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Report Finds Certain States have Higher Audit Rates for Tax Returns


June 16, 2016
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Do certain states have higher audit rates than others?

A new study by TaxAudit.com, cited by the Motley Fool, found that certain states have higher audit rates than others. The report’s cumulative rankings were based on the results of TaxAudit.com’s Audit Defense consumers in 2014 who were eventually audited in 2015.

The study’s state-by-state findings

Among the 1.5 million tax returns analyzed by TaxAudit.com, Vermont and California had the highest IRS audits per capita in 2015 for their 2014 tax returns. The report also found that Hawaii and New York had the most state audits per capita for their 2014 tax returns. Meanwhile, Oklahoma was found to have the lowest number of IRS audits per capita, and Texas with the least state audits in 2015.

The top ten states with the highest number of IRS audits after Vermont and California included Nevada, Massachusetts, Delaware, Colorado, New York, New Jersey, Florida and New Hampshire. Interestingly, New York, New Jersey, Delaware and Massachusetts appear on the top ten list of audits per capita conducted by the state. Following Hawaii and New York in the state audit top ten list were Delaware, Michigan, Massachusetts, Alabama, New Jersey, District of Columbia, Pennsylvania and Montana.

Why were taxpayers in these states targeted for audits?

While the results point to a connection between the state and its likelihood of federal and state tax audits, there is no direct correlation. However, there are some specific reasons why taxpayers in these states are more likely the target of audits.

Most notably among these reasons is income. The IRS statistically audits more taxpayers in the higher income brackets. This was evident in the TaxAudit.co1m report as four of the top ten states audited by the IRS comprised the top 20 percent of household income in the U.S. in 2014. In fact, only Florida and Nevada were not in the top 50 percent.

This occurs for many reasons, mainly because there is the potential to generate more tax revenue for the IRS and the states. According to research cited by CPA Practice Advisor, 16 percent of tax returns audited by the IRS belonged to taxpayers with more than $10 million in household income in 2014. So while all tax brackets get audited, even those under the $25,000 threshold, income correlates directly to tax audits.

The reasons behind the state audits are much tougher to pin down. Presumably, income is a factor. But each state’s revenue department has varying levels of resources to carry out more audits. So if one state had more personnel in its internal revenue department, they would be able to execute more audits.

All told, there are no hard and fast rules behind the IRS and state audits. Certain states are targeted for unique reasons. The TaxAudit.com report uses Hawaii as an example: It may have a higher audit rate per capita because taxpayers writeoff {as a verb it’s two words}their work-related expenses for moving to the state. Since these relocation costs are higher than for most states, the deductions may be targeted for audits.