State Refunds, Not Reported On Federal

[geekgirldany]

I was just wondering how long it takes for IRS to catch up with state refunds not being reported on the 1040. New client brought by two years of returns with 2009 information. Both years there was no state tax refund listed on 1040. It should have because of their income and the Schedule A deductions.

Is it 3 years? I would like to let them know. I will offer to amend the returns.

[ChEAr$]

I have never known IRS to pick up on lack of state refunds on a 1040.

Not to say they won't of course.

[geekgirldany]

I haven't really ran across it either.

[Koss]

State Refunds

Some state refunds are not fully taxable on the federal return, even if the taxpayer itemized deductions the previous year.

There's a complex worksheet involved in determining what portion, if any, of a state tax refund is taxable. Doing the worksheet the right way involves, among other things, a comparison of what the person's tax liability would have been if they had itemized deductions without the state income tax, and also what their tax liability would have been if they had chosen to take the general sales tax deduction instead of income tax.

The worksheet, and the calculations involved, are absolutely mind-numbing. In some cases, none of the refund is taxable, even though the person itemized the year before, and even if the state issues a Form 1099-G. But the worksheet is not part of the return. It doesn't get filed, on paper, or electronically.

My guess is that from a cost benefit analysis, the IRS does not consider it worth the time and resources to challenge those cases where none of the refund is reported as taxable. The return might be correct. And the manpower, or... um... humanpower, or whatever, involved in determining whether some or all of it is taxable is just not worth the few dollars of tax that they might recover.

A mismatch of data on Form 1099-G is probably not enough to generate a notice from the IRS. But if the return is selected for a full-blown examination or a field audit, then it might well become an issue.

BMK

[JG EA]

Also check if they claimed sales taxes the year before. Or check if they didn't claim sales taxes but the income tax they choose minus the sales taxes they could have chosen (included the allowable big ticket items allowed) brought it down to a lower amount or nothing.

[Lion]

Amt

Many of my clients don't have taxable state refunds, because they had AMT the prior year that disallowed their state and local tax deductions. No benefit last year; no income this year.

[geekgirldany]

Thank you all for posting.

Well I tracked it down to sales tax after the posts and done the worksheet. So the returns are correct. Actually quite a bit of sales tax reported and they are not in a sales tax only state. I guess they made some big purchases.

[JohnH]

Sometimes it's best not to know too much about prior years...

[Black Bart]

I was just wondering how long it takes for IRS to catch up with state refunds not being reported on the 1040. New client brought by two years of returns with 2009 information. Both years there was no state tax refund listed on 1040. It should have because of their income and the Schedule A deductions.

Is it 3 years? I would like to let them know. I will offer to amend the returns.

I've never seen an IRS bill on this either. But even if they did I wouldn't amend anyway -- the little dab of money's not worth it. I'd just let them wait and see if they got a bill unless you're looking to drum up some business and/or they're the worrying type.

I've noticed it usually takes about a year and a half after filing to get a notice on most things. Leave something off now and a notice pops up in late summer next year.

[geekgirldany]

Sometimes it's best not to know too much about prior years...

Too true John.

They are owing. Re my previous post on Making Work Pay. Now I get to explain why there was no state refund showing as income last year versus this year Oh boy.