The state of Maryland Department of Revenue has a new project. According to sources in the Department of Revenue, auditors came through and asked state officials if they are verifying the amounts paid on W-2 documents when they discharge liabilities for a variety of reasons. Now the state is looking back over returns as old as 12 years, and disallowing the Maryland Withholding if there is no W-2 in the electronic or paper file.
This causes problems because if the state did not scan your return or they did not scan the W-2, the state will claim that you did not send the W-2 in with the return. The state will take the position that the taxpayer must maintain these documents to prove the amount of the state withholding. The state will also take the position that the state did not loose the document, the taxpayer failed to send it in with the return.
If the taxpayer(s) cannot produce the W-2, the state will then disallow the withholding and demand that the taxpayer(s) pay the amount of the withholding, penalties and interest.
This situation is compounded by the fact that the IRS does not maintain the state withholding as a part of their electronic W-2 file and if you ask for a transcript from the IRS if will not contain amounts for state withholding(s). The IRS no longer keeps a paper file of the forms so you cannot get the forms that would have the state withholding on it, and the state does not always keep the state withholding amounts in their files in Maryland. In fact, we have found out that routinely the state neglects to include these amounts as input into the files.
As you are aware, federal and state officials maintain that if they cannot find a document that should have been attached to the return in their files, that the taxpayer never sent the document in. An incomplete return is not a properly filed return which extends the statute of limitations until a complete return is filed. Not filing a return is considered fraud and extends the statute of limitations until three years after a complete return is filed.
Maryland state is also destroying the electronic files when they get five or more years old. So it falls to the taxpayer to proved, by producing a paper (or facsimily) copy of the W-2 to verify the withholding or they must now pay the state again for the withholding as much as 12 years later.
The state also maintains that if the W-2 was not sent in with the return it was not a proper filing, and they are now returning files that do not have W-2 documents attached. The state maintains that without the W-2 that you did not file your return under the doctrine that an incomplete return is not a return.
The state claims that you are "ok" if you filed electronically or if the W-2 was filed electronically within the five year window that they keep those electronic documents on file.
This gets even more fun when the state shares this information with the federal government who promptly disallows the amounts for state withholding as an itemized deduction and sends the taxpayer a bill for the newly computed tax.
Taxpayers do not keep their returns in a place where they can find them. Compound this with the psychosis which develops out of fear of the IRS and the state departments of revenue and you have an unreasoning taxpayer who is scared so silly that they cannot find the documents. How many times have we seen this where the taxpayer just wants the situation resolved but can provide us with no help. We, as practitioners, remember the box they brought in and some of us even went though the box and know first hand that the documentation was in good order when the return is filed. Who knows what happens years later.
This can get further complicated by the practice of most practitioners of limiting their liability by destroying or returning to the client files that are over seven years old. If the return is 12 years old, those documents were long gone five years prior. We have seen this with other "incomplete" returns where the taxpayer neglected to tell you about stock sales or something else that they are not accustomed to giving their tax preparer for their return preparation.
I have heard, "was I supposed to give you that?" even though we ask all the right questions, use a questionnaire and get them to sign the declaration that they gave us everything. One missing item can be enough to keep the year open for an extended period if the amount of the alleged missing income is high enough. We represented a taxpayer who left over a million dollars in stock sales off the return because they did not understand that the IRS didn't just "take care of it" for them. "We paid the tax at the time of the sale. The stockbroker withheld taxes from the transaction." And other comments are often heard from taxpayers.
I think from the taxpayer and voter perspective this sends a bad message. Here the taxpayer has relied on the state and federal government to keep adequate records which they have failed to do. Additionally, the state and the fed are conveniently not keeping track of the state withholding which allows them to disallow the amounts after the fact and in some cases over a decade later. It would seem to me that the state and federal governments have an obligation or a duty to maintain complete records including the amounts of state withholding(s). It would seem to me decisive to not maintain them just so you could disallow the amounts in the future and demand that the taxpayers pay the bill twice.
We have two of these cases now for 2000 and 2001 income tax return years. The cases are being looked into by the office of the Maryland Comptroller's Ombudsman and the Taxpayer Advocate Service. The auditors appear to be unresponsive in these cases. Letters go unanswered for months on end. And the process continues to proceed forward unabated through the 30-day, 15-day, 90-day letters, in spite of repeated phone calls, faxes and letters.
If you have any similar situations or problems, I would love to hear from you. Land line 410-747-0396, fax 410-747-6357. email alfred@giovetti.com, snail mail 1615 Frederick Rd., Catonsville, MD 21228. I can also be reached on Linked-In or Facebook.
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