*Note: This was written by a Yahoo! contributor. Do you have a personal finance story that you'd like to share? Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.
Most Americans who file a federal income tax return are also required to file a state income tax return. It is a huge mistake for anyone who is required to file, think that the filing of the return is optional and that the state taxing authority does not have the authority to make your life miserable. As an enrolled agent, I would like to assure any people in doubt, that failure to file a state income tax return will have consequences. Internal Revenue Section 6103 authorizes the federal government to share information with states and other agencies. In plain English, this means that if you file a federal return, eventually your state will know about it. States are hungry for revenue and they are actively going after people who they think should have filed a return.
Two years ago, a client person came into my office with a tax problem. They received notices from Pennsylvania claiming that they had not filed a tax return for 2003 and 2005. The notice was alarming because the penalties involved were substantially larger than the original amount due. To complicate matters, the client had since moved and did not have access to all his records.
How each year got resolved is a very good example of why taxpayers need to keep good records and, in my opinion, why people should e-file when possible.
The person became my client in 2006 came to my office to discuss the fact that he did not know how to prepare his return for 2005 because he had worked in two states and had substantial income from each. When he started to do the returns, he did not know how to allocate income between states and put it out of mind. It is a mistake to ignore the issues because the penalty for failing to file a tax return can add 25 percent to your bill. This is in addition to the late filing and late payment fee.
It was simple to prepare the return and, while he owed Pennsylvania some small amount, he was due a larger refund from the second state. The returns could not be e-filed because they were late but the paper returns were filed.
Pennsylvania's Department of Revenue had received all the income data from the IRS as well as information as the amount of the itemized deductions. Pennsylvania assumed all the income was taxable and earned within the state. The bill was $13,500 which included over $6,000 in interest and penalties.
I was able to address the issue with the Department of Revenue because I had copies of each return, both Pennsylvania's and other state. I explained how the returns were filed and that possibly PA had erred. We could not produce a copy of a cancelled check and had to pay the original tax due which was just $125 plus a penalty for late payment. This saved the client over $13,000.
We were not as fortunate with the 2003 return because the client had not kept a copy of the return nor bank records. That tax bill was about $2,800 including original tax of $1,000 plus penalties. The state argued that because the client could not produce a copy of the return, that the client did not file one, and that the common three-year statute of limitations was not applicable.
The lesson is to always file a return, and keep a copy forever! I used to think that you could safely discard a return after seven years, but I think that forever is now the appropriate response.
- Politics & Government