Tax Preparer Work Demands Considerations With State Returns

Although the focus of tax preparer education is the myriad of IRS rules for federal returns, some knowledge of state tax returns is important. Preparation of state income tax returns is a routine service for most tax practitioners. When people earn income in multiple states during the tax year, a tax preparation business will encounter even more circumstances for helping with accurate filing.

Learning about all the possible states where an individual is required to file a return is a valuable process for avoiding tax trouble. In fact, adverse consequences can follow anyone who doesn't allow a paid tax professional to address taxes in all applicable states.

Omitting preparation of a state income tax return created serious repercussions for a couple from New York that sold California property in 2005. The transaction created a capital gain of $425,000. Their income tax return preparation reported this sale. They filed a federal tax return and a state return for New York, where they resided. However, the couple failed to submit a required California non-resident return. When the state of California located the couple, the tax plus penalties had ballooned to $43,000.

However, the couple is entitled to a credit on their New York return for paying California on the transaction. This caused preparation of an amended New York return by the couple's licensed tax professional. They were entitled to a New York tax credit of about $28,000 for 2005. The amended return was mailed in January 2009.

Following this, some unfortunate circumstances unfolded for the couple. An apparent $7,000 mismatch existed between income reported by the IRS to New York and the figures on the state tax return the couple provided to New York. The couple responded to the discrepancy.

When the couple received a letter that the state was correcting the problem on their 2005 return, they assumed this referred to the amended return. However, the New York letter actually applied to the $7,000 error. In fact, the state never received the amended tax return - at least there is no record of receipt.

When the couple's tax specialist sent a note to New York about the amended return in April 2009, the state responded in June that no amended return was received. When the tax preparer work was executed in September to clear up the $7,000 matter, a copy of the amended return was sent.

The couple eventually rectified the $7,000 discrepancy in October 2009 without causing any additional tax. However, the amended return was disallowed because receipt occurred after the deadline for amending. Because the original filing deadline was April 15, 2006, an amended return is required before the expiration of three years from that date.

When the court adjudicated this case, the taxpayers learned that they bear the risk of a timely postmark and whether the document is eventually delivered. However, they did obtain relief from a lucky break. The note sent by the tax adviser was before the April 15, 2009, deadline for amended returns. According to the court, this constituted an informal claim for refund. Any defects in this claim were subsequently satisfied by submission of the amended return copy in September.

The couple escaped damage, but would have encountered much less trouble by conveying thorough information upon original tax return preparation. A taxpayer has only three years to amend a tax return filed in a home state. However, another state where a required return was not filed has no statute of limitations for catching the non-filing taxpayer. If three years pass before that happens, tax is paid to both states on the same income.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

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