After Dealing With IRS for Taxpayers, Enrolled Agents Might Be Needed For State Audit Too
Although an enrolled agent certificate is a federal designation for dealing with the IRS, the same tax expertise is often required for handling state income tax matters. In fact, as state governments are struggling for revenue to meet their fiscal obligations, the audit of a state income tax return is just as likely as an IRS examination.
Although EA continuing education requirements address federal tax subjects, enrolled agents are wise to also complete some courses on state income tax. In many cases, state tax auditors are even pursuing former residents. This is especially common for years when taxpayers moved and thus earned partial income in different states.
Income tax return preparation for multiple states in one year requires correct division of income among the distinctive locations. Whether mistakes are intentional or not, states expect tax on the income earned in their jurisdictions. The Illinois Department of Revenue recently added 50 auditors to its staff. Connecticut increased it audits of state income tax returns by 10 percent in 2011. Audits of state tax returns are also increasing in California, New York, and New Jersey.
Updated computer programs are able to compare shared information with the IRS on federal tax returns. To keep up with accurate tax reporting enrolled agent software needs to properly compile income data by state. Of particular interest to the various states are non-residents with real estate in the state or residents with rental property in another state. Taxpayers holding interests in trusts or partnerships with properties in various states are also targets for scrutiny.
Every state has distinctive tax rules. For example, New York has pursued income tax from individuals who have seasonal residences within the state. New Jersey is examining small businesses owned by individuals living in neighboring states. California also closely follows anyone who earns business income in that state despite having headquarters elsewhere.
Individuals with employer stock options have triggered state tax audits. This occurs when they move to another state after the option grant and before full vesting. Many states take a tax bite on equity compensation that was granted to state residents even when they move out-of-state before realizing the income.
Not all tax notices from states are accurate. In many cases, taxpayers can support claims that their state income tax returns were accurate. However, these are cases where enrolled agents can provide the same assistance as they deliver in dealing with the IRS.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.