State Returns

[MarkCTX]

This may be more of an ethics question, but here is the scenario. Taxpayer is NY full year resident. He has a K-1 from a Sub S corp that is treated as passive. The Sub S does business in several states and may have withholding or payments made by the Sub S to the state on the taxpayers behalf. Usually the refund or balance due is under $100. It cost more than for me to prepare the state return. Seems only fair to me that I inform the client of the options and consequences. They can forego the refund and my fee. Or they can wait for a letter/invoice from the state demanding payment. Then pay the balance due which is less than he would have paid me to prepare that state's return. There are other considerations such as preserving certain elections, NOL's, statute of limitations, etc. If the client ignores a filing requirement he is not squeaky clean. Does you have a policy or standard practice?

Mark

[Lion]

Yeah, I lay it out for the client, the right way to file, my fees. Usually they tell me not to file all those states. Of course, I give them no choice on their resident state as well as their tax home for commuters where we're already filing a NR return. I point out any state with particularly high incomes on the K-1 or deductions that would carry over as NOLs or passive loss carryforwards or.... I really need to start putting this all in writing and having clients sign. Someone's going to throw me under a bus soon when a property sells in an odd state creating income but has no NOLs or other carryovers in that state to cushion the blow. Although, the carryovers I see are like $12 or less!

[Nashville]

Composite Payments

Two areas of conversation, I think, Mark. An S corp operating in several states is a common problem. Some of the S corps pay in "composite" payments to these various states for their shareholders. Essentially these composite payments buy off the state from forcing shareholders to file a return. And the states are more than happy to accept these payments since they are always on the upper end of the tax bracket. This way the shareholder is exempted from having to file a return. As you say, a typical minority shareholder will end up paying more in tax prep fees than the amount of tax due or refunded.

What is there is no "composite" payment? Taxpayer can still avoid filing a return if his income in the various states is below the filing threshhold for these states.

As a practitioner, I can't ignore a filing requirement. I will prepare all states where the client's state income creates a filing requirement. If the client doesn't wish to file, he can choose not to mail it in, but I have fulfilled my obligation as a tax preparer. If the client is complicitous to filing all states then I will electronically wire them in.

I have had a couple incidents where we ignored a filing requirement and the states came back on the client. Client blamed me for not filing return to begin with.

[MarkCTX]

I think both of you see the problem quite clearly. In this particular case there were a few composite returns filed. Those states may be candidates to skip. You also bring up a practical point that if the client gets a demand letter from a state it's automatically the preparer's fault. May be a good idea to place the recommendation to file in all states in writing. Thanks for your comments.