The State of Oregon is stepping up their income analysis audit techniques.
Recently we have seen state agencies, including the State of Oregon, increase their use and scope of the “Bank Deposits” method of verifying income when performing an audit.
What does this mean for you?
This means that auditors are closely examining bank statements and requesting an explanation for all deposits they are unable to easily identify as having come from a source of income that has been reported on the tax return. While it is not uncommon for a taxpayer to receive cash inflows from non-income sources, the requirement to verify them in totality seems to have increased.
The following is a non-exhaustive list of non-taxable cash deposits that you may receive that could be questioned in an income tax audit. Due to the onus placed on the taxpayer to provide documentation verifying the source of non-taxable deposits, we recommend maintaining any information confirming the source of such deposits.
- From an eligible HSA plan
- From an eligible 529 education plan
- From an employer
- Returns of capital, distributions
- Cash gifts received
- Loan proceeds received
- Principal received from a note receivable
- Redeposits (bad checks)
- Transfers from other accounts
- Income earned in prior years
- Federal income tax refunds
- Tax-exempt interest
- US Savings bonds redeemed
- Other non-taxable deposits
If, during an audit, you are unable to provide the backup pertaining to non-taxable deposits, the auditing agency can consider them as taxable, increase your income, and apply additional tax.
To reiterate, the responsibility of proof is placed on the taxpayer during an audit, and our goal is to ensure the process goes as smoothly as possible. Having appropriate third-party documentation is essential to this process. Please contact your tax professional if you have any questions or concerns.