How to Prepare for a Multi-State Tax Audit

by Apr 23, 2020Uncategorized

No matter whether you’re the business owner or a part of the financial department, the word “audit” is notorious for making hearts flutter.

Before going into fight-or-flight mode, there are several ways that you can prepare for a multi-state tax audit.

Let’s first take a breath and know that audits are just exams that ensure you’re following the rules and are in regulation with current IRS policies. If you need guidance or just a quick reminder, now is the time to figure out a game plan to conquer your taxes.

If you’re in financial services or are a small business owner, take notes on re-adjusting your state taxation paperwork. Focusing on documenting the time and expenses used throughout the tax year will help you in the long run. The main thing to get top of mind is decreasing your potential exposure by protecting yourself, employees, and business.

How to Prepare for a Multi-State Tax Audit

Multiple State Travel Tips

Any time an employer conducts business in multiple states, income taxes may need to be withheld in each of those states. An employer needs to identify which state they consider their resident state, which is where they live and work. Employers who do business in both their home state and in another state can see if each state has a reciprocal agreement available for tax purposes. 

What Is a Reciprocal Agreement?

Reciprocal agreements were enacted to ensure a smooth process for employers by allowing them to only withhold in one state. If a person works anywhere other than their home state, they will be subject to paying state taxes in all states they have traveled for business.

Multi-state audits start by creating efficient audit systems where states delegate different groups to start the examinations. The audit programs abide by specific tax laws and typically apply to taxpayers who:

  • have large intercompany transfers
  • don’t accurately report
  • have apportionment that changes annually
  • have an excess of 250 million on subject line #28 of their federal income form

If you’re a frequent traveler, you may have to file a part-year resident return in both prior and new states. Also, if you commute to work in a place that is not your resident state, you will need to file a resident tax return in both states as well. 

Apply for Tax Credits

While you may be overwhelmed with preparing your federal and state income tax in one or more states, there is something called a tax credit, which may be beneficial to you. Tax credits are income tax benefits available to companies that meet specific guidelines and tax laws within their state. 

With the Multistate Tax Commission growing sterner in their guidelines, it’s in the taxpayer’s best interest to stay in compliance. They can do this by performing SALT or “state and local tax” reviews to see if they need to file in multiple states and if they’re on the right track to passing audits. The overall objective of the SALT review is to limit potential exposure to unsettled tax liabilities.

Find a Tax Program That Fits Your Needs

Sign up for a non-standard settle program, which is a proactive program formulated to catch errors and prevent future losses. One type of system is the National Nexus Program. At Nexus, they strive to educate local taxpayers and organize public forums to answer questions directly from you. Nexus is not available in all states, so double check your state is a non-member state. Seeking additional information tools and administrative programs like this once is a preventative measure to help you and your small business or financial service come time to pay taxes. 

Ready for your audit?

Finding a tax professional is a smart way to ensure you abide by local, state, and federal laws to the best of your ability.

At Considine and Considine, we strive to be your go-to for the complex regulations that states may require. If you have any questions about preparing for an audit—or if you’re being audited—contact us to learn more.

PPP Loans: Practical Advice on Asking for Forgiveness

Considine & Considine's Rick Hotz, a partner in the Business Tax department, sits down with Amit Singh and Dulce Martinez of Stradling Attorneys at Law to talk about PPP loans.  In this webinar, Hotz and his co-hosts provide some practical advice on asking for PPP...

How to Choose a Small Business Retirement Plan

Planning for the future can be a little unnerving, but is essential to securing a stable financial situation for you and your family. According to experts, Americans will need to maintain between seventy to ninety percent of their current income to keep up with the...

How to Prepare for a Multi-State Tax Audit

No matter whether you’re the business owner or a part of the financial department, the word “audit” is notorious for making hearts flutter. Before going into fight-or-flight mode, there are several ways that you can prepare for a multi-state tax audit. Let’s first...

Preparing for Inheritance Tax: The Ultimate Breakdown

In life, there are things we prepare for and things that hit us out of the blue. Inheritance taxes are definitely one of these subjects that can cause us to pause, especially if the inheritance is due to the death of a loved one. Talking about what to do with an...