Growing Without Rain

News and Views about Taxes

Why tax preparers turn gray

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A long-time client of mine brought me something new this year – a Schedule K-1 from a limited partnership (formed through the company that employed the client) that was liquidated this year. Normally, a Schedule K-1 isn’t a big deal – you key the information from the form, it carries to the appropriate schedules on the 1040 and the state return, and you are done. However, this one was a big deal – the partnership reported income allocations to 28 different states, and not only did they report that income to those states but they also paid state taxes to most of them.

Initially, I was still thinking this wouldn’t be a big deal – most of the income amounts were small, and I thought that most if not all of them wouldn’t even require that the client file a return. Turns out I was wrong – I wound up generating 17 separate nonresident state tax returns. The reason? Many states require nonresidents to file a tax return if the taxpayer has *any* income from sources in those states, no matter how little.

It turns out that the client got small refunds from most of those states – refunds which the client would have been more than happy to forego under the circumstances, because the amount of effort required on both the client’s part (signing all of the forms) and mine (generating them) was considerable. And when you factor in the amount of effort on the part of the receiving states to process the return and the refund – even though most of these are E-file/direct deposit – it’s still a lot more effort than is necessary.

My client’s company did their best to ensure that the investors understood that they are likely to have multiple tax obligations (I saw a copy of their letter to their shareholders), but I have to wonder how many of these shareholders are going to take the time and effort to dig out their actual state tax obligations – and what the odds are that at least some of them will get letters from various states asking about their failure to file returns. And I also have to wonder why state tax agencies can’t apply some sort of reasonable minimum dollar amount on nonresidents before requiring that they file – as they usually do for residents. Especially in this case, where the company actually paid state taxes on the income.

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Written by nctaxpro

April 6, 2011 at 8:05 pm

Posted in State, Taxes

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