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Expect More State Tax Audits – Enforcement

By: branberg

Expect more audits, enforcement and collection activity from the Minnesota
Department of Revenue (MN Rev)
In the Governor’s January 22, 2009 appropriation request for the next biennium,
MN Rev has requested a substantial increase in its appropriation for tax compliance,
enforcement and collections.
Citing “aggressive challenges to the state tax laws by individuals and businesses,”
MN Rev is directing its existing and new funding to “improve existing tax audit and
collection efforts to generate added revenue from citizens and businesses that evade
or underpay their tax.”
Claiming that the funding of these compliance actions has since 2002 generated $6
in additional revenue for every $1 “invested,” MN Rev us asking for more money to
generate more revenue to balance the budget.
Since 2002, the portion of MN Rev’s total budget allocated to enforcement has risen
from 48% to 67%.
For example, for the 2008-2009 biennium, $20.5 million was appropriated for
compliance, audit and collection activities and as of November 30, 2008, MN Rev
states that these activities generated $87.9 million, or 86% of the $102.4 million
anticipated for the biennium ending June 30, 2009.
MN Rev’s success in its enforcement activities as yielding more than it projected is
cited as “further evidence of the substantial tax gap between the amount of the tax
paid and the amount that should be paid.”
MN Rev estimates that the “tax gap” (e.g. the difference between the amount of the
tax that should be paid verses the tax actually paid) is $604 million in individual Sieloff and Associates, P.A.
Yankee Square Office III, 3460 Washington Drive, Suite 214, Eagan, MN 55122
Phone: (651) 454-2000 • Website: • Email: Page | 2
income tax and $451 million in sales tax, in each case a gap of 11% of the total tax
that should have been paid.
Interestingly, one of the reasons for the stepped-up audit activity is cited as the
conversion to electronic records “reducing the type of information in the records
making less data available for revenue and audit.”
MN Rev also cites:
“Increased challenges to state tax laws by taxpayers
More and more, taxpayers are minimizing taxes through questionable tax
shelters and challenges to state tax laws. Some tax law and accounting firms
solicit clients by offering to reduce or eliminate their taxes through challenges
to tax laws and the agency’s interpretations.”
SO –What to Expect? More audits, enforcement actions, investigations, targeting of
transactions (i.e. land sales, non-residency claims; basis, itemized deduction audits;
small business audits).
If you think that MN Rev has been too aggressive in its compliance activities, you can
expect even more aggressive enforcement in the future.
On a small positive note, interest on unpaid balances on individual income tax will
decline from 6% in 2008 to 5% in 2009 and 8% to 5% for business taxes. (The IRS
reduced its interest rate on July 1, 2008 from 6% to 5%).
Penalties are another story. For individuals, penalties for late filing and payment
can be 19%. For businesses, it can be even higher, particularly for sales tax and
withholding tax.
SO –What to do? File your returns on time and pay your taxes on time. Keep good
If you are one of the unlucky ones who is a subject of an audit, enforcement or
collection action, get a professional to represent you from the start. Too often the
taxpayer tries to handle it himself and makes things even worse.
Although MN Rev’s motto is “everyone pays the right amount, no more, no less,” the
complexity and ambiguity of the tax laws are such that the “right amount” is often
elusive and often in the eyes of the beholder.Sieloff and Associates, P.A.
Yankee Square Office III, 3460 Washington Drive, Suite 214, Eagan, MN 55122
Phone: (651) 454-2000 • Website: • Email: Page | 3
As long as there are chronic budget deficits, and as long as the stepped-up
enforcement yields exceed the cost of the enforcement, the government is going to
inflict taxpayers with stepped-up audits and enforcement activities.
MN Rev intends to complete its integrated tax processing software programming
system by 2011 that will integrate all tax administration, audit and collection
systems for all of the 28 tax types administered by MN Rev. This will undoubtedly
give MN Rev even more data points and handles to put all taxpayers under a
microscope. The worst is yet to come