Administrative Procedure  AP 609: Verification of Returns Through Audit

Date:	01/24/2024
Organization:	Massachusetts Department of Revenue
Referenced Sources:	Massachusetts General Laws

609.1. In General

The Department (“DOR”) may examine or audit a taxpayer's books, papers, or other records to verify a taxpayer's tax liability.  Generally, DOR may audit a return at any time within three years of the date the return was due or was actually filed, whichever is later.  Thus, if a return was due on April 15 of a given year, and the taxpayer filed on March 2, DOR has until April 15 three years later to audit that return.  If the taxpayer filed the return late on July 15 of a given year, DOR has until July 15 three years later.  If the taxpayer filed no return or filed a fraudulent return, DOR may assess the taxpayer at any time.  If the taxpayer substantially understated the amount of a tax or income on the return, DOR may assess the taxpayer within six years after the return is filed.  See 830 CMR 62C.26.1 for more information.  In general, DOR may audit a trustee tax return within three years of the date the return was due if the taxpayer was not registered for that trustee tax.  However, if a liability is found during the audit, DOR may audit tax tax periods occurring within the most recent seven tax years.  See TIR 11-1.  If a taxpayer subject to more than one tax is selected for audit, all taxes may be audited.

The procedures DOR uses in auditing estates may differ from those described below.  See AP 500, et al, - Estate Tax; 507 - Audit of Returns; Notice of Intent to Assess; Hearings.

609.2. Notice of Insufficient Return

If DOR has reason to believe that a taxpayer has filed an incorrect or insufficient return, DOR may send the taxpayer a Notice of Insufficient Return (NIR) during or prior to a formal audit.  The sending of an NIR does not preclude a formal audit should DOR later determine that an audit is necessary.  The taxpayer has thirty days after the date of the NIR to demonstrate the correctness of the original return or file an amended return with the notifying office.  DOR will, if requested, assist the taxpayer in determining the proper tax due.  If the taxpayer fails to respond to the NIR, DOR may assess the tax at up to double the amount determined to be due as provided by G.L. c. 62C, § 28.

609.3. The Audit Process: Taxpayer Records

DOR conducts both "desk" and "field" audits.  In a desk audit, the taxpayer’s tax return is examined at a DOR office.  The office conducting this audit may request any additional information necessary to complete the audit or may require the taxpayer to appear in person.

For more complex returns, or where a desk audit has proved insufficient, a DOR auditor may conduct a field audit by visiting the taxpayer and performing an extensive review of the taxpayer's books and records. The taxpayer will be notified in advance that the taxpayer has been selected for audit and will be told which books and records should be made available.

Taxpayers are required to retain any records pertaining to tax returns until the statute of limitations for assessment has expired, usually three years from the date the return was due or filed, whichever is later. In certain cases, e.g., purchase of stocks, bonds or real estate, records have to be retained for as long as necessary to substantiate any transactions that may be required to be shown on future returns.  Also, if a taxpayer has consented to extend the time in which DOR may audit a return and assess a tax, that extended time should also be taken into account when retaining records.  In cases of fraud or failure to file the record retention period is indefinite.  DOR may request that the taxpayer provide all accounting records and information in a searchable electronic format, to the extent that the taxpayer maintains such records in an electronic format.  For more specific information on what records should be retained for each tax type, see 830 CMR 62C.25.1.

In addition, DOR may enter into an agreement with the taxpayer to use statistical sample methods in conducting audits where a taxpayer's records are so voluminous as to make a complete audit impractical.  The audit findings derived from such methods may be projected over the entire audit period to determine the proper tax.   If, after a good faith effort, the parties cannot reach an agreement to use these methods, the commissioner may utilize statistical sample methods which he deems appropriate and which comply with the provisions of the Internal Revenue Code.

609.4. Outcome of an Audit

A desk audit or field audit may result in a determination that there is an overpayment, a deficiency or that no change is necessary.  Where appropriate for a field audit, a "no change" letter will generally be issued.

When a field audit is completed which results in proposed changes to a taxpayer's liability, the DOR auditor will discuss the results of the audit with the taxpayer or representative.  Upon review of field audit findings by the auditor’s supervisor, the taxpayer will be afforded the opportunity for an "exit conference" with the agent and/or the auditor’s supervisor.  Following an "exit conference", a determination is documented and conveyed to the taxpayer or representative.

In the case of overpayment, DOR will generally first apply that amount to any other undisputed tax liability owed by the taxpayer or, if there is no such liability, DOR will generally refund the amount without requiring the taxpayer to make a formal application for abatement.

If DOR makes a determination of deficiency or over assessment, it will send a Notice of Intent to Assess (NIA).  (See AP 611.4 for instances in which an NIA is not required.)  The NIA will explain the basis of the proposed assessment and how DOR determined the deficiency or over assessment.  See 830 CMR 62C.26.1.

609.5. Appeal Requests

After the issuance of the NIA, or if the taxpayer challenges the “Notice of Change to Your Tax Return” issued pursuant to G.L. c. 62C, § 26(c) and requests that the Commissioner assess the additional tax under G.L. c. 62C, § 26(b), the taxpayer has the statutory right to confer with the Commissioner or their authorized representative.  This conference gives the taxpayer an opportunity to show that he or she is not liable for the amount shown on the NIA.  A taxpayer may also seek settlement consideration after the issuance of the NIA.  A taxpayer seeking a pre-assessment appeal must submit a request within 30 days either online or by submitting a paper form.  To request an appeal online a taxpayer may use the appeal function on MassTaxConnect (MTC) by choosing "File a Dispute" under "I Want To" in their account for each tax type even if they did not file the original return electronically. Please make sure to select the pre-assessment dispute option. This is the fastest and most efficient way to submit an appeal.

A taxpayer may also submit a paper Form DR-1, Appeals Form, to the address of the auditor or the auditor’s supervisor listed on the NIA by mail and e-mail. In addition, Form B-37, Special Consent Extending the Time for Assessment of Taxes, should be uploaded to MTC or submitted with the paper Form DR-1 (discussed below).  A paper request must be postmarked within 25 days following the issuance of the NIA.  A request for a conference postmarked after the 25^th day following the issuance of the NIA will be considered solely at the discretion of the Commissioner. If the request for a conference is not received in sufficient time for a conference to be held within 30 days of the issuance of the NIA, the Commissioner may assess the tax, unless the Commissioner in his discretion agrees to hold the conference after the 30^th day, subject to the Commissioner’s right to require a consent to extension of time agreement as described in 830 CMR 62C.26.1(6)(d)3.  See AP 628, Resolution of Disputes at the Office of Appeals, for further details.

During the appeals process, the taxpayer may dispute the results of the audit, but the taxpayer must be able to substantiate any disputed items with appropriate documentation.  The taxpayer may be accompanied by a family member, attorney, accountant, or other tax professional during the appeals process.  The taxpayer may send a representative in his or her place, but only if the representative holds a valid power of attorney as described in AP 614.  See 830 CMR 62C.26.1.

609.6. Early Audit Settlement

Certain taxpayers may be eligible to settle or resolve potential audit disputes with DOR before an NIA is issued.  If the auditor’s supervisor believes that the audit is appropriate for settlement, he may suggest that the taxpayer seek early audit settlement.  A taxpayer requesting early audit settlement must provide a complete explanation of the facts and issues in dispute, a written settlement proposal, any statute of limitation waivers needed to preserve both the rights of DOR and the taxpayer, and, if appropriate, additional documentation substantiating a settlement adjustment.  If an NIA has been issued, the taxpayer must also submit a completed Form DR-1 to the auditor’s supervisor within 30 days of the date of the NIA.  When the taxpayer and DOR have agreed to settlement terms, the taxpayer (or its designated representative) and DOR must sign a written settlement agreement reflecting those terms.  If an early audit settlement is not reached, the taxpayer will still be able to appeal any assessment through the normal appeals process, such as a conference or settlement consideration by the Office of Appeals.  See AP 628, Resolution of Disputes at the Office of Appeals, for further details.

609.7. Early Mediation Program

In addition to requesting a hearing or settlement consideration, certain taxpayers may be eligible to participate in DOR’s Early Mediation Program.  Generally, Early Mediation is available for any audit case in which the amount in dispute is at least $250,000.  Early Mediation is a voluntary program and both the taxpayer and DOR 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 in the course of a tax audit, but not later than 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, Early Mediation Program.

609.8. Extending the Time for Assessment

Generally, DOR may make an assessment of a taxpayer's liability within three years from the date the return was due or was filed, whichever is later.  (See AP 609.1 and AP 611 for more information.)  During the course of an audit, DOR and the taxpayer may agree to extend the time for assessment by signing Form A-37, Consent Extending the Time for Assessment of Taxes.  If the taxpayer requests a conference and/or settlement consideration with the office of Appeals, the assessment period may be further extended by Form B-37 as described in AP 628 Resolution of Disputes at the Office of Appeals. A taxpayer may submit the form electronically through MTC by uploading the completed form as an attachment.

609.9. IRS Audits, Other Changes in Federal Income or Federal Estate Tax

If the IRS through audit or otherwise changes the amount of a taxpayer's federal income or federal estate, the taxpayer must report that change to DOR and pay any additional amounts due.  See AP 619, Reporting Changes in Federal Taxable Income, Federal Tax Credits, or Federal Taxable Estate, for more information.

609.10. Massachusetts Audit Reports

If DOR adjusts a Massachusetts return in such a way as to increase federal taxable income, it will notify the IRS of the change.  It is the taxpayer's responsibility to research any possible requirements to report these changes to the IRS.

609.11. Exchange of Information with IRS and Other Taxing Authorities

DOR routinely exchanges information with the IRS, other taxing authorities and other state and local authorities to assist in examinations of returns, assessments, audits and other activities.

 

REFERENCES:
G.L. c. 62C, §§ 22, 23, 24, 25, 26 (b), (c), (d), 28, 36, 37C
830 CMR 62C.21.1
830 CMR 62C.22.1
830 CMR 62C.25.1
830 CMR 62C.26.1
830 CMR 62C.26.1(6)(d)3
AP 507, Audit of Returns; Notice of Intent to Assess; Hearings
AP 611, Assessments
AP 614, Power of Attorney
AP 619, Reporting Changes in Federal Taxable Income, Federal Tax Credits, or Federal Taxable Estate
AP 628, Resolution of Disputes at the Office of Appeals
AP 635, Early Mediation Program
Form A-37, Consent Extending the Time for Assessment of Taxes
Form B-37, Special Consent Extending the Time for Assessment of Taxes
Form DR-1, Appeals Form