Most states are dealing with high unemployment, decreasing tax revenues, and substantial budget shortfall. How better to address these three challenges than by hiring more revenue agents? Just be careful that you’re not the one who gets stuck single-handedly paying a chunk of the salaries for these new agents.

In addition to staffing up their revenue departments, states have also increased their “data mining” capabilities. By having sophisticated computer programs comb through driver license info, voter registrations, employment rolls, real estate transfers, and a variety of other databases, state governments are systematically trying to locate every person who might be subject to their state’s income taxes. A few years back, a state tax expert in Massachusetts warned me and the other attendees of a state tax seminar to expect to see a significant rise in the number of notices and inquiries sent to taxpayers due specifically to expanded data mining efforts.

Check out these real life examples that demonstrate what our clients have been dealing with so far this year:

  • California withdrew more than $40k from a client’s business account to pay for what California deemed as reasonable withholding and unemployment taxes, even though this client had a loss on his business for the past few years and has not been able to take any salary.
  • New York sent notices to two of my clients assessing more than $80k in taxes, interest, and penalties due to non-filing of a state income tax return, even though both clients moved  out of New York prior to the year in question, and properly filed a tax return with their resident state for that year.
  • New York sent another business client a bill assessing a $10k penalty because his corporation recently started to pay an employee who worked abroad but had a New York residence. Evidently, this client’s insurance carrier did not report to New York State that my  client had purchased Workers’ Compensation insurance that covered      employees within New York (even though this employee would not be working      within New York).
  • Massachusetts is auditing one of my clients  over an issue for which the IRS had previously audited, and would not accept the “No Change Letter” that the IRS had provided me from this audit.
  • Massachusetts is forcing another client to pay Massachusetts taxes on a portion of their income since this retired couple maintained a bank account with the address of a vacation home within Massachusetts that they still own, even though they live outside of Mass for more than six months a year and each have a driver licenses from their home state.

While we are in the process of getting each of these items resolved on behalf of our clients, all this activity clearly shows that the states are increasing their tax compliance, assessing, and collection efforts. By doing so, not only do they raise more money for their state, but they also put more people to work. While I’m not opposed to seeing unemployment rates decrease, I find reducing unemployment by each state staffing up with new revenue agents to be quite disconcerting.

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