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SALT TALK: State Tax Audits – Why Federal Conformity Has Me Waiting By the Phone

Posted by Wayne Berkowitz CPA, J.D., LL.M. on Apr 18, 2016 11:07:00 AM
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If you are of the belief that some earlier period of time was better or simpler than the present, the good old days of state taxation are probably something you yearn for. Start with federal adjusted gross income, add or subtract a few adjustments, multiply by the tax rate, and send a check. State tax specialists were thought to be at best unnecessary indulgences or, at worst, incapable of determining what that federal starting point should be.

Fortunately for our clients, our firm and my career (not necessarily in that order) have never then or now viewed state and local taxation as an afterthought. The reach goes well beyond income taxes to sales and use taxes, real property transfer taxes, personal property and real property taxes, and the list goes on. Figuring your federal tax burden is unassuming by comparison.

Although I have absolutely nothing but personal experience to back this up, state and local tax audits outnumber federal audits by at least a factor of ten to one. You ask, what could all those auditors possibly be looking at (we will stick with just the income based taxes for now) if everything is simply based on the federal numbers? Aside from nexus, apportionment and a multitude of other issues, state auditors are more frequently examining the so-called federal starting points.

A good state tax practitioner must be well-versed in federal concepts and have the resources to back him up for the more complex issues. Unfortunately, not all state field auditors are as well-versed (although I have run across my share of those who are) in federal tax and, as a result, can bring an audit to a dead stop. 

In all fairness to the state and local tax jurisdictions, there are permutations of federal tax law as applied to a state tax return that just haven’t been considered. Hence, my waiting by the phone — for a jurisdiction to remain nameless, to decide on how a federal rule, which all acknowledge is followed for state purposes, applies for state tax purposes. I’m not really sure why supposed federal conformity requires further thought, but I do yearn for the good old days.

Should you face a state tax audit, reach out immediately to your Berdon advisor or to me at wberkowitz@berdonllp.com.

Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.

Topics: SALT TALK

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