Personal Tax Obligations: Frequently Asked Questions
My primary office is in one location (New York, Maryland, Virginia, D.C., etc.) but I am living and working remotely from another state. Will I owe state income taxes in the same location as my primary office?
The ability to work remote is now commonplace. Individuals throughout the nation have chosen to take on this lifestyle, enjoying the increased flexibility that comes with the ability to choose the location of their home office. Although this freedom is refreshing, there are some complications when it comes to state tax obligations.
The majority of state taxing authorities tax income based on the taxpayer’s physical presence within their state. This seems logical, if you live in that state, it makes sense to pay taxes. But other states are fighting back, arguing that state tax is based on the location of the employer.
Notoriously high state tax locations, like New York and California, are cracking down on the need to file an income tax return even when located in another state. But when does this apply? It is possible for state taxing authorities to initiate an audit even when you do not live in that state. The New York State Department of Taxation and Finance explains that it may use the state’s convenience of the employer rule to consider a taxpayer a resident of New York for income tax purposes even if they are a non resident. The rule allows this treatment if the taxpayer receives income from New York State sources.
State taxing authorities are starting to provide more guidance, but the answer is nuanced and depends on each individual situation. It is also possible that the taxpayer’s home state may allow for a tax credit to help offset a tax paid to New York or another state taxing agency. A tax attorney can discuss these and other options if you think you may need to pay these taxes.
What about foreign assets?
The Internal Revenue Service (IRS) requires taxpayers to report financial accounts maintained by a foreign financial institution. The IRS expects U.S. citizens and resident aliens to report all income on their Form 1040, including foreign income. This is generally done on Schedule B. These can include savings, checking and brokerage accounts as well as certain stocks and securities. Depending upon how much you have/had abroad, the government will also expect you to file a Form 8938 and FBAR.
The IRS requirements for taxpayers to file Form 8938 Statement of Specified Foreign Financial Assets differ depending on whether they live inside or outside of the United States. Those who live inside the U.S. are generally required to file if they hold foreign assets over $75,000 at any point during the tax year or $50,000 on the last day if single or more than $100,000 on the last day of the tax year or $150,00 at any time if married filing a joint return. Those who live outside of the U.S. are required to file if they hold more than $300,000 in foreign asset at anytime during the applicable tax year or $200,000 on the last day of the year for single returns and $600,000 or $400,0000 respectively for joint returns.
Tax law may also require taxpayers to file a Foreign Bank Account Report (FBAR) FinCEN Form 114 if they have more than $10,000 at any point during the calendar year in foreign accounts, financial interest, or signature authority. Examples include bank accounts, securities accounts, and some foreign retirement arrangements.
A failure to file either of these forms can come with serious penalties. A failure to file Form 8938 can result in a $10,000 penalty as well as 40% on the underpayment of the related tax. Additional failure after getting a notification from the IRS can result in a penalty of up to $50,000. An accidental failure to file an FBAR can come with a fine of up to $10,000 per violation. If the government can prove that the failure was intentional, these penalties increase to $100,000 per violation.
Those who are concerned that they have not reported foreign accounts have options to come into compliance and depending upon what and how much was not reported, the alternatives may not be so taxing.
I was the subject of a tax audit and I think the results were wrong. What are my options?
The IRS is not infallible and it can make mistakes. There are options if you believe that the IRS made a mistake on your tax audit. Mistakes could include an incorrect decision because the agency misapplied the law, misunderstood the facts, or took inappropriate collection action.
Depending on where you are with the examination, you can appeal the results of the audit with the group manager, through the Office of Appeals or before the US Tax Court. The process generally involves the following steps:
- Review the audit report. The IRS will send a full report of the audit and request you sign and return a copy of the report. By signing the report, it generally means that you acknowledge and accept the IRS’ findings.
- Extension. If you need more than the 30-day time period to complete the next step, request an extension.
- File a protest with IRS Appeals. File an official protest within 30 days of the date listed on the letter. This should generally include your contact information, a statement of the reason for the appeal along with the exact portion you disagree with and facts to support your argument, a copy of the IRS letter, the tax year at issue, your signature. Mail this protest to the address listed on the IRS correspondence.
A successful protest generally requires the taxpayer demonstrate a clear understanding of the issue and is ready to push the matter through litigation if necessary. If possible, the IRS will attempt to resolve the matter. If the Office of Appeals agrees with your protest it will modify or overturn the audit. Otherwise you should exercise your right to appear before the US Tax Court when the matter involves a deficiency proceeding.
The importance of action cannot be stressed enough. The IRS can add penalties and interest to the amount owed and a failure to respond can result in a notice of deficiency or bill and loss of rights.