When You Owe State Income Taxes
- The IRS and State Taxing Authorities
- Does Your State Have a Taxpayer Bill of Rights?
- State Time Limits to Assess and Collect Income Taxes
- State Tax Collection Departments
- State Tax Bills
- When All Else Fails, Try Your Political Connections
All states except Alaska, Florida, Nevada, New Hampshire, Tennessee, South Dakota, Texas, Washington, and Wyoming impose an income tax. Usually the filing requirements, penalties, and collection techniques mirror those of the federal IRS. For more specific information, write or call your state taxing authority. Even if you live in a state without an income tax, there may be helpful information in this chapter—for example, your state may tax business entities or estates.
The IRS and State Taxing Authorities
States’ agencies have computer links with the IRS. Only Nevada does not share residents’ data with the IRS.
Most state taxing authorities act quickly when they receive IRS information if it means the taxpayer will owe the state more, too. In fact, many states act on IRS-supplied information before the IRS does. By the time the IRS comes to collect, you may have set up a state installment plan or lost your property to a state tax collector, leaving little for the IRS. Why the IRS gives this information to the states before it acts on it is a mystery.
Audit adjustments. Because of the computer linkage, if you are audited by the IRS, your state automatically finds out. Based on IRS adjustments, the state can change your state tax bill without conducting a separate audit.
If you contest an IRS audit in tax court, notify your state’s income tax department to prevent a premature state tax assessment. Send the state agency a copy of your tax court petition. (See Chapter 5.) Request that no further action be taken until your case has been decided.
States seldom audit individual taxpayers. They prefer to let the IRS audit you and then tag on a bill. States are more likely to audit businesses for sales or employment taxes. If you are audited by your state taxing authority, most of the general principles of this book will apply.
Most state tax assessments can be appealed, as with IRS audits. If your appeal of a proposed state assessment is rejected —even an assessment following a state audit—you cannot contest the tax bill in most state courts unless you pay the bill first.
Collections. If the IRS pursues you as a nonfiler, so probably will your state. Most states automatically dun taxpayers based on IRS bills. So, if the IRS makes a mistake in the bill, the state will, too.
Does Your State Have a Taxpayer Bill of Rights?
Some states have enacted their versions of the federal Taxpayer Bill of Rights. To find out if your state has one, and to obtain a copy, call or write your state taxing authority. Many of the state bills include grievance procedures. The California bill, for example, provides an administrative hearing to protest an improper seizure of property.
Also, ask if your state has a taxpayer advocate who acts much the same as an IRS taxpayer advocate. (See Chapter 8.) For example, taxpayer advocates may get state wage levies released or property returned, if they are convinced that the seizure threatens the taxpayer’s health or welfare.
If your state has a taxpayer advocate whom you want to contact, first try by phone. If that fails, write or show up at the advocate’s office. Tell them your home and work telephone numbers and the best times to reach you.
If your state doesn’t have a taxpayer advocate, contact your state representative or assemblyperson.
State Time Limits to Assess and Collect Income Taxes
As you’ve learned, once you file a federal return, the IRS generally has three years to assess additional taxes by way of an audit. In some situations, the IRS has six years. (See Chapters 3 and 6.) Similarly, state time limitations vary from one to five years.
Once additional taxes are assessed, the IRS has ten years to collect them. Again, state limitations differ tremendously.
Beware—in many states, the period to collect the tax is renewable; that is, it is not limited. In California, for example, the ten-year period can be renewed twice, for a total of 30 years.
State Tax Collection Departments
Like the IRS, most states have a computerized collection system. It spits out a series of notices. If you don’t respond, involuntary collection starts. Just like the IRS, the state files liens and seizes your property. (See Chapter 7.) States act quickly at grabbing property, often much faster than the IRS. And some states hire private collection agencies, usually to go after debtors who have moved beyond the state line.
If you disagree with the state’s assessment notice, there is likely an appeals process similar to the IRS’s. If your state doesn’t have a specific form to appeal, follow the sample protest letter in Chapter 4.
The state may have an informal conference or appeal hearing. If you are unsuccessful, you must pay the tax and then file a claim for a refund or sue in state court. Some states let taxpayers go to court without first paying a tax bill, similar to tax court.
Many state tax agencies don’t run as smoothly as the IRS. That’s pretty scary, huh? Letters are lost and calls not returned. Most state taxing authorities must respond to your inquiries within a certain number of days. If the agency denies receiving your letter or won’t return calls, however, what can you do?
Avoid lost mail and unreturned phone calls by dealing with the state taxing authority in person. Always get the name and direct telephone number of any employee you talk to. This fixes some responsibility and may keep him from vanishing when you call back. If you reach any agreement over the phone or in person, immediately send a confirming letter. Later, if anyone disputes the agreement, speak to a supervisor or the state taxpayer advocate. Consider asking for political help.
State Tax Bills
Most state tax collectors operate similarly to the IRS—they may accept installments, seize assets, or settle tax bills for less than the full amount owed. States can also suspend collection for hardship. Some states, like California and New York, are especially tough to deal with.
Getting a State Payment Plan
Most tax collectors will grant installment agreements if they don’t believe you can make a full payment. As with the IRS, you may be able to get a time payment agreement over the phone or by writing. You might have to visit the state tax office in person. Call to make an appointment or go to the office and wait in line.
You may be required to complete financial disclosure forms showing your assets, bank accounts, and sources of income.
Many states use an abbreviated version of the IRS financial disclosure Form 433. (See Chapter 6.) State forms usually don’t have enough room for listing all expenses. Therefore, before meeting with a state tax collector, thoroughly review the material in Chapter 6 on Forms 433-A and 433-B if you own a business. Gather together your proof of expenses, such as credit card bills and rent receipts. Expect an argument if you list expenses the collector does not think are absolutely necessary. Charitable contributions, cigarette expenses, and entertainment are usually in this category.
Provide a copy of your most recent pay stub. If your pay varies due to bonuses or overtime, take the lowest recent stub. If self-employed, take in your last tax return —unless your income has dropped lately. In that event, write up a projection of your income and expenses for the next three months to a year.
States don’t usually verify the information in a financial statement as stringently as the IRS. State tax offices tend to accept any documentation that appears to be genuine. This doesn’t mean, however, that you should be less than truthful. Let your conscience be your guide.
State tax collectors often display a take it or leave it attitude. They demand payment plan commitments on the spot, without much negotiating. They may reject requests for agreements to last more than 12 months. If you need longer, you may have to agree for now and ask for more time later. Most can give you more time to pay, regardless of how tough they talk. And even if you get an installment agreement, the state may record a tax lien, just like the IRS.
Enforced Collection—Seizing Assets
States often act quicker than the IRS in seizing property of tax delinquents. State laws vary as to the amount of wages that the state can take. In California, for example, the state can grab 25% of your net pay.
Keeping your bank account from tax collectors—state or federal—is always a concern. (See Chapter 6 about protecting your bank accounts from collectors.)
If you have made financial disclosures, the state will have a list of your assets, such as your bank accounts, car, and home. Most states have the power to seize houses, but you may be entitled to full or partial protection under the state homestead exemption.
Homestead exemptions never protect you from the IRS, however. In some states, if tax collectors take a house, they must pay the homeowner the amount of his statutory homestead exemption. Every state is different, so check with an attorney or do some legal research. (See Chapter 13.)
Installment Plans With the IRS and Your State Tax Department
If you owe both federal and state income taxes, coordinate your payment plans. Let each taxing agency know you owe the other. Make your federal and state financial disclosure forms match. Propose installment plans simultaneously with payments in proportion to your total tax debt.
Example: Hamlet owes Minnesota $3,000 for state income taxes and the IRS $12,000. Although it’s a strain, he can scrape together $500 a month for back taxes. He offers $100 to the state and $400 to the IRS. When questioned about his allocation, Hamlet says, “What could be more fair? I owe the IRS four times as much as I owe Minnesota. I should pay in that proportion.”
Assuming the usual case—you owe the state far less than you owe the IRS— consider stalling the IRS and paying off the state first. Negotiating is simpler when your monster has one head, not two. Typically, states seize wages and property more quickly than the IRS. Finally, if you borrow money to pay off the state, this is another debt and expense to list on your IRS financial disclosure form.
State tax bills, like IRS debts, can be handled under federal bankruptcy law. If the state is about to take your property, filing for bankruptcy could give you a reprieve. Collection activities must stop. State tax debts may or may not qualify for discharge in a Chapter 7 bankruptcy. See a bankruptcy lawyer in your area for details. But, if the state taxes don’t qualify for Chapter 7, you can force a payment plan on the state in a Chapter 13 bankruptcy. (See Chapter 6.)
Compromising a State Tax Assessment
You must settle an IRS tax bill through the Offer in Compromise procedure. (See Chapter 6.) Many states, too, will consider settling a tax bill you can’t afford to pay. Contact your state tax agency and ask if it can be done and, if so, how. There is probably a form for making the request. If you are told it can’t be done, speak to the clerk’s supervisor. Keep going up the ladder until you are satisfied you have received the final word.
If you can convince the state that paying would be a hardship, you may get a collection reprieve. You will likely have to tell a sob story and make a financial disclosure, in person, in writing, or perhaps on the phone. Expect the state to balk, so be persistent with your request. If you are unemployed, have health problems or other serious difficulties, you should prevail.
When All Else Fails, Try Your Political Connections
If the state tax agency is treating you unfairly, use whatever political connections you can muster. Someone in your broad circle of friends, relatives, acquaintances, or business associations may know a state legislator. Contact the elected official’s office even if you don’t have a connection. State tax agencies tend to be more sensitive to political pressures than the IRS. It’s certainly worth a call to your state representative’s office.
- IRS computers automatically exchange your tax data with all states except Nevada.
- Most state tax agency procedures are modeled after the IRS.
- State tax agencies generally have the same powers of audit and tax collection as the IRS.
- Inside the IRS: What You Need to Know About IRS Operations
- Filing Tax Returns: If You Haven’t Filed and Other Concerns
- Winning Your Audit
- Appealing Your Audit Within the IRS
- Going to Tax Court: No Lawyer Necessary
- When You Owe the IRS: Keeping the Tax Collector at Bay
- IRS Enforced Collection: Liens and Levies
- The Taxpayer Advocate: A Friend at the IRS
- Family, Friends, Heirs, and the IRS
- Fraud and Tax Crimes: Do You Really Have to Worry?
- Small Business/Self-Employed: When IRS Trouble Comes
- Penalties and Interest
- Help Beyond the Book: Tax Professionals and Tax Information
- When You Owe State Income Taxes
- The Taxpayer Bill of Rights
- The 25 Most Frequently Asked Questions