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New York’s ‘Wiseguy’ Revenue Raisers

Many states are struggling to find ways to balance their budgets, but it seems New York is borrowing some of its approaches from The Sopranos: a combination of intimidation and, shall we say, less-than-perfect bookkeeping.

New York’s budget crisis isn’t news; the state has been struggling to reconcile its budget for some time. Taxpayers first became aware of Albany’s plan to use them as a more lucrative revenue source in 2009, when the New York State Department of Taxation and Finance suddenly changed their estimated tax requirements. It seems New York was not only counting on the additional revenue from the changes in the tax rate and itemized deduction calculations, but also on interest and penalties charged to taxpayers who were not aware of these changes in time to comply.

Relying on taxpayer confusion alone, though, evidently was not enough. Recently, our firm encountered a less-than-pleasant letter from New York’s Department of Taxation and Finance. A client forwarded me the letter, which was headed with capital letters stating “NOTICE AND DEMAND for Payment of Tax Due,” and asked me to look into it. It seemed to me that this letter was drafted specifically to intimidate taxpayers.

In this particular case, I called the Taxation and Finance office, because it was unclear from the notice how they were calculating the payment they claimed the client owed. The office informed me they had erroneously issued the taxpayer a refund, and that they now wanted the $450 back with interest. I did not contest that the taxpayer cashed the $450 check, but I did not agree the taxpayer was responsible for interest — especially interest calculated from April through November, when the check was only deposited in early October.

The representative said that the taxpayer should have called the department to ask why they sent him a check. I explained that the taxpayer reported about $900,000 of income on his 2009 return, and paid $70,000 in taxes. A check for $450 is immaterial in these circumstances, and it is outside rational thought that a taxpayer needs to call before depositing a check. I told the representative the taxpayer would send a check to the Commissioner of Taxation of Finance, but asked the interest be waived. She told me the department does not have the ability to waive interest; the taxpayer must file a formal request. We filed one.

The interesting tidbit about this specific notice is that the $450 check resulted from a composite payment on behalf on the taxpayer being credited to his personal account. The taxpayer only participates in one composite return, the Metropolitan Commuter Transportation Mobility Tax (MCTMT) composite. The MCTMT is imposed on self-employment earnings of individuals who do business in the downstate counties containing New York City, Long Island and the lower Hudson Valley. It also is imposed on employers of individuals who work in that region. The tax is cumbersome and annoying, and the state went out of its way to make it so. First, the deadlines for estimated MCTMT payments, as well as for the return, are different than standard personal and corporate returns. Second, the tax payments cannot be combined with New York’s state and city income taxes. A taxpayer can therefore be wildly overpaid for income tax purposes, and still get charged an underpayment penalty for the MCTMT.

In the end, the state’s own over-complicated system caused them to cut a check in error. Way to go, New York.

About a week later, another client forwarded an “Account Adjustment Notice — Personal Income Tax” letter to us for review. The letter reduced the client’s refund by about $1,200. The letter indicated New York state was charging the taxpayer about $400 in interest and $800 in late payment penalties because he did not make his estimated tax payments in a timely manner. They recorded the taxpayer’s 2009 third-quarter payment on Sept. 19, 2009, the 2009 fourth-quarter payment on Jan. 20, 2010, and the 2009 extension payment on April 27, 2010. (Assuming the due dates do not fall on weekends or holidays, these payments are due on Sept. 15, Jan. 15, and April 15, respectively.)

We recommend clients send their payment certified mail for exactly this reason. The client was able to provide proof of timely filing. This was critical, because according to New York state law, tax payments, returns, and other documents sent to the to the New York State Department of Taxation and Finance are considered to be timely filed if they are postmarked on or before the due date.

Because our client had receipts for the dates his payments were posted, he could prove that they were filed in a timely fashion, despite the state’s claim. If he hadn’t had a way to counter the state’s argument, he would have stood to lose a decent amount of money because of the state’s error. Either New York has a bad system in place or they are hoping taxpayers are unaware of the law. I’ll let you decide.

Letters from taxing authorities are inevitable, but no one enjoys receiving them. Our clients can forward these letters to us. I suspect many others blindly assume the state is correct and pay. Correspondence from the Department of Taxation and Finance should not be intimidating. More importantly, mistaken assessments should not be a tactic of choice for New York to close its budget gap.

Client Service Manager Rebecca Pavese, based out of Atlanta, contributed several chapters to our firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55, including Chapter 2, “Relationships With Adult Children;” Chapter 3, “Planning For Incapacity;” and Chapter 7, “Grandchildren.”

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