Are More Audits on the Horizon?

The Tax Cuts & Jobs Act of 2017, a major overhaul of the federal tax system, raises the question of whether we will see an increase in audits as the new rules take effect and filers begin adapting their tax returns accordingly. We are currently seeing this situation as the result of a tax law change implemented four years ago in New York State.

In March of 2014, New York Governor Andrew Cuomo signed legislation that made significant changes to New York State tax law. New York state’s two parallel business tax systems (Article 32 for banks and Article 9-A for other corporations) were merged into one tax system. Banks were now subject to the same provisions as general corporate taxpayers, unless they qualified as a community bank or a small thrift, and then they were entitled to certain subtraction modifications.

One of these subtraction modifications could create losses for the foreseeable future, and thus, a number of banks wrote-off their deferred tax assets related to New York state taxes after the law change. We are now seeing an uptick in audits of New York State bank tax returns, as auditors focus on these subtraction modifications.

Changes stemming from the new federal tax law may produce a similar result. Will it create additional federal tax audits in the future? Will it create additional state residency audits in the future?

If you would like a pre-audit review or are undergoing an audit with which you need experienced assistance, contact your Marcum professional.