New Yorker residents must pay both federal and state taxes. Each state has its own set of tax laws and auditors who work to ensure that all required taxes have been paid. However, while the concept of an audit is the same, the actual process will differ on the state and federal levels. Here are some of the distinctions between a federal and a New York audit, of which you need to be aware as tax season approaches. If you are facing an audit, immediately speak with a New York tax attorney.
New York May Audit You for Residency
One common type of audit that you may encounter in New York that the IRS does not undertake is a residency audit. Here, New York is trying to ascertain whether or not you are a legal resident of the state for purposes of owing income taxes in the jurisdiction. Some taxpayers who spend significant time in New York may claim that they are legal residents of another state, especially one that has a lower tax burden.
A residency audit is a form of intensive scrutiny that does not necessarily look at your financial records (like the standard IRS audit will). Instead, a residency audit examines where you were physically during the relevant tax year. The auditors will try to ascertain whether you maintained a primary residence in New York or if you meet the statutory residence test. You can expect a residency audit to be invasive, as auditors may request that you provide them with personal records that can be used to prove where you live.
There Are Different Triggers for Federal and State Audits
The purpose of both a federal and state audit is to ensure that you have paid all of the taxes that you owe. New York may analyze different factors than the federal government in determining whether to pay closer scrutiny to your return. New York collects much of its revenue from sales taxes. As such, the state may see a cash-heavy business as a likely target of an audit to ensure that it has charged and paid all sales taxes to the state. The state may not be as focused on determining what your actual income was because that is more the focus of the IRS.
The IRS may be more concerned about whether you have taken large deductions or have unreported income. The IRS does more work than New York to determine your taxable income because the state often relies on information that you have reported to the IRS or that it receives from the federal government.
Audit Focuses Are On Different Taxes
The federal government is primarily concerned with income, payroll, and corporate taxes. They use the Internal Revenue Code and the associated rules and guidance to determine how much you may owe in taxes, after they have scrutinized your deductions and credits to determine whether they were validly taken.
New York audits may be focused on whether you are in a position where you owe taxes to the state (after potentially having claimed that you were not a New York resident. The state is focused on collecting its own income and sales taxes. New York may only look for unreported income as it relates to the sales taxes that your business may owe. When the state conducts its audits, they occur pursuant to New York tax laws (as opposed to IRS rules).
How Audit Results Are Enforced
Both the IRS and New York have a variety of powers that they can use to collect money they claim you owe. Both can go after your financial assets and income. They can seize your bank accounts and garnish your earnings to pay a tax debt. New York has a unique enforcement tool that the federal government does not have, and vice versa. The federal government has the ability to place restrictions on your passport, which can keep you from being able to travel. New York can suspend your driving privileges, which can present great difficulty for your ability to live your daily life.
The problem is that a federal audit may trigger one in New York, and you may be forced to deal with two agencies at once. The federal and state governments share information to an extent, although the IRS will not inform New York that you are under audit. However, New York will learn of an audit if the IRS makes changes to your federal return in the wake of their examination. If you do not report this information on your own, the IRS will share it with New York. Then, you can face a second audit that may result in additional back taxes on the state level.
You Need a Tax Lawyer for Both a Federal and State Audit
If you have been contacted by the IRS or New York with regard to an audit, you should not take any chances. The results of an audit can be disastrous if you end up owing significant back taxes and penalties. You should hire a New York tax audit defense lawyer to represent you. A lawyer can help you come up with a strategy for how to handle the audit, and they can present your strongest possible arguments to the auditor. You have the right to be heard when you are being audited, and our New York tax defense lawyers can ensure that your side of the story is told.
Contact a New York Tax Attorney
Facing state or federal tax audits is overwhelming and potentially costly without experienced legal representation. The Thorgood Law Firm provides aggressive audit defense for New York taxpayers, protecting your rights during IRS and New York State Department of Taxation examinations. Our skilled tax attorneys handle all communications with auditors, prepare documentation, challenge unfair assessments, and negotiate favorable resolutions.
Contact The Thorgood Law Firm today by visiting our website or by calling us at (212) 490-0704 for a confidential, free consultation and dedicated audit defense that minimizes tax liabilities and protects your financial future.
Frequently Asked Questions About New York and IRS Tax Audits
- What is the difference between an IRS audit and a New York State tax audit?
An IRS audit reviews federal tax returns, while a New York State audit reviews state tax compliance.
IRS audits typically focus on federal income tax issues, deductions, or unreported income. New York State audits often involve sales tax, residency issues, and employer withholding taxes.
In some cases, adjustments made during an IRS audit can trigger a New York State tax audit, because the agencies share information.
- Are New York State tax audits more aggressive than IRS audits?
New York State audits can sometimes be more aggressive in certain areas, particularly residency audits and sales tax audits.
For example, the New York Department of Taxation and Finance frequently investigates taxpayers who claim to have moved out of the state while still maintaining ties to New York.
Because these audits can involve extensive financial reviews, many taxpayers seek guidance from a tax audits attorney in NYC before responding to auditors.
- What triggers a New York State tax audit?
New York tax audits are often triggered by:
- Large deductions or unusual reporting patterns
- Residency claims by high-income taxpayers
- Sales tax inconsistencies
- Cash-heavy businesses such as restaurants or retail stores
- Differences between federal and state tax filings
Businesses in New York City are particularly vulnerable to sales tax audits, which can involve detailed reviews of financial records.
- What triggers an IRS audit?
IRS audits are typically triggered by statistical anomalies or mismatches in reporting.
Common triggers include:
- Large deductions relative to income
- Unreported income from Forms W-2 or 1099
- Significant business losses
- Cryptocurrency transactions
- High income levels
Although the IRS audits a small percentage of taxpayers overall, high-income individuals and business owners face higher audit rates.
- What is a New York residency audit?
A New York residency audit occurs when the state questions whether a taxpayer who claims to live outside New York is actually still a resident.
The state may review:
- Travel records
- Credit card transactions
- Cell phone location data
- Home ownership records
- Time spent inside New York
If the state determines that a taxpayer is still a New York resident, it may attempt to tax all of the taxpayer’s income, even income earned outside the state.
Because the financial stakes can be very high, many taxpayers consult a tax audit attorney in New York City during residency audits.
- What is a sales tax audit in New York?
Sales tax audits are among the most common business audits in New York.
During a sales tax audit, state auditors may review:
- Point-of-sale records
- Bank deposits
- Invoices and receipts
- Inventory purchases
- Cash register records
If the auditor believes records are incomplete, the state may estimate tax liability using industry markup methods or indirect calculations.
A New York tax audit lawyer can often challenge these estimates and negotiate with auditors.
- Should you hire a tax audit attorney in NYC?
Not every audit requires legal representation. However, working with a tax audit attorney in NYC can be particularly helpful when:
- The audit involves a large amount of tax
- Multiple years of returns are under review
- A business is facing a sales tax audit
- The audit involves residency issues
- Fraud penalties may be alleged
An experienced tax audit lawyer can communicate with auditors, prepare documentation, and help resolve the audit in the most favorable way possible.