“Audit” is a fearsome word—and for a good reason. The last thing a person or organization wants is a notice from the IRS or Michigan’s Department of Revenue informing them of an oncoming tax audit.
Regardless of who is performing the audit, you must familiarize yourself with the process to avoid any unforeseen circumstances that may negatively reflect you. Luckily, avoiding audits is a relatively straightforward process once you know what you’re looking for.
Read on to learn more about IRS audits in Michigan and how you can navigate the audit process as smoothly as possible.
Understanding Tax Audits
Before getting too deep into the details, it’s essential to understand what an audit is and to better familiarize yourself with the audit process. An audit occurs when the IRS or state’s Department of Revenue scrutinizes your tax returns to ensure the accuracy of your reported income and deductions. Should either agency discover disparities, you might face fines, penalties, and potentially jail time should either accuse you of fraud.
Differences Between a State and Federal Audit
The most significant difference between a state and federal audit lies in the organization performing the tax audit. Federal audits concern your federal tax returns, which the IRS oversees. Michigan tax audits focus on your state tax returns, which Michigan’s Department of Revenue monitors. While both tax returns process simultaneously, you can experience problems with one and not the other.
State Audit in Michigan
According to recent data, Hawaii, New York, Delaware, Massachusetts, and Michigan trend as the states with the most state audits. Michigan, in particular, performs a large number of audits due to a significant percentage of the population working in other states, thus complicating their tax returns.
While getting an audit does not necessarily finger you as being deceitful, it indicates some misunderstanding regarding your tax return between you and the state.
The trigger for your state audit may have been one of the following:
● Nexus: Nexus is when your company has a tax presence, otherwise known as nexus, in a state or states. Due to each state having its own tax laws, nexus can make tax returns more complex—for example, when a business sells its products on Amazon or has locations across state borders. After a company establishes nexus, it has to register for use and sales tax. If this does not happen, a state that finds you operating a business in its territory can audit you.
● Use Tax: Use tax is a sales tax on items you purchased in another state but intended to use, store, or consume in your own state. Many people and businesses fail to report use tax, which might involve inventory transfers, charitable donations, and promotional giveaways.
● Sole Proprietors: As opposed to LLCs, C Corporations, and S Corporations, sole proprietors tend to see audits more frequently, usually due to the filing of self-prepared returns. Self-filing leaves them open to more mistakes, leading the state to audit sole proprietors more often.
IRS Audit in Michigan
The United States government reserves the ability to issue audits wherever it sees fit. If the IRS audits you, it will review only your federal tax return, scrutinizing your accounts and financial information to make sure everything adds up correctly.
Sometimes, the IRS selects individuals and businesses as a part of a random selection process. While the agency refers to it as random, your tax return is, in fact, compared to other tax returns through a computer screening, and a discrepancy likely arose if the IRS selected you in this manner.
Should you be involved with other taxpayers who are under review, through mutual investment or partnerships, there’s a good chance the IRS will audit you, too, as a precautionary measure.
Many things can trigger an IRS audit Michigan, including but not limited to:
● Having very much or very little income
● Making errors (typos, math)
● Not reporting income
● Making too many tax deductions
● Failing to report cryptocurrency
● Operating a cash-based business
● Claiming Earned Income tax credit
● Being a self-employed worker
● Operating a home-based business
● Writing off 100% of a company car
What Happens If the Government Suspects You of Fraud?
One of the primary reasons for an audit is the suspicion that you have been committing tax fraud. Typically, the government will try to ascertain whether or not you acted in concert with the tax preparer. This can lead to conflicts of interest if the taxpayer who committed tax fraud chooses to hire the same tax professional that prepared the audited return to represent them.
Suppose the IRS proves that your tax preparer conspired with or aided and abetted their client (you) to understate their tax liability. In that case, the preparer is a much larger target for criminal prosecution than the clients they serve. The government will often intervene to ensure that the tax preparer does not represent the person under audit for fraud.
Contact a Tax Professional at Levy & Associates Today
Do you need help with an IRS audit in Michigan? At Levy & Associates, we have experience helping clients deal with federal and state tax audits. We’re here to help you navigate the process.
Reach out to talk with one of our tax consultants today at (800) TAX-LEVY and get the clarity you need about your impending audits. Don’t take on these hurdles alone. Trust in someone who knows tax laws inside and out, as we do at Levy and Associates.