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Tax audits rise as states seek additional sources of tax revenue

California residents know our state's budget deficit troubles all too well. While California's deficit is quite large, other states are experiencing problems similar in kind, though much smaller in degree. Under pressure from some constituents not to raise taxes, some state governments are instead relying on increased tax enforcement to gather much needed revenue.

Some states have increased staff to perform additional tax audits on businesses and individuals, hoping to find sources of income that have been omitted from tax returns either intentionally or accidentally. And according to information gathered by the Federation of Tax Administrators, the approach has met with significant monetary success. States are collecting more in formerly overlooked tax revenue than it costs to hire a new crop of auditors. Smaller states have collected millions of dollars, while larger ones have brought in hundreds of millions.

The success experienced by some states has been tempered by a largely unfavorable public response. Objections to increased enforcement and additional audits have provoked some legislators to make some state tax laws more taxpayer-friendly. Even so, more states may turn to stricter tax compliance as a way to find the money to defray mounting public costs.

The sands of tax laws shift regularly, and California residents should keep current with any new changes to our tax laws passed by the state legislature. Audits can be a particularly stressful process, especially when auditors may be under pressure to collect more revenue. In addition, if the state discovers that some individuals or companies owe back taxes, it will disclose those names to the public to create an incentive for increased compliance.

Source: Associated Press, "Reluctant to raise taxes, some states push the tax man on tougher collection enforcement," John Miller, Sean Murphy, Judy Lin and Michael Virtanen, May 27, 2012.

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