Overview
The purpose of an audit is to:
- Determine whether a tax return is required to be filed
- Verify the accuracy and completeness of tax return information and
- Assist taxpayers in matters relating to state taxation.
Returns are selected for audit for a number of reasons. Most audits are based on:
- Information provided on a tax return or from our extensive exchange of data with the Internal Revenue Service (IRS)
- Other state and local agencies
- Taxpayer's filing history.
In some instances, audits are based on information obtained from another taxpayer's return. DOR also may look at a random selection of returns to see whether there are:
- Consistent filing problems or
- Issues that need to be addressed.
All information received from other agencies, as well as information already in our files, is always kept strictly confidential.
Audit process
Typically, an audit is initiated when a tax examiner sends a notice to you:
- Requesting additional information about an item, or items, on your return, or
- To notify you of an error that needs to be adjusted.
It is very important that you always respond to these notices. If you don’t, you may be responsible for any interest, penalties, and interest resulting from the audit.
If you receive an examiner’s notice, it will:
- State the nature of the problem and an explanation of possible changes in your tax situation
- Ask you to provide additional information or explain why you disagree with these changes
- Give you a date by which you should respond, and
- Give you the name and telephone number of the DOR employee who is handling your case.
Audits are usually conducted for a 3-year period but may be expanded up to 6 years if your returns weren’t filed when they were due.
During the audit, you and the auditor will review your records and the returns you filed to resolve any issues or concerns.
You will be allowed adequate time to respond to our questions and ask questions of your own.
In some cases, you may be asked to waive the statute of limitations on the audit period voluntarily. This is usually done if:
- Additional time is needed to conduct the audit and
- Will prevent a possible assessment due to lack of time to fully complete the audit.
Types of audits
There are 2 main types of audits. Many audits, known as desk audits, are straightforward and can be completed quickly via letters between the Department and the taxpayer.
In other cases, DOR may have to examine a taxpayer's books, records, etc., to verify his or her tax liability. These examinations are known as field audits.
Desk audits
A Notice of Intent to Assess (NIA) detailing the reasons for any proposed change in tax will be issued to the taxpayer if it is determined that the full amount of tax wasn’t assessed from the verification of a tax return or review of DOR records.
A Notice of Failure to File (NFF) generally will be issued to the taxpayers if:
- The taxpayer has failed to file a required tax return
- Inconsistencies or questionable issues arise during a preliminary review of filing history.
Once notified, the taxpayer is responsible for supplying the requested information and/or complying with the instructions in the NIA or the NFF.
Such an audit is usually completed quickly via information letters between the Department and the taxpayer. Typically an auditor will send the taxpayer a notice requesting additional information about an item, or items on their return, or to notify the taxpayer of an error that needs to be corrected. The auditor’s notice will:
- State the nature of the problem and an explanation of any possible changes in the taxpayer’s tax situation;
- Ask the taxpayer to provide additional information or an explanation as to why the taxpayer disagrees with the proposed changes;
- Provide the taxpayer the date by which a response is due; and
- Give the taxpayer the name and telephone number of the DOR employee that is handling the audit.
It is important to respond to all notices sent by the Department to you, as failure to do so may result in being responsible for any additional tax, interest, and penalties found due.
Field audits
Before the field audit, an auditor will contact you to arrange a convenient time to meet at a DOR office. If auditing a business, the meeting will be the business’ location.
Audits may also be arranged, by mutual consent, to take place at your accountant’s or other representative’s office.
Field audits are usually conducted during normal work hours. We will work with you to minimize the impact of the audit on your schedule or your business operations.
The auditor will:
- Describe the types of records that you’ll need to show, and
- Explain the planned audit method and procedures.
The auditor will also:
- Provide you with a copy of the Massachusetts Taxpayer Bill of Rights
- Answer any questions you may have regarding your rights
- Determine how your records will be reviewed
- Discuss the company and ask how your records are maintained if you're a business
- Ask you to identify other issues which may affect the audit
- Determine the method in which the audit will be conducted
- Conduct a detailed audit, which involves looking at all of your records. We may look at a sample or portion of your records.
Visit the Field Audit Procedural Manual.
Audit representation/Power of attorney
You can have an attorney or anyone else accompany you when you meet with a DOR employee.
Power of Attorney
If you want someone to represent you, you must give that person what is known as a Power of Attorney. To do so, submit a completed Form M-2848 to DOR.
The Power of Attorney authorizes:
- The representative to discuss and receive information regarding the audit and
- Binds the taxpayer to the authorized activity declared on the Power of Attorney.
To learn more visit Power of Attorney (POA) and Paid Preparers.
Post-audit
After the audit is completed, you’ll be notified of the findings. The auditor will explain any adjustment to you or your representative before the audit is final.
If you have information we haven’t considered, or if you believe a mistake has been made, please contact the auditor promptly.
The auditor will also:
- Discuss future filing responsibilities and answer any questions you have concerning the audit;
- Provide you with a copy of the audit report identifying issues to be corrected for future compliance as necessary; and
- Explain your rights to appeal should you disagree with the audit findings.
If the income tax audit raises an issue that affects your federal income tax, we may notify the IRS.
If this procedure is used it will be discussed with you by the audit supervisor.
Assessment of back taxes after an audit
If a tax is determined to be due, a Notice of Intent to Assess (NIA) will be sent to you. Taxpayers who don’t dispute the findings of an audit are encouraged to pay at this point to avoid any further penalties or interest.
Taxpayers who dispute an audit finding still may want to pay to avoid additional interest in case they ultimately lose their appeals.
Taxpayers who win their audits
If a taxpayer wins an appeal, DOR will pay interest on any money it has been holding from the date DOR received a properly completed abatement application.
Statute of limitations
DOR has the legal authority to audit any type of individual or business returns for up to 3 years after filing. This period is known as the "open years."
Under certain conditions, such as
- Massive underpayment or
- Fraud,
business and individual income tax returns may be audited for up to 6 years.
However, there is no time limit on the statute of limitations if:
- No return was filed, or
- A false or fraudulent return was filed.
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 the 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.
For their own protection, taxpayers should:
- Keep tax records for as long as possible or
- For at least 6 years
Without proper documentation, proving your tax liability or verifying a payment may be difficult.
Appeals
DOR may issue an NIA detailing the reasons for any proposed change in tax. After receiving an 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 under MGL Chapter 62C, Section 37C, or
- A pre-assessment conference under 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.
After 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 doesn’t 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.
To learn more visit DOR Tax Appeals.
Early mediation program
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 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 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.
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 DOR. 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
- An 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 before 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."