Under the New York State personal income tax, as well as the personal income taxes of most other states, individual taxpayers determine taxable income subject to state tax initially by reference to their income for federal income tax purposes.1 Taxpayers set forth on their state income tax returns the income from the relevant lines of their federal personal income tax returns (Forms 1040), and then make various required adjustments to the federal taxable income (e.g., eliminate deductions for state taxes, eliminate income from New York municipal securities, account for differences in depreciation methods).
In general, the New York Department of Taxation and Finance has focused its audit attention on matters peculiar to the New York State tax law, such as the required adjustments to income, status of an individual as a resident or nonresident, and the allocation of income of nonresidents. In recent years, however, the department has begun to audit and challenge taxpayers on federal income tax issues more frequently.2 Department officials have stated that this shift in focus in New York State audits resulted from the (correct) belief that the IRS has been auditing fewer “day-to-day” tax issues, as the IRS focuses its enforcement attention on offshore accounts and tax shelters. It is also likely that the increased audit of federal issues is expected to generate additional revenue.
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