Careful! The one thing likely to trigger a tax audit for people in NJ
❓ Does New Jersey audit personal income tax returns?
✅ The one thing that is most likely to trigger an audit.
❓ Does NJ really pay you to report tax fraud?
You have questions? I get you the answers.
This idea for this column came from this simple question from a New Jersey 101.5 listener:
“Does New Jersey audit tax returns?”
When we posed that question to a spokeswoman for the New Jersey Division of Taxation, the response was one word: “yes.”
Anyone who has gotten a letter from the IRS or the New Jersey Division of Taxation probably had their heart skip a beat.
It can be extremely stressful to know your tax return is getting a closer look, even if you didn’t do anything wrong.
For more on audits, I spoke to Thomas McCabe, CPA/PFS, CEO of Alliance Wealth Management Group in Flemington.
Please note: this column deals only with actions by the New Jersey Division of Taxation, not the IRS. It is intended as general information only. Please contact a tax professional to discuss your individual circumstances.
McCabe notes there is a difference between a true “audit” and what’s known as a “tax notice.” Full audits are relatively rare, but “tax notices” are far more common.
Often it is a request for information.
“I find myself as a preparer spending a lot of time dealing with tax notices,” McCabe says. “In fact, I'd say that we actually have three seasons now. We used to have two, we used to have tax planning season in the Fall and tax preparation season in the Spring. Now I say that we also have tax notice season that starts in June when a lot of these notices are sent.”
Part of the reason is a lack of timely communication between the IRS and New Jersey Division of Taxation.
McCabe says he frequently sees the state requesting W2s when they have a question about a return because it takes so long for information to be reconciled with the IRS.
As long as you have the documents the state is requesting, many of these “notices” can be resolved very quickly and often through mail or e-communication.
What is most likely to trigger an audit in New Jersey?
By far, the thing that is most likely to get the attention of the New Jersey Division of Taxation is this: Unreported Income.
McCabe says the one thing the IRS and the state of New Jersey is good at is reconciling how much income you report.
“If you received a form 1099 for income paid to you,” McCabe warns. “That has to go on your return.”
And it really doesn’t matter how much, or how little, income it is.
“You have to report any amount of income that is reported under your Social Security number,” McCabe explains. “If you get a 1099 from somebody, they're also sending a copy of that to the government.”
Even if you did not get a 1099, you do legally have to report any monies you were paid.
It was not the FBI that took down the notorious Mob boss Al Capone, it was the IRS. Capone was nailed for tax evasion for not reporting all his illegal income. He went to jail not for murder, extortion or other crimes, rather for not telling the IRS how much money his criminal enterprise was making.
If you get a notice from the state requesting income information, be truthful and don’t ignore it. That could lead to them taking a closer look at your entire return or triggering a full audit.
Bottom line, McCabe says, “If you want to avoid an audit, report any income that is reported under your Social Security number.”
How long should I keep my tax documents in New Jersey?
McCabe suggests at least seven years.
While New Jersey does get your reported income information from the federal government, it is not a timely process.
“A lot of that information just goes to the federal government,” McCabe says, “And then the states have to get that information from the federal government and it takes a long time to get it.”
McCabe says, “New Jersey is typically three years behind. So, they're not sending notices (now) on 2022 income. They're sending now on 2019 stuff because it takes them so long to get the information. The systems aren't very compatible with the federal government.”
Does New Jersey pay you to report tax cheats?
No. They do not.
New Jersey does, however, allow residents to report suspected tax fraud. They even encourage it.
From the New Jersey Division of Taxation website:
“New Jersey relies on its citizens to help fight tax fraud. You can report suspected tax evasion and fraud involving individuals, businesses, and tax preparers using the form below—it is quick, easy, and confidential.”
You can report suspected tax fraud to New Jersey by clicking HERE.
The IRS, however, DOES pay for such tips.
If the IRS determines the information you provided led to a successful recovery, you could be eligible for a monetary reward.
Several factors determine how much but generally the IRS Whistleblower Office will pay between 15% and 30% of the proceeds collected.