Behind the Curtain: How States and the IRS Compare Your Sales Tax Reporting

As our lives exist more and more online, data sharing is easier than ever. And no, we’re not just talking about individual data. A sales tax report filed in one place can now live in the same enforcement ecosystem as federal return data, payroll filings, audit workpapers, and nexus questionnaires. It may sound like a tangle of disconnected systems, but for tax authorities, it’s increasingly becoming one connected web of sales tax information.

For years, the IRS and state tax agencies have exchanged data through formal programs. That isn’t new. What is evolving is how frequently that data is used, how effectively it’s shared, and how fast it is to analyze. The result is a far more connected compliance environment for businesses selling across state lines. Through multistate agreements, coordinated audits, and improved data infrastructure, agencies are closing compliance gaps.

While this calls for a more unified compliance environment for businesses operating across state lines, it raises the stakes for errors in sales tax reporting.

Let’s unpack what’s actually happening, and what it means for your business.

The Federal-State Data Bridge: Where IRS Tax Data Meets State Enforcement

At first glance, federal tax data feels siloed, locked within federal vaults. After all, taxpayer confidentiality is a cornerstone of IRS operations. But like most things in tax, there are carefully structure exceptions.

The core legal hook is Internal Revenue Code Section 6103(d), which permits the IRS to share certain return information with state tax agencies for tax administration purposes. But, this isn’t a tax data free-for-all. To receive the information they want, states must:

• Enter into formal disclosure agreements with the IRS
• Maintain strict data security safeguards
• Complete annual compliance certifications
• Demonstrate a clear tax-administration need for the data

This framework exists for a reason. In fact, as far back as 1978, the Government Accountability Office (GAO) pushed the IRS to limit disclosures to only what is “necessary” for tax administration. That principle still governs the system today. However, even within that limited structure, states can still receive extracts from the IRS Data Exchange Program containing:

• Individual and business return data
• Income and deduction summaries
• Entity and filing status information

This information can be used to identify non-filers, compare federal vs. state-reported revenue, and support audit selection. In other words, it’s a very effective compliance compass. If your federal filings show $5M in revenue, but your sales tax reporting suggests a much smaller taxable footprint, that discrepancy becomes an audit starting point.

Not Just IRS-to-State: States Are Sharing With Each Other, Too

If the federal-state bridge is one side of the equation, interstate collaboration is the other—and it’s just as consequential.

The Multistate Tax Commission plays a central role here. Its mission is to promote uniformity and cooperation across state tax systems. In practice, that often means shared audits and shared intelligence.

The Joint Audit Program

Through MTC’s Joint Audit Program, states pools resources to select candidates for corporate income, sales and use, franchise, and gross receipts tax audits. MTC auditors conduct examinations on behalf of multiple states, and distributes those findings to participating jurisdictions. While this approach has been shown to significantly decrease the time and cost of conducting an audit, it also means that just one audit can ripple across several states. If an issue is identified—say, misapplied sourcing or exemption errors—it doesn’t stay contained to just one state’s Department of Revenue.

The Exchange of Information Framework

Even more impactful is the MTC’s Uniform Exchange of Information Agreement, which allows states to share a broad range of tax-related data, including:

• Tax returns and supporting schedules
• Nexus questionnaires and business activity data
• Audit reports and findings
• Records tied to appeals, disputes, or enforcement actions

However, there are still guardrails here. For example, IRS-originated data generally cannot be re-shared between states without federal authorization. But for state-generated data, the sharing environment is more robust. Suddenly, Arkansas data is connected to California’s, and a finding in one jurisdiction can inform compliance decisions—or audit strategies—in another.

What This Means for Sales Tax Reporting

For sellers, the implications are scaling from state compliance to maintaining consistency across the country. Inconsistencies are now easier to spot, and harder to explain away. A payroll filing in a state may suggest physical presence (and nexus) that hasn’t been caught yet. A prior audit adjustment in one state may trigger scrutiny in another. And revenue reported federally may be investigated locally.

While individually these may seem like small gaps, they form a pattern together that makes enforcement more difficult to avoid.

This creates a need for both an administrative and a mental adjustment. In order to be sales tax compliant, a business’s entire tax footprint needs to tell a consistent story across federal filings, state registrations, nexus determinations, exemption documentation, and multi-state sales tax reporting. This is where the trouble lies for many businesses—not because they’re intentionally noncompliant, but because their systems aren’t yet adapted to cross-agency visibility.

The Important Counterbalance: Taxpayer Rights Still Matter

At this point, it’s easy to assume the system is stacked entirely in favor of enforcement. But that’s not entirely true.

Even in a highly interconnected environment, taxpayer rights and procedural safeguards remain firmly in place. States must follow their own statutes regarding the use and disclosure of tax data, and IRS-shared data is subject to strict confidentiality rules. Moreso, audits require substantiation, and taxpayers always retain the right to respond, appeal, and contest findings.

There is also a practical upside: as systems become more integrated, states are gradually moving toward more consistent interpretations and expectations. For compliant businesses, that can reduce ambiguity over time.

Where SalesTaxSolutions.US Fits In

This is exactly the environment where having a coordinated strategy matters.

At SalesTaxSolutions.US, we work with businesses to align their full compliance picture—from nexus reviews and exposure analysis to multi-state sales tax reporting and audit support. The goal isn’t just to file returns, but to ensure those returns hold up when compared across agencies.

If your business is expanding across state lines, it’s time to ask the important question: Does your data tell the same story, or are there plot holes in the narrative?