State audits on income and sales taxes for the smallest businesses as well as out-of-state inquiries on operations in other states are on the rise, accountants say.
Speculation among local tax experts is that New Jersey’s and other states’ budget woes are driving not only the recent uptick in audits — one firm reports five times the number of audits in 2009 versus earlier years. They also say that the deeper probing by auditors makes the process longer and more costly.
Other factors also are making finding offenders quicker and easier, the tax specialists say. Electronic tax filing and agreements between states to share information help tax officials track whether businesses are paying staff, storing goods or making profits beyond the borders of the states they’re registered in.
"In the last 12 to 18 months, we’re seeing state audits of a lot of small businesses," said Ted Carnevale, chief executive officer for accounting firm Gramkow Carnevale Seifert & Co. in Oradell. "You’re just seeing a higher number of audits in an attempt to raise additional revenues."
Carnevale and other accountants say audits from the New Jersey Division of Taxation have picked up among sole proprietorships and unincorporated businesses that are typically cash enterprises with no employees.
Always under the state’s radar, the owners often file income tax returns along with their individual tax returns, commingling business and personal expenses.
Last April, New Jersey’s tax division announced on its Web site that it put a special emphasis on auditing "smaller ‘cash’ type businesses" and that it had hired more auditors and investigators to find the offenders.
While some accountants say the audits of their clients aren’t targeting particular issues, others see an increase in notices relating to sales and use taxes. Tax attorney Steven Weisberger, with Williams Caliri Miller & Otley in Wayne, said requests for legal representation by mostly sole proprietors and cash business owners have increased to about three in most months during the last year, from one or so prior to that.
At 7 percent in most districts, New Jersey’s sales and use tax is likely why, because it’s considered high and it’s guaranteed revenue, versus income tax, which varies, said Debra Simon, owner of DMSimon CPA LLC in Hackensack. She says she’s also seen increases in audits relating to sales-tax issues.
Accountants also agree the process is taking longer. Carnevale said at his firm, where audits have increased to 24 in the past year from about five a year, several responses providing the requested documents are now required to settle issues, where one used to suffice.
The cost to a business owner varies from $1,500 to $10,000, he said, depending on how many years the audit is questioning and the condition of requested documents. Audits are starting with 2007 and going back a few years, Carnevale said.
At Tobin & Collins CPA in Hackensack, where both state and federal individual audits are on the rise for clients with revenue of less than $10 million, Richard Tobin said another factor in the $7,000 to $8,000 cost for "serious" cases can be the auditors themselves.
Ralph Albert Thomas, executive director of the New Jersey Society of Certified Public Accountants in Roseland, is hearing from members about both issues.
"Tax auditors are spending more time and are not as amenable to come to a resolution," said Thomas, and are probing deeper into cases. Plus, agents at local field offices are referring cases to higher authorities.
New Jersey and the Internal Revenue Service are not the only entities pursuing possible tax offenders. Public accountants say business clients registered in New Jersey are getting more notices from states — Ohio and California to name two — questioning if they’re generating income, paying staff or renting or owning property there, factors subject to taxes.
"Those states are coming in to tax that portion [of income] earned in those states," said Rosemary Ervin, a certified public accountant and director at Hunter Group CPA in Fair Lawn. Her firm has recently seen increases in those inquiries to its clients, she said. "With the advent of technology, it’s easier for them to see it."
With so much on electronic records, it’s easier for states to share information by belonging to associations, such as the 14-member North Eastern States Tax Officials Association, said Ervin.
Those inquiries are up recently for many other NJSCPA members, according to Thomas, and at Simon’s firm. She attributes the recent rises in multi-state inquiries and tax audits to taxpayer information getting into tax systems faster, and she advises clients to disclose the out-of-state activity as soon as possible.
"I would talk to people before [the recent uptick] … but if they had to write a check to come clean, that wasn’t happening," she said. "Now they’re understanding they’ve got to do it."
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