What Triggers a State Tax Audit?

Generally, what triggers a state tax audit is a tax return with an error or discrepancy. Some of the most common ones are mathematical mistakes, incomplete information and mismatches between what the taxpayer reported and data the government has in its database. In addition, the tax department may flag a return for further review because the taxpayer falls into a certain category or situation where statistically there tends to be more errors or fraud, such as being a sole proprietor, having high income, claiming excessive deductions and other issues. In identifying tax returns for audit, state tax departments rely heavily on technology. In New York, the software used to select returns is known as the Case Identification and Selection System (CISS).

How Can New York’s CISS Technology Trigger a State Tax Audit?

Since 2003, New York has used its Case Identification and Selection System (CISS) to review every tax return filed. In 2011, enhanced technology was combined with human personnel in the form of the Fraud Analysis and Selection Team (FAST) to further identify patterns that suggest fraud among millions of returns.

Commonly used to evaluate personal income tax returns, CISS detects improper refunds as well as aids in comparing wages and withholding claimed by taxpayers versus those reported by employers. It also uses business analytics and predictive models to determine efficient collection actions. For businesses, New York uses CISS to detect unreported sales. The State utilizes electronic data collected from third parties such as wholesalers and distributors to compare against retailers to detect businesses under reporting on their cash sales. The State takes averages of similar businesses and can determine sales based on inventory levels and other markers.

New York also mines the electronic data collected from debit and credit card purchases in order to help detect retailers who fail to remit sales tax. By comparing the sales reported by credit card companies with those a retailer reports on state tax returns, CISS is able to create increasingly sophisticated models to enhance fraud detection.

CISS selects and scores data from every return, which is then used by FAST members to further analyze returns and create industry models to improve fraud detection on all returns.

What Other Data Does New York Use in Determining Whether to Audit a Taxpayer?

New York can obtain information from federal and other state governments to identify tax delinquents. For example, when a taxpayer is audited by the IRS, the IRS electronically provides information about any adjustment to the states so they can take action against taxpayers if appropriate. As a result of information sharing, it is common for taxpayers to end up having to deal with multiple audits.

A state tax audit should always be treated seriously. If you are audited, a tax attorney can assist you in presenting the strongest case to resolve your tax problems. Contact us to discuss how we can help you achieve the best result in your case.