You come home from a long day of work, check the mail, and find a letter from the IRS. Your heart sinks to the floor as you open the envelope. Straight from the enclosed IRS CP2000 notice:
The income and/or payment information we have on file doesn’t match the information you reported on your tax return. This could affect your tax return; it may cause an increase or decrease in your tax, or may not change it at all.
The IRS has been doing it for years. Fail to include a 1099 for $100 of bank interest on your tax return and you are likely to receive a “matching notice” requesting the additional tax, interest and penalties. Catch me if you can (see my February 8, 2016 blog regarding state voluntary disclosure programs) has turned into match me if you can.
So we all know it’s just easier to pay the additional $40 of tax, interest, and penalty and be happy this is all the IRS wants from us. We send a check out the next day and put this drama behind us. Two years later, we again come home from a long day of work, check the mail, and this time we have a letter from the State X (fill in your State) Department of Revenue. Apparently, you forgot to amend your state tax return for the changes the IRS made with the CP2000 notice.
As we all know, the IRS and the state revenue departments have been sharing information for a very long time. Some states have been quick to send notices where federal changes have been reported, while others have failed to or been slow to act. Ohio issued an announcement this week indicating that taxpayers will be receiving billing notices for the 2012, 2013 and 2014 tax years if they failed to amend their Ohio tax returns to reflect the federal adjustments.
So what’s the takeaway? First, promptly reply to a federal matching notice. If you inadvertently omitted an income item, pay and be on your way, but make sure to file the appropriate state return as well. Second, make sure any state matching notice is correct. While the state revenue department may have matched the correct federal number, it is very possible that the specific item of income in question is not sourced to that state, and despite an increase in federal income, no additional state tax is due to that jurisdiction.
Questions? If you have received a state or federal notice, contact your Berdon advisor or Wayne Berkowitz at WBerkowitz@Berdonllp.com.
Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, New York Accountants, advises on the unique requirements of governments and municipalities across the nation.