1. Which Business Taxes Can Trigger an Audit?
The IRS administers federal taxes, New York State handles state taxes and state-administered local sales taxes, and NYC administers separate city business taxes.
Federal Income Tax and State Franchise Tax
The IRS examines federal income tax returns. New York Tax Law Article 9-A governs franchise taxes for covered corporations, administered by the Department of Taxation and Finance. Federal adjustments may affect state liability, but deductions and income allocation can differ. Compare returns and state and local tax calculations before accepting corresponding adjustments.
NYC Corporation and Unincorporated Business Taxes
NYC Business Corporation Tax generally covers qualifying corporations other than federal S corporations. Qualifying S corporations generally remain subject to General Corporation Tax, while certain banking S corporations fall under Banking Corporation Tax. Some sole proprietors, partnerships, and LLCs may owe Unincorporated Business Tax. These taxes apply citywide, including Staten Island. Commercial Rent Tax separately applies to qualifying commercial premises in Manhattan south of 96th Street.
State and Local Sales Tax Audits
The New York State Department of Taxation and Finance administers state and NYC sales and use taxes. Audits may examine taxable sales, exemption certificates, and tax remittances. Sales tax assessments follow state protest procedures, not NYC business tax appeals.
2. What Should Businesses Review after an Audit Notice?
Information requests, proposed adjustments, and formal assessments create different response obligations. The notice identifies the disputed tax and available procedures.
Identify the Notice and Deadline
An IRS 30-day letter generally offers administrative review, while a statutory Notice of Deficiency triggers a Tax Court petition period for covered taxes. New York State may issue proposed audit changes before a formal deficiency or determination notice.
For NYC business taxes, a Notice of Proposed Tax Adjustment generally allows 30 days from the notice date to submit objections and records or request an exit conference. A subsequent Notice of Determination triggers formal protest rights.
Match Adjustments to Supporting Evidence
Compare ledgers and bank deposits to distinguish revenue from loans or transfers. Invoices establish transaction timing, while receipts support deductions. Payroll records verify wages and withholding, while allocation schedules establish income or receipts attributable to particular jurisdictions. Preserve prior returns and correspondence. An IRS audit adjustment may require separate NYS or NYC reporting, with deadlines depending on the tax and year.
3. How Can Businesses Challenge a Tax Assessment?
Each agency has separate protest requirements, deadlines, and review forums. Informal communication does not replace a timely formal filing.
IRS Appeals and U.S. Tax Court
The IRS Independent Office of Appeals reviews qualifying disputes. An eligible 30-day letter may permit administrative review before litigation. Under IRC §6213(a), a statutory Notice of Deficiency generally permits a Tax Court petition within 90 days after mailing, or 150 days under qualifying overseas conditions. Petitions may be filed through DAWSON or an authorized paper method. Employment taxes and certain other liabilities follow different procedures.
New York State Conciliation and Tax Appeals
Qualifying state Notices of Deficiency or Determination generally allow 90 days to request a BCMS conference or petition the Division of Tax Appeals. Eligible conciliation requests use the online Respond to department notice service or Form CMS-1-MN.
Formal hearings require Form TA-100, an original petition, and two copies, filed by mail or hand delivery in Albany. Electronic filing is unavailable. A Conciliation Order generally allows 90 days after issuance to petition the Division of Tax Appeals. Certain specified matters have a 30-day period. Select the appropriate tax disputes procedure using the actual notice and applicable statute.
NYC Conciliation and Tribunal Proceedings
A NYC Notice of Determination generally allows 90 days from its stated date to request a Finance conciliation conference or petition the NYC Tax Appeals Tribunal. Qualifying notices addressed outside the United States allow 150 days.
An adverse Conciliation Decision generally permits a Tribunal petition within 90 days after mailing. Tribunal petitions require paper filing and separate service on Corporation Counsel. Electronic filing is unavailable.
Appealing NYC Refund Denials
Refund disallowances follow different rules from additional tax assessments. Business Corporation Tax, General Corporation Tax, Banking Corporation Tax, and Unincorporated Business Tax generally have a two-year protest period under their applicable refund rules. Other tax refund denials generally carry a 90-day period. Verify the governing provision and notice because deadlines vary by tax.
4. What Happens When an Assessment Becomes Final?
An assessment may become final after the protest deadline expires. The agency can pursue collection under its governing procedures.
Collection and Remaining Remedies
The IRS, New York State, and NYC collect unpaid liabilities separately. NYC may issue a Notice and Demand, tax warrant, or other authorized collection action. Payment arrangements generally do not reopen expired protests. Refund claims, penalty abatement, and tax debt resolution may remain available under separate rules.
Interest and Penalty Relief
Interest generally continues on unpaid taxes. Penalties depend on the violation, including late filing, late payment, or understatements. Some penalties may qualify for reasonable-cause relief. Payment arrangements do not automatically eliminate interest or penalties.
5. Frequently Asked Questions
Can a Business Owner Be Personally Liable for Unpaid Taxes?
Yes. Under New York Tax Law §§1131 and 1133, responsible persons may be personally liable for unpaid sales and use taxes. Responsibility depends on authority over tax collection, reporting, and payment. Certain minority LLC members and limited partners may seek partial relief using Form DTF-8 before liability becomes fixed and final.
Separately, IRC §6672 imposes a federal Trust Fund Recovery Penalty on responsible persons who willfully fail to collect, account for, or pay over covered trust fund taxes.
How Long Should a Business Keep Tax Records?
Federal income tax records generally should be retained through the assessment period, commonly three years. Certain omissions, fraudulent returns, or filing failures require longer retention. Employment tax records generally require at least four years after the tax becomes due or is paid, whichever is later.
Records supporting asset basis or depreciation may require longer retention. Preserve relevant documents during pending audits and comply with separate NYS and NYC requirements.
6. Review the Notice before Responding
Businesses facing an audit notice, proposed adjustment, or assessment should confirm the agency, disputed tax, deadline, and supporting records. A tax attorney can review available protest and collection procedures before the business decides how to respond.
04 Mar, 2026
