State Audit & IRS

[IllinoisTaxMan]

One (retailer) of our clients got audited by the state and as a result, she has to pay lots of money for underreported sales tax for last two years. The state collected all the invoices from suppliers and recalculated the estimated sales tax she should have paid to the state.

The question is "Should she file amended federal income tax return?" The tax effect on the federal level would be zero since underreported sales and underreported purchases are equal except for additional sales tax payment because of the audit.

What is the federal requirements in this case?

Any experienced advice would be greatly appreciated.

[Evan S. Golar]

I don't believe it's necessary if you are dealing with a business that has both taxable and nontaxable sales.

As a former state sales tax auditor many years ago, I never heard of amending a Federal return due to a sales tax audit.

What CAN happen (but only in really extreme cases does it actually happen), is if the sales tax unit picks up a huge assessment on its audit, it can suggest to the corporation tax unit to do an audit of its own.