state rules and deadlines vary.
What types of state tax audits are common?
Income tax audits, sales and use tax audits, payroll withholding and unemployment audits, franchise/gross receipts audits, and residency/domicile audits for movers to states like Florida.
What records will I need for a state audit?
Sales invoices, exemption certificates, purchase invoices, resale certificates, bank statements, GL detail, payroll reports, W-2/1099 files, nexus and registration documents, and proof of residency if challenged.
How far back can a state audit go?
Most states look back three to four years, longer if you never filed, underreported materially, or committed fraud. Keep records at least seven years for safety.
What is a sales and use tax audit?
States verify you collected/remitted tax on taxable sales and paid use tax on untaxed purchases. Missing exemption certificates and untaxed online sales are frequent adjustments.
Do I need to collect sales tax in other states if I sell online?
Possibly. Economic nexus rules can require collection once you pass sales or transaction thresholds. We review nexus, register where needed, and set up compliant collection and filing.
What is a residency or domicile audit and who faces one?
If you moved from a high-tax state to Florida, your former state may audit to claim you as a resident. You’ll need day counts and objective ties (license, homestead, voter reg, banking) to prove Florida domicile.
Can a state and the IRS audit me at the same time?
Yes. States often follow IRS changes. We coordinate responses so records are consistent and deadlines are met for both federal and state levels.
Should I respond to a state audit notice myself?
It’s safer to use representation. With a Power of Attorney, we communicate with the auditor, narrow the scope, organize documents, and prevent unnecessary disclosures.
What if I’m missing documents the state requested?
We reconstruct records from bank/merchant data, POS exports, shipping logs, payroll systems, and vendor statements. For sales tax, we also secure or replace missing exemption certificates.
Can I reduce penalties and interest in a state audit?
Often. Many states offer penalty abatement for reasonable cause or first-time issues. Interest usually cannot be waived, so fast resolution saves money.
What happens after the audit—can I appeal?
If you disagree, you can request a conference, file an administrative appeal, or proceed to tax court depending on the state. Strict deadlines apply—we preserve your rights and file on time.
How do I avoid future state audits?
Register correctly, track nexus, maintain exemption certificates, reconcile sales and use tax monthly, issue accurate 1099s/W-2s, keep clean books, and file/pay on time with a documented workflow.
Do you handle multi-state businesses and remote employees?
Yes. We assess nexus, set up withholding/unemployment accounts, manage registrations, and build a compliance calendar for multi-state filings.
How do we get started if I received a state audit notice?
Upload the notice and your latest returns. We map deadlines, request transcript/data pulls, prepare a document checklist, represent you with the state, and work toward a fast, fair resolution.
