Does TurboTax Audit Defense Cover State Returns?

August 06, 2020 by Keith York, EA
State Taxes Sign

The short answer is “Yes.” TaxAudit is the exclusive provider of TurboTax Audit Defense. Having the protection offered through your Audit Defense Membership Agreement essentially means that TaxAudit will represent you through the completion of any income tax audit (state or federal) for the tax return year identified on the membership certificate during the Period of Membership.

But if the real question is how being audited by the state differs from being audited by the IRS, the honest answer is – they are tougher than leather on a blistering hot Sunday afternoon!

In my experience, state audits can be much more complex and in-depth than your typical IRS audit. State examiners tend to focus on challenging issues such as residency/domicile. They will often conduct an extensive bank deposit analysis in search of unreported income. You’ll likely be asked to produce bank and credit card statements for your business and personal financial accounts for the entire period under audit, plus the preceding December and following January (i.e., fourteen consecutive months on a single-year audit). The examiner wants to see where all your money is coming from, where it is going, and how much commingling of funds is occurring. Many people who have a small business don’t keep a separate business checking account and don’t log their business expenses in real-time. This makes it increasingly difficult to isolate what items are tax-deductible, and therefore defensible, if claimed as a tax write-off.

Moreover, a large percentage of the state audit defense cases we work involve tax returns for the current year. Unlike the IRS, states send out audit letters quickly, sometimes within a matter of days from when the original tax return comes in the door. Like the IRS, state tax agencies aggressively audit refundable tax credits such as the Earned Income Credit (EITC). Tax returns claiming the EITC are some of the most heavily audited returns based on historically high noncompliance rates. It’s hard to blame the IRS and state tax agencies. Recent IRS reports suggest as many as 1 out of 4 EITC claims are paid in error.

In an EITC audit, the tax agency will generally freeze all or part of your refund before it goes out the door. It’s up to you to prove your tax return was filed in accordance with the law, which means you’ll need to fully explain your personal/family living situation. Unfortunately, many of the mistakes we see on self-prepared tax returns are caused by bad advice from people you would ordinarily trust. Despite their best intentions, this type of free tax advice from friends/family on who exactly qualifies as a dependent or what makes you qualified for the head of household can cause more harm than good. This is due to the increased likelihood a noncompliance penalty will be imposed on the erroneous refund claimed when funds are paid out.

Fortunately, having a pre-paid audit defense membership means you’ll get expert help navigating through a state audit of your EITC, income tax residency status, itemized deductions, or any other tax-related issue they choose to investigate. We’ll do everything we can to ensure the state tax authority releases the full amount of refund you are rightfully owed based on the established facts of your case and gives you the full benefit of your well-documented business expenses and personal income tax deductions. The only thing we can’t predict is the speed at which they do so. Not only are many state tax agencies more aggressive, they also tend to operate much slower than the IRS. This is largely due to a smaller workforce.

The bottom line is that state tax audits are some of the most challenging cases we work here at TaxAudit. State tax law doesn’t always conform to federal treatment, meaning additional legal research is often required to verify the proper way to handle the audit. Moreover, state tax examiners tend to be more vigilant when probing for unreported or self-employment income, and they generally won’t accept anything but full substantiation on claimed expenses. In situations like this, you need a bona fide tax expert to light the way through the scary forest of confusion and doubt.

While the risk of being audited is so uncertain, one thing is for sure - you simply won’t find a better value or Groupon deal than the purchase of a pre-paid audit defense membership, whether as a bundled item included as part of your TurboTax checkout purchase or bought as a stand-alone item through our TurboTax Audit Defense website. For more information about the benefits of our audit defense program, go to https://www.taxaudit.com/prepaid-audit-defense.

For a more in-depth discussion about how audit protection works and the many ways your assigned tax professional can assist you during the audit, click here.

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Keith York, EA
Tax Professional

 

Keith York, EA, is an industry veteran with over twenty years of experience working in the tax business. Prior to joining TaxAudit in December 2017, he worked in both the public and private sector doing a variety of jobs, ranging from economic research and information security, to tax preparation and audit representation. His dual-sided knowledge of tax compliance is a great asset to a company like TaxAudit. He routinely contributes ideas and suggestions on how to be more efficient and effective in the areas of client relations and audit case management. Keith is a feature contributor on the TaxAudit website and has authored numerous "Audit Stories" articles that highlight real-life examples of how we vigorously defend our member throughout the audit process. Outside of TaxAudit, Keith manages a boutique tax practice located in Northern California.


 

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