The purpose of an audit is to: (1) determine whether a tax return is required to be filed; (2) verify the accuracy and completeness of tax return information; and (3) assist taxpayers in matters relating to state taxation.
Most audits are initiated based on information obtained from audit selection criteria, an examination of another return, the IRS or other states. An audit may also stem from the taxpayer's filing history or as the result of other outside referrals. An internal review of tax return information and filing history is conducted prior to any taxpayer contact. Audits are conducted either from the desk, or, in the case of a business, at the taxpayer's premises if an examination of the taxpayer's books and records is deemed necessary.
A return may be audited up to three years after it has been filed or required to be filed whichever occurs later. In the case of substantive omissions in terms of tax or gross income, the statute may extend beyond three years. However, if no return was filed, or, if a false or fraudulent return was filed, there is no time limit on the statute of limitations. If there is a change in federal taxable income made by the federal government, an assessment can be made within one year of receipt of information from the taxpayer or two years of receipt by the commissioner of information from the federal government that it has made a final determination of federal taxable income. A taxpayer will be subject to a 10% penalty if amended return(s) are not filed to report the federal adjustments within certain prescribed filing periods. See MGL Chapter 62C, sections 24, 26 and 30.
If it is determined that additional time is required to complete the audit, a Consent Extending the Time for Assessment of Taxes (Form A-37) is requested to extend the statutory period, if applicable. A Consent Extending Period for Assessment of Estate Tax (Form EET-1) is requested to extend the statutory period for audits of estate tax returns. See MGL Chapter 62C, section 27.
At any time during the audit process a taxpayer may choose to have another individual represent him/her. A completed Power of Attorney (Form M-2848) must then be submitted to DOR by the taxpayer. The Power of Attorney authorizes the representative to discuss and receive information regarding the audit and bind the taxpayer to the authorized activity declared on the Power of Attorney.
If, from the verification of a tax return or review of Departmental records, it is determined that the full amount of tax was not assessed, a Notice of Intent to Assess (NIA) detailing the reasons for any proposed change in tax, will be issued to the taxpayer.
Accordingly, if it is determined that the taxpayer has failed to file a required tax return, a Notice of Failure to File (NFF) generally will be issued to the taxpayer. Or, if inconsistencies or questionable issues arise during a preliminary review of a tax return or filing history, a letter may be issued to the taxpayer requesting an explanation of the items in question.
Once notified, the taxpayer is responsible for supplying the requested information and/or complying with the instructions in the NIA or the NFF.
Before or at the opening conference, the auditor will inform the taxpayer of the audit plan for the examination, and the records required to be made available. The auditor may also ask for a tour of the operations. Field audits generally will cover tax periods within the three-year statute of limitations as well as any non-filing periods.
After conducting a preliminary review of the records to determine the scope of the audit, the auditor generally will take one of the following steps: (1) conduct a comprehensive examination; (2) sample, if possible, mutually agreeable periods to use as a basis for a projection of tax liability, or, if necessary, utilize such statistical sample methods which he/she deems appropriate and which are in accordance with the Internal Revenue Code; (3) inform the taxpayer of delinquent periods; (4) request amended returns where a consistent pattern of error is identified, or; (5) if the facts and circumstances warrant, discontinue the audit.
At the exit conference, the auditor/supervisor will review the work-papers with the taxpayer, provide a verbal explanation of how the work-papers were prepared, and provide an explanation of the taxpayer’s rights of appeal. If the taxpayer requires additional time to review these work-papers, an additional period of time for review may be granted, if warranted. The auditor will make any justified changes. After any final changes have been made, the audit supervisor will issue a letter to the taxpayer summarizing the results of the exit conference. The audit supervisor will also provide a Form DR-1, Appeals Form to the taxpayer at the conclusion of the audit.
DOR may issue a NIA detailing the reasons for any proposed change in tax. After receiving a NIA, a taxpayer has several options. The taxpayer may pay the NIA amount within thirty (30) days, or let the NIA expire and wait for DOR to issue a formal bill, a Notice of Assessment (NOA). The taxpayer is also entitled to request settlement consideration pursuant to MGL Chapter 62C, section 37C, or a pre- assessment conference pursuant to MGL Chapter 62C, section 26(b) to dispute the audit findings, with the Office of Appeals. Such requests must be made by sending Form DR-1 directly to the Audit Division by the response due date indicated on the NIA. The taxpayer may be requested to sign a special consent extending the time for Assessment of Taxes (Form B-37). A determination of a net overpayment will be automatically refunded. See MGL Chapter 62C, section 26.
Subsequent to the issuance of a NOA, the taxpayer may dispute the assessment by filing an application for abatement. See MGL Chapter 62C, section 37. The filing of an abatement does not stop interest or late file penalty charges from accruing on any unpaid tax liability. Filing an appeal will stay the accrual of late pay penalties on any unpaid contested amounts for taxpayers who have been audited. Involuntary collection activities will be suspended for all taxpayers whether audited or not, while an abatement is pending with DOR or upon subsequent appeal to the Appellate Tax Board or Probate Court. See TIR 99-18.
In addition to requesting a hearing or settlement consideration, certain taxpayers may be eligible to participate in the Department’s Early Mediation Program. Generally, Early Mediation is available for any audit case in which the amount in dispute is at least $250,000. Mediation is a voluntary program and both the taxpayer and the Department must agree that the case is suited for Mediation. Early Mediation may be initiated at any time after a matter in controversy has been fully developed and up to 30 days after the issuance of an NIA. When Early Mediation is unsuccessful, the taxpayer will be offered the opportunity to pursue resolution through traditional Appeals processes. See AP 635 for more details.
The DOR may waive penalties in certain circumstances if the taxpayer can support the contention that the non-compliance was due to reasonable cause and not willful neglect. Determinations are based on the particular facts and circumstances of each case. See AP 633 for more details.
If a Chapter 62C, section 35A penalty is proposed, it will generally result from an audit undertaken by the Department. However, in many of these instances the applicability of the section 35A penalty cannot be determined until the audit is near completion. Therefore, a taxpayer might not know until a final set of work-papers is received or a NIA is issued that section 35A penalty has been proposed. Regardless of when it discovers that the section 35A penalty is applicable, a taxpayer may request relief from imposition of the penalty at any time prior to the expiration of the applicable statute of limitations. Therefore relief from the penalty may be requested both pre-assessment and post-assessment. See Directive 12-7 for more details.
This document sets out a general overview of the audit process as required by MGL Chapter 62C, section 80(a). Any specific questions about this audit should be asked of the auditor or his/her supervisor.
For more information about your rights as a taxpayer, please refer to "A Guide to the Department of Revenue: Your Taxpayer Bill of Rights."