Tax Review: Types, Procedures, and Legal Responses

Tax reviews exist to protect the state's revenue system by ensuring fair and accurate tax collection from all entities operating within New York. Through data comparison, document analysis, and field inquiries, the state can uncover underreporting, non-filing, or deliberate tax avoidance schemes. The regulatory framework supports transparency and accountability across all sectors, ensuring that the burden of taxation is distributed equitably.

Regular reviews are scheduled based on standard selection procedures and occur regardless of prior violations, often serving as a routine oversight mechanism. They typically target businesses with high revenue (such as over $100 million, though no mandatory interval is legally fixed), individuals and entities that haven’t been reviewed in 4 or more tax cycles, and randomly selected taxpayers from high-risk industries (e.g., real estate, hospitality). Even if a taxpayer is fully compliant, they can still be selected under the statistical sample method used for routine oversight, confirming the state's commitment to broad-based compliance.

Special reviews, sometimes referred to as investigative reviews or field verifications, are launched when red flags or strong suspicion of tax evasion arise, indicating a high probability of significant non-compliance. Common triggers include informant reports and whistleblower filings detailing illicit activity, late or amended tax filings with significant, unexplained discrepancies, and a clear pattern of underreporting or sudden, substantial drops in reported income without a corresponding economic justification. Furthermore, non-cooperation with previous, less formal compliance requests can escalate a matter into a full-scale special review. These reviews are highly focused and often commence without standard advance notice.

For regular reviews, taxpayers receive a formal notice at least 15 days prior to the review commencement, clearly outlining the scope. The notice outlines the specific review period, the list of information or documents required for the audit, and the taxpayer rights under the Taxpayer Bill of Rights, ensuring procedural fairness. After the tax authority completes the document collection and analysis phase, they issue a preliminary result, which is crucial as it allows taxpayers a formal opportunity to respond, provide additional documentation, or contest findings before a legally binding final decision is issued.

Unlike the scheduled nature of regular reviews, special reviews can be initiated without prior notice, especially when there is a risk of document destruction or asset flight. In high-risk cases involving suspected criminal activity, investigators may obtain a judicial warrant to legally access business premises, personal assets, or bank records without the taxpayer's immediate consent. The collected materials are reviewed in meticulous detail, and findings are submitted internally to a senior review board. Based on the severity and intent, the outcome may range from administrative penalties and revised tax bills to civil litigation for recovery of back taxes or, in the most severe cases, referral to the District Attorney for criminal prosecution and indictment.

Prior to the commencement of any formal review, taxpayers must carefully read and fully understand the review notice to confirm the scope and requested documents. It is imperative to assemble all requested records in both digital and physical formats and to proactively understand your right to request a reasonable delay or reschedule the commencement date, which is often permitted for document compilation. It is highly advisable to seek legal advice from a qualified tax attorney or CPA at this stage, especially if there is any anticipation of significant problems or potential non-compliance issues.

During the process, a taxpayer should formally verify the credentials and identity of the reviewer(s) from the Department of Taxation and Finance before providing access to financial records. It is crucial to maintain exact copies of all documents submitted and to ensure that all substantive explanations are submitted in writing, not just verbally, to create a clear record of communication. Taxpayers should strictly avoid disclosing speculative or non-relevant personal financial details that could inadvertently expand the scope of the review. If investigators appear to exceed their mandated scope or violate taxpayer rights, you have the formal right to object through an internal taxpayer protection officer.

Once the review concludes, the state will issue a formal written summary detailing their findings. At this point, you will either receive a clean result indicating full compliance, be asked to pay additional tax with or without penalty (Notice of Deficiency), or face a formal recommendation for legal action (Civil or Criminal). If the result is unfavorable and you disagree with the state’s assessment, you have the statutory right to appeal the findings through established administrative channels or pursue formal litigation in the New York Tax Appeals Tribunal, which serves as the independent venue for tax disputes.