The IRS published a list of Information Exchange  agreements it has with state agencies, a copy of which is available here IRS State Information Exchange Table.pdf

The disclosure of this list may help taxpayer’s and practitioner’s determine when and possibly whether to file late or amended state or municipal returns.

Example 1:  Assume a taxpayer operates a business that accepts credit cards.  The credit card transaction runs through a merchant processor, which is a middleman between the business and the sponsor of the card, (VISA, MasterCard, etc.). Annually the merchant processor files a Form 1099-K to report to the IRS the gross credit card receipts of each merchant.  Under the terms of an Information Exchange agreement the IRS will report the Form 1099-K information to the various state taxing agencies as well as using the information for federal audit purposes.  The IRS may also share its industry average ratios between credit card sales and cash sales.  For businesses in which cash is pominent understanding how the information exchange process works is important to insure compliance.

Example 2: Assume a taxpayer has unreportered foreign financial accounts and has not filed annual Reports of Foreign Financail Accounts (FBAR). If the taxpayer comes forward through the formal Offshore Voluntary Disclosure Program (OVDP) or otherwise, such as through the Streamline Procedures and files late or amended returns the tax liability will be reported to the state of taxpayers listed residence. Therefore, consideration must be made to filing a state voluntary disclosure, if authorized by state statute.  We prepared a table of state voluntary disclures laws, see  https://www.millarlawoffices.com/blog/2015/07/state-offshore-voluntary-disclosures-surveyed.shtml.

The potential for civil fraud  penatlies and prosecution under state tax laws is a prenicious threat that taxpayers and tax professional must guard against. When in doubt seek the advice of experts.  We are experts in this area.