NY State and Federal Audit Processes Get Face Lift, Tax Conference Reveals

By Simon Eskow and Marietta E. Gentles

The New York State Society of CPAs’ annual all-day tax conference on Nov. 13 in New York City drew hundreds of CPAs for seminars and discussions on topics like local taxation, and an update from the Internal Revenue Service on the National Research Program.

In his seminar, titled “Current Developments in Tri-State Taxation,” Eisner and Lubin tax expert Barry H. Horowitz discussed New York state’s revamped audit system and New Jersey’s Business Tax Reform Act.

Horowitz told the audience that the New York State Department of Taxation and Finance plans to “catch up” through a reorganization of the department’s audit work flow by next April. Two distinct divisions in the department will handle corporate income tax and personal income tax separately until the April 2003 reorganization. The reorganized department will then seek to “maximize revenue,” Horowitz said. The department also will share audit information with the IRS.

Horowitz then went on to discuss New Jersey’s Business Tax Reform Act that has raised eyebrows among local businesses. The state’s revised corporate tax assessment system will take its toll on more businesses that will be heavily taxed under the new law. Even businesses that owe the minimum tax will end up paying more money, Horowitz said, and the system could result in a lot of discrepancies and lawsuits.

Speakers from the IRS later described efforts to update the formula for conducting audits through the department’s National Research Program (NRP) while refitting the audit process itself, which is based on procedures established in 1952.

Craig Sylvester, territory manager for small-business and self-employed taxpayer education, told CPAs that the IRS audited 15,000 taxpayers a year for no good reason because the agency is using a formula dating back to 1988. The IRS is using the NRP to develop a new formula, and help reduce the burden on compliant taxpayers, Sylvester said.

The program will sample 50,000 returns beginning now, in what is supposed to be a less intrusive manner than in the last audit study in the 1980s. Sylvester said the IRS will conduct limited-scope field exams of about 30,000 returns that have two or more issues outstanding. The IRS probably will conduct full audits of 2,000 returns. The NRP will continue over the next few years, and cover a range of returns including 1040s, 1120s and 1065s, and 1041s.

Michael Donavan, IRS compliance director for New York state, then gave a presentation on how the IRS is attempting to make the audit itself a better experience by sampling the best internal practices of hundreds of organizations in projects focusing on field and office exams. The IRS hopes the studies will promote communication between auditors and taxpayers, create uniform templates for audits and help the IRS deal with cases consistently.