Tax Audit Process and Compliance Guidelines

Washington D.C.'s Office of Tax and Revenue (OTR) primarily enforces three distinct types of tax audits, which vary based on the required interaction and scrutiny. Taxpayers should be aware of these types to ensure an appropriate and efficient response to the OTR.

D.C. tax audits are often triggered by specific risk factors flagged by the OTR's systems, though random selection occasionally occurs. Most examinations result from anomalies in a taxpayer's filing profile or inconsistencies detected through data matching.

Common triggers include:

• Excessive deductions relative to industry standards or reported income.
• Inconsistent filings between D.C. returns and federal tax returns or third-party reports (e.g., 1099s).
• Failure to register business activity in the District (nexus issues) or failure to remit sales/use taxes.
• Reporting substantial losses for multiple consecutive years without adequate business justification.

Responding effectively requires providing necessary records to substantiate all reported figures, as D.C. regulations mandate the retention of accurate financial records for a minimum of three years. Failure to produce requested documents can result in the auditor disallowing deductions or issuing assessments based on estimates.

Key documents frequently requested by D.C. tax auditors include:

• Bank and brokerage statements.
• Income records (1099s, W-2s) and payroll data.
• Invoices, expense receipts, and detailed general ledgers.
• Sales tax filings, business licenses, and related exemption certificates.

The audit notice explicitly sets a response deadline that taxpayers must strictly observe. It is highly recommended that taxpayers retain a tax attorney or certified public accountant (CPA) who is familiar with D.C. audit practices. A representative can manage all communications, ensure efficient document preparation, and act as a crucial buffer to protect the taxpayer's rights and interests throughout the process.

Auditor-taxpayer interviews may be scheduled if the auditor requires clarification on specific financial transactions or business structures, though they are not always required. The interview process is formal and can cover income sources, business structure, and deduction justifications. Taxpayers must be aware that any statement made during these interviews is legally binding, requiring absolute truthfulness and accuracy. Professional representation is vital to manage these interactions effectively.

If the auditor identifies discrepancies or non-compliance during their review, they will issue a preliminary notice detailing the proposed adjustments to the tax liability. This notice is a crucial opportunity for the taxpayer to present additional evidence, offer detailed rebuttals, or request reconsideration of the findings. Effective management of this phase is key to preventing an unfavorable preliminary finding from becoming a final, enforceable assessment.

If a taxpayer disagrees with the NOPA findings, they have established rights to dispute the assessment through formal channels within the D.C. tax system. This process requires timely action and begins with requesting an informal conference with an OTR hearing officer. Alternatively, the taxpayer can file a formal protest with the Office of Administrative Hearings (OAH) within 30 days of the NOPA. Further judicial appeal is available through the D.C. Superior Court.

Failure to comply with audit obligations or the deliberate understatement of tax liability can result in civil or criminal penalties under the D.C. Tax Procedures Code. Penalties are structured to encourage compliance and penalize negligence.

Civil Penalties

Knowingly submitting fraudulent documents, destroying relevant financial records, or actively obstructing an official D.C. OTR audit can lead to criminal prosecution. Such actions may result in substantial fines up to $5,000 and potentially imprisonment, as defined in D.C. Code §47-4101. Taxpayers must maintain integrity and transparency throughout the entire audit process to avoid criminal charges.