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Responding to a Massachusetts Notice of Insufficient Return

The Massachusetts Department of Revenue often works in coordination with the IRS. An audit of a federal tax return may trigger a DOR Notice of Insufficient Return (NIR).

How long does the DOR have to audit a return? The general rule allows the state three years from the date a state tax return was filed or due, whichever is later. In this post, we discuss how the timing of a filing affects this window. Then we discuss options for responding to a NIR.

Early versus late

One interesting quirk is that the state actually gets longer to audit early filers. For instance, if you filed on February 24, 2014, the DOR has until April 15, 2017 to send an NIR or request a formal audit. In contrast, if you filed a tax return late on July 10, 2014, the statute of limitations would expire on July 10, 2017. A few months or days can sometimes make a big difference.

Failing to file a tax return or filing one with fraudulent information opens you to indefinite audit exposure. Similar to federal rules, the limitations period extends to six years, if income or taxes owed are substantially understated. On the federal level, this is basically anything that results in an understatement of 25 percent or more.

30 days to prove “correctness”

If you receive a NIR prior to a formal audit, there is no time to delay. You have 30 days from the date on the NIR to respond. You need to demonstrate that your original return is correct or you could file an amended return to correct an error.

Speaking with a tax attorney within a week or 10 days of receiving this notice ensures adequate time for a review of your situation. Because of the tight timeline waiting can cause cascading problems. Ignoring a notice and failing to respond could result in a DOR tax assessment with a penalty that might effectively double your outstanding tax bill.

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