Every tax agency audits taxpayers to ensure a fair tax system and broad-based compliance with tax laws.
Audits of individuals and businesses are based on information on a tax return or from our extensive exchange of data with the IRS and other states. Frequently, the Department of Revenue's audits can be completed quickly via letters between the Department of Revenue and the taxpayer involved. In other cases, the Department of Revenue may have to have an auditor examine the taxpayer's books, records, and other documentation. Generally speaking, the better your records are, the faster auditors can complete their work. If you are going to be audited, you will receive a notice from the Department of Revenue signed by an auditor. You should call the auditor handling your case if you have any questions.
The Department of Revenue has the legal authority to audit any type of return for up to three years after it has been filed. Corporate and individual income tax returns may be audited for up to six years if the taxpayer omits from gross income any amount properly includible in gross income that exceeds 25 percent of the amount of gross income disclosed on the return. Other returns may be audited for up to six years if the taxpayer omits an amount of tax from the return that exceeds 25 percent of the tax reported therein.
However, if a taxpayer has failed to file a return or has filed a false or fraudulent return, there is no time limit on how far back the Department of Revenue can go to discover a taxpayer's true tax liability. Although there is no statute of limitations if a return has not been filed, the Department of Revenue generally will require a taxpayer to file returns for the year that is currently due plus the six prior years. (Exceptions to this general rule include failure to file returns and pay over trustee taxes that have been collected from third parties but not remitted to the Commonwealth, and willful failure to file taxes the taxpayer knew or should have known were due.) Please note that the year "currently due" refers to the year of initial contact between Department of Revenue and a taxpayer, which may predate the year a taxpayer actually comes forward to file a return. For more information on this issue, please see Technical Information Release (TIR) 01-8.
If there is reason to believe that a taxpayer has filed an incorrect or insufficient return - for example, not submitting all necessary schedules - the taxpayer may be required to submit proof to support the information on the original return or to file an amended return. For their own protection, taxpayers should keep records for as long as possible or for at least six years. The lack of records may make proving your tax liability or verifying a payment difficult.
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