Why Avoid Tax Audit?

So why need a CPA? The mere thought of being audited by the IRS is enough to give most individuals the willies. There is a reason for that, but many people completely ignore state tax audits. This is a mistake given the fact such audits are going to rise dramatically. The United States is generally considered a good financial bet. This was proven once again during the worst part of the recession when people, institutions, and countries around the world invested in treasury notes. This practical faith allows the federal government to spend far more than it takes in without much in the way of short term consequences. The same is not true for states.

The states are having a brutal time in this economy. The state just reported its tax revenue for July 2009 was over 10 percent less than the revenue collected in July 2008. Perhaps even worse, the figures for July 2009 represented the 18th straight month of reduced tax revenues. This is a common scenario faced by most states. The present financial status of states is brutal. If they were individuals or companies, most would’ve been forced into bankruptcy long ago. They have racked up years of debt and now have major cash shortfalls. There are three steps they can take at this point. One is to cut expenditures. The second is to raise taxes. The third is to increase audits of individuals and businesses to try to find lost revenues. The first two will happen at the last moment because politicians don’t desire to be associated with either act, but audits are already tamping up.

How is a state tax audit different than one carried out by the IRS? Well, every state handles them a bit differently from a procedural perspective, but all will ask you for records proving your claimed deductions and such. One major difference, on the other hand, will be the law applied. Most of us barely know federal tax law if we are honest. Few of us even know how to look up state tax law, much less what it says. If you are faced with a state tax audit, getting a CPA or tax attorney involved is a must to avoid being run over?