Students have been asking me the question above.
Friday Jan 29, 2010:
My husband and I receive two identical audit notices from NYS Tax Department Audit Division in the mail. Out of the blue, they have suddenly decided to challenge the fact that we had the audacity to claim both of our dependent daughters on our 2006 NYS tax return. (They were both full-time students, ages 16 and 20, and we provided 95% of their support, easily meeting the criteria to claim them as our dependents for both federal and state tax purposes. Before asking us any questions, the state peremptorily decided that we should only have claimed one. The burden of proof is on us to prove we are entitled to claim both daughters. We have birth certificates, tuition bills, and transcripts to establish dependent student status.)
The audit notices suggest we can deal with this by phone or mail.
Unlike the popular perception of an audit, the NYS Tax Department has no interest whatsoever in seeing us in person, so there's no option for a face-to-face encounter. Like most audits these days, this is a so-called "correspondence audit."
Monday February 1, 2010:
The issue should be very straightforward, so I spend 25 minutes on the phone, most of it on hold, with NYS Tax Department employees to explain the situation. No luck. The first person I reach tells me he can't resolve the issue, but transfers me to someone else he says will be able to help me. The second telephone representative says the matter is easy to resolve but ultimately tells me she can't actually resolve it herself. She tells me that I need to mail the information I've just given her on the phone.
Tuesday February 2, 2010:
I mail the requested information to the specified address, certified mail with delivery tracking.
Thursday February 4, 2010:
US Post Office notifies me electronically that they have delivered our letter to the NYS Tax Department.
Long pause....during which we hear absolutely nothing....
Thursday March 25, 2010: (SEVEN weeks after our letter was delivered to the NYS Tax Department.)
My husband and I get two identical copies of a letter from the NYS Tax Department stating that they have received the letter the PO delivered to them seven weeks ago.
That's pretty much all the letter states. They have received our letter. They have assigned us a "protest ID number." They will not take any further collection or enforcement action until "the protest has been resolved."
No word on how long we can expect until the audit is resolved. This is a very simple and straightforward issue. More gory details for those interested are in past posts here.
Running tally of easily measurable audit costs incurred by NYS tax authority:
Postage costs: $1.688 spent by NYS in metered postage for four envelopes containing a total of 14 pages of standard letter-sized paper, all of it computer-generated. $3.24 spent by me for postage to send required information certified mail with delivery confirmation.
Telephone costs: 25 minutes of connect time on their toll-free phone line attempting to resolve the audit on February 1. Most of this time was spent on hold, but live state employees spent about six minutes of time talking with me. I called from a landline, so no toll costs to me, but a low-income taxpayer whose only phone is a cellphone with costly pay-as-you-go minutes would have run up charges.
The amount of tax at stake for us is $68 plus $16 in interest the state proposes to assess. It is probably going to cost more than that in everyone's time and trouble to resolve, but it is educational for me! The amounts at stake for our low-income clients are much larger when their dependents are challenged.
Update: about one week later, we got another set of duplicate letters. The audit was resolved in our favor.
Further update: The following year, we were audited again (on the same issue!) However, it was much easier to respond. The NYS Tax Department website is awesome. It allows you to respond to an audit notice by uploading a PDF of your receipts and other supporting documents. The IRS should take note and follow suit.