How to Deal with Pesky Letters from State Tax Authorities
By Joseph Smith
When most people think about taxes, the first organization that comes to mind is the IRS. But due to the nature of their work, travelers often have to deal with multiple state tax agencies, too.
Each state has its own budget and administers tax policies that are mostly independent from the IRS. States are also very vigilant when it comes to protecting their tax revenues. Travelers can potentially receive notices from each state they work in, as well as their home state.
The following are typical notices travelers receive from state tax authorities:
1) Denial of Tax Credits From Other States
Whenever a travel nurse works in multiple states, the home state will tax worldwide income but allow a credit for taxes paid to other states. To receive this credit, the home state requires proof that these taxes were paid, often in the form of a copy of the return filed with the other state. Whenever an individual files a paper return, copies of the state returns are required. However, when the home state return is electronically filed, they do not normally receive electronic copies of the other state returns. If the state chooses to confirm that these taxes were paid, they will either deny the credit or put the return on hold until the additional documentation is received. Often, letters notifying the taxpayer of the denial do not always explain why the tax amount was changed — they may allude to inadequate documentation or an error, or request additional information without specifically stating what is required.
2) Residence Issues
State tax authorities will often cross-reference other legal documents as the basis for determining whether a taxpayer is required to file a return, regardless of whether they earned any income in the state. For example, a state may scan a database from the Department of Motor Vehicles and match all active drivers’ licenses with filed returns. Some states even go so far as to cross-reference mailing addresses for W2 forms. When there is a positive cross-reference, state tax agencies will automatically send a letter to the taxpayer asking why a tax return has not been filed. If there is no response within a specific time frame, the state will assess the tax based on the gross income reported to the IRS (which they can procure on demand).
California is notorious for requiring tax returns from anyone holding a professional practice license, regardless of whether they maintain their home or earn income in the state. Thanks to California, most states now cross-reference professional practice licenses as a matter of routine in determining whether an individual is required to file a return.
Another issue that comes up frequently regarding residence issues is when an individual has worked in a state for a number of years but then suddenly ceases to show income. For example, if a taxpayer maintains a home in Nevada but works each year in Oregon, he or she may receive a notice asking for a return or why one was not filed if he or she suddenly stops working in Oregon. The request is simply based on historical patterns that the taxpayer had established.
As a multi-state, mobile professional, the receipt of these letters should not be viewed as a reflection of your tax professional’s expertise or the accuracy of a return. Whether it is a state tax authority or the IRS, each of these governmental entities will do their best to ensure that the tax revenue is collected. Every possible angle is explored for mining revenue from individuals who have not filed returns — as well as from those who have. Mobile professionals like travel nurses are in an entirely different world from individuals who hold a single job, so one should expect a higher level of scrutiny of their financial affairs from the governmental authorities.
About the Author
Joseph Smith is an IRS Enrolled Agent and former travel respiratory therapist whose firm (TravelTax LLC) provides tax preparation and audit representation for the mobile professional. He is a regular contributor to Healthcare Traveler and LocumLife and is a speaker at the annual Travel Medical Professionals Convention.