Whether you run a small business or file as an individual taxpayer, you have a responsibility to prove the deductions and expenses you claim on your New York state tax returns. If you cannot prove your deductions with receipts during an audit, locate bank statements, if possible, to avoid interest, penalties and other tax consequences.
The New York State Department of Taxation and Finance will determine that you cannot support your deductions or expenses if you do not have receipts to provide to state auditors. Once the New York tax office comes to this judgment, you are responsible for the original tax liability you would have paid if you did not have deductions or expenses. If you disagree with the state's judgment, the tax office typically gives you a window to dispute it.
The New York tax office charges you interest for every day past the due date that you do not pay your taxes. The state considers your unpaid tax return as borrowed money and charges an interest rate that compounds daily -- much like a loan or credit card. The interest rate on unpaid returns depends on the federal reserve interest rate set every quarter. For instance, if the federal reserve sets interest rates at 1 percent, your unpaid tax liability will accrue 1 percent interest compounded daily until it is paid.
The penalty for your income taxes depends on the type of error on your return. Typically, failure to provide proof of your deductions or expenses with receipts is negligence, which requires you to pay a penalty of 5 percent of the amount by which your original liability and correct liability differ. For instance, if you calculated your original tax liability as $9,000, but the lack of receipts pushes that liability to $10,000, you have a $1,000 difference. The penalty you owe to New York with a $1,000 difference is $50.
If the state of New York can prove that you filed your state tax return fraudulently, it may pursue criminal charges against you. For example, if the state believes that you claimed fake deductions or expenses to lower your tax liability, it would view this as fraud. Merely not having receipts for your taxes is not fraud, but not having receipts and not owning the items is another story. The criminal penalties for fraud in New York vary. You could serve jail time, perform community service or both.
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