The year 2023 brought many changes in the world, and the tax world was no exception. Many states have been making significant changes in response to IRS changes and are preparing for future adjustments. One trend we have seen across the board is an uptick in Schedule C Audits. This rise in audits is primarily due to the IRS doubling its investigatory efforts of deduction abuse. The main targets the IRS is looking into are individuals who own businesses combined with unusually high expenditures on meals and travel, substantial home office deductions, and substantial vehicle expenses claimed for business use only. These things are being flagged in conjunction with over-claiming expenses with little to no income claimed on Schedule Cs. While this is an ongoing issue across all states, some notable state-specific efforts to crack down on deduction and credit abuse mirror the IRS's efforts.
New York is a prime example of these increased efforts. Having the country's highest number of state audits, New York implemented severe changes after passing their 2023-2024 Budget Bill. One of the most notable changes came from the New York False Claims Act amendments. These changes enable actions against taxpayers who knowingly conceal or improperly avoid tax obligations, aiming to close perceived loopholes and strengthen tax enforcement efforts. While some states are taking action and tightening their regulations to prevent audits, others are trying to educate their citizens to avoid filing for credits they do not qualify for. One state that has been putting great effort into this front is Michigan.
At Tax Protection Plus Tax, our resolution specialists regularly receive notices from the Michigan Department of Treasury regarding audits of the Homestead Credit. Many taxpayers and tax preparers are unaware of the specific criteria necessary to claim the credit. This results in the overclaiming of the credit, which is often followed by an audit. To further exacerbate the Homestead Credit claim problem, many people are confusing this credit with the Michigan Heating credit. While some folks need help understanding the criteria, others knowingly file for this credit despite their lack of meeting the qualifiers. These things combined have led Michigan, like New York, to increase its efforts to combat deduction and credit abuse, which inevitably leads to more audits.
In the tax landscape of 2023, these are just a few examples that offer insight into the increasing shifts experienced by states in response to IRS changes. Many states like New York and Michigan are adjusting to combat deduction and credit abuse, reflecting the beginning of a nationwide trend. While some taxpayers knowingly participate in abuse, a lack of awareness about credit criteria often leads to overclaims and subsequent audits. As a leading audit protection presence, Tax Protection Plus knows that staying informed about current state tax laws is crucial. It's essential to monitor audit trends and remain vigilant in filing practices. Efforts to promote tax compliance are gaining momentum daily, emphasizing the need for taxpayers to stay informed and meticulous in navigating the evolving tax environment.
References
Kelly, Daniel. “2023 New York Tax Update – Year in Review.” NYSSCPA, February 1, 2024. https://www.nysscpa.org/most-popular-content/2023-new-york-tax-update-year-in-review#sthash.HnbyVeZB.q1X1As1X.dpbs.
“Who Qualifies for a Homestead Property Tax Credit?” SOM - State of Michigan. Accessed April 2, 2024. https://www.michigan.gov/taxes/questions/iit/accordion/homestead/who-qualifies-for-a-homestead-property-tax-credit-1.
By: Ashley Payne, EA/Professional Case Assessment Lead [Protection Plus]
Hayley Bales, Marketing Communications Specialist [Protection Plus]
Featured in the March 2024 issue of NATP TAXPRO Magazine