An audit is an examination of the taxpayer’s books and records to determine whether taxes are being correctly reported. An audit may be either a desk audit conducted by mail or by telephone with an examiner in the Montpelier office or a field audit where the auditor comes to a taxpayer’s place of business.
What Generally Prompts an Audit
The Vermont Department of Taxes receives information from several sources, such as the federal Internal Revenue Service (IRS), Vermont Department of Labor, Secretary of State’s office, and several other state agencies. We also use information gathered from previous audits conducted, review of returns filed, and tips received. Most often audits result from the information being analyzed and discrepancies being detected.
Reference Guide for Data Sources Used for Routine Internal Revenue Service Discrepancy Audits
Many of our audits use information received from the IRS. The following chart is intended to provide common reasons or sources related to differences noted on the "Notice of intent to Assess details" letter involving IRS-related discrepancy audits.
How You Will Be Notified
If you are selected for an audit, the Department will send you a letter notifying you of the audit. The letter will tell you the following details:
- What kind of audit will be performed
- The audit period
- What documents to collect for review or to provide information about a tax return we believe you need to file
The letter may also ask you to either confirm an appointment with an examiner or to set up an appointment. Please respond promptly.
What to Expect During the Audit
The Department of Taxes conducts two types of audits, desk audits and field audits.
If your audit is conducted by one of our field auditors, the auditor will usually make an appointment to visit your business for review of operations and accounting procedures. During this initial meeting the auditor will also discuss the audit process, timelines, and test periods.
The auditor will review your financial records such as the chart of accounts, general ledger, cash receipts, disbursements, and the supporting detail for returns filed. In some situations, we may also look at tax returns journals, payroll registers, payroll forms, cash register tapes, merchant credit card statements, and bank statements.
For audits being conducted from our Montpelier office, the audit often starts with a letter detailing the issue being reviewed and the records needed to resolve what appears to be a potential discrepancy or the need to file a tax return. These audits are typically handled with the exchange of information happening either by mail or electronically. However, in some cases you may be asked to meet with a desk auditor in Montpelier.
During an audit it is not unusual for issues to come up. It is expected that all issues will be discussed as they arise. Factual issues should be resolved during the course of the audit, whereas legal differences may need to be resolved through an appeal process if the taxpayer disagrees or is not satisfied with the Department’s explanation.
Prior to concluding an audit, the Department will usually provide notice of any issues discovered during the audit. This notice will include the issues discovered during the audit and any associated amounts due. There is an expectation that the Department representative will work with the taxpayer to resolve any outstanding questions or concerns. Any amounts (issues) unresolved will be assessed, which the taxpayer can appeal.
Tip: Remember, the best way to be prepared for an audit is to keep good records. Having good records means you will be able provide the necessary documentation. Throughout the process, communication and cooperation are vital. You should feel free to ask questions and be forthcoming with information for examiners. Audits are not cause for panic, just a routine check that can be relatively seamless when taxpayers work with the Department. The IRS website has information on keeping good records for businesses and for individuals.
Your Audit Has Been Completed, Now What?
At the end of the audit, you will be mailed an assessment. You will also receive an explanation of your right to appeal the assessment. You have sixty (60) days to appeal.
If you agree:
- Pay the full amount (current payment options will be included with the bill) or
- Contact our collections unit to arrange a payment plan
If you do not agree:
- You may appeal the findings before the 60 days is up. An appeal may be addressed in multiple ways. You may work with the auditor and their supervisor to handle any outstanding factual issues and discuss points of law. This might include a conference with the supervisor, audit manager, or division director. If the appeal cannot be resolved, it will be referred for a formal hearing which results in a determination from the Commissioner of Taxes. This process may take a year or longer.
Following the hearing the Department sends a copy of the Commissioner's Determination and instructions on how to appeal. If you don't agree with the Commissioner’s findings, you have 30 days to appeal to Superior Court. Most cases are resolved long before Superior Court comes into the picture.
Throughout the audit and appeal process, you have the right to be treated respectfully and receive timely responses to inquiries. If you feel at any point that you are not being treated respectfully or receiving timely responses to inquiries, you should contact the Department and ask to speak to an audit supervisor.
If you feel that the supervisor has not adequately addressed your concern, you may contact the Taxpayer Advocate for assistance.
Review our frequently asked questions to learn more.