Does The State Tell the IRS

[MsTabbyKats]

When the IRS disallows something....and the tax goes up....they ultimately contact the state....and the client gets that letter asking for more money.

If the state disallows something (that would affect the federal tax).....and the tax goes up....do they contact the IRS?

Does anyone have an experience with this?

[Guest Taxed]

In my state they match the state return to the Federal return data for all returns. There is a 2 year lag. So the notices we are getting now are generally for 2010 and we will soon start seeing for 2011.

They check income items 1040 (lines 7 -22), line 40 particularly Sch A itemized deductions that flow into the state return. Form 2106 is a sore point because of the differences between Federal treatment and MA, people make mistakes there.

I once had a conversation with a state auditor and she indicated that MA does not generally notify IRS if the results of their audit, unless special circumstances exist. Would not elaborate on that but I think it has to be egregious violations.

[MsTabbyKats]

Well...this is exactly what happened:

Client is a music teacher. She went to school for her master's....definitely to improve her skills in a field she is employed in.

The school, instead of charging her tuition....gave her a W-2. According to the client, she never saw that money. It went right back to the school.

So...it shows up as income.....and I took a Schedule A deduction (yes...I know she can get an adjustment or credit). The IRS didn't challenge this. However, NYS wanted a letter from the school showing "the relationship" between the "wages and tuition". The school wrote some nebulous letter that I couldn't understand...so I'm sure the clerk at NYS didn't understand either....and NYS disallowed the deduction. The state did not question if the tuition was related to her current position...and if it would improve her skills...just proof of payment....and her school's letter was so ambiguous.

If she take a credit or adjustment on the Fed return...it won't change the tax the state now wants.

[MsTabbyKats]

Spoke to state....it seems they now want a letter about "job duties etc" from the school

[Pacun]

I think most states share the info with the IRS but big brother doesn't listen to that info.

Unless, the state solicits help from the criminal investigation unit from the IRS, the IRS doesn't listen to the info.

[ILLMAS]

You should write up a letter and have you client ask the school to put it on their letterhead, if they show your client where the door is, just have them pay the tax.

[Lion EA]

An IRS liaison in CT speaking at a tax preparers meeting, spoke of the agreements with a large number of states (40?) to share information with the IRS. However, much of the information the IRS acts upon from the states has to do with Department of Labor audits re employee vs. independent contractor. Also, some states have a longer statute of limitations than the IRS, so some information is too old for the IRS to act upon unless it's fraud, nonfiling, large percentage of under-reporting, etc.

[MsTabbyKats]

She's getting letters from her 3 W-2 employers....so really no problem anticipated. She has been taking the tuition as a deduction for a couple of years....never had an issue. The client usually has 10 W-2/1099-Misc total....she gets around.

Before I spoke to NYS I was going to suggest "just keep the federal return "as is".....and if contacted by the IRS in the future, we can amend"

Oh....NYS is such a pain!

As always....thanks for the input

[SaraEA]

A couple of weeks ago I was at a seminar where two CT DRS employees were presenters. Several people asked this exact question about the state sharing with the feds. (They were mostly concerned about EITC claims; the states audits what seems like all of them and disallows many.) One presenter said the state doesn't share. The other got up and had written down a few questions directed at the first that he wanted to chime in on. He said the state DOES share. So there we have it: Yes and No. That's the same answer I heard at a different seminar when the same question was asked. There was only one CT speaker, but his response was so convoluted I could only conclude that the answer is Yes and No.

Best to play it safe and be sure the taxpayer can pass the state's stiff EITC standards before claiming EITC on the federal. They literally ask for ALL business records, proof about who lives in the house, everybody's birth certificate. The IRS must love it when the states do their auditing for them, providing the outcome gets passed up. Does it? Yes and No!

[Guest Taxed]

As I mentioned previously the MA state auditor was also very vague. I think state auditors are told what to say when that question is asked and to be very vague so that the taxpayer is kept guessing??

>> Best to play it safe and be sure the taxpayer can pass the state's stiff EITC standards before claiming EITC on the federal.

Excellent point. My state does more EIC audits now than I have seen in the last 10 years. They have data from family and child protection services, where the kid is sleeping in most of those suspect cases.

[kcjenkins]

Frankly, I'm glad to hear that some level is actually trying to reduce the EITC fraud.

[Guest Taxed]

Once IRS starts to really go after shady tax preparers with the fines I think you will begin to see more vigilance.

In my own practice, I took flak from long time clients when I asked for documents to satisfy the checklist. Granted I am not an auditor so I really don't know for sure if the kid is still living with that parent, but i am satisfying the requirements prescribed by IRS. That is the best I can do for now. I really don't want to become an IRS auditor and work for them free!