We write about income tax audits fairly often, but most of those posts are about federal tax audits conducted by the Internal Revenue Service. Today, we are shifting our focus to the other audit, the audit conducted by the Minnesota Department of Revenue.

The department may act on information it has gathered on its own. Like the IRS, the department reviews returns as they come in.

The department may also act on information shared by the IRS, information from Minnesota taxpayers’ federal returns that were adjusted or audited, on average, two years earlier. So, if you misstated your income when you filed your federal return this past February but filed an amended return in August, the IRS will notify the state of the adjustment in 2017.

The statute of limitations, however, demands that the state act quickly on that information. If the department determines that an audit is in order, it must initiate that audit within 3.5 years. However, the clock started running on either the date the return was due or the date it was filed, whichever was later. In the example above, the state would learn of the adjustment in, say, October 2017, and it would have to initiate the audit by the middle of 2019.

The time limit is flexible under certain circumstances — for example, the IRS or the state has extended the deadline to file an amended return. Interestingly, the deadline can be extended if the taxpayer has filed a fraudulent return.

What about the audit itself? Will that be an hours-long session spent reviewing every Walgreen’s and gas station receipt?

We’ll get into that in our next post.