Tax professionals seem to love sharing bizarre stories of the trade especially when the taxpayer or the government acts in some silly manner. I am no exception.
Recently I settled a multi-year complex tax problem for a small business client in Pennsylvania. I figured that, as happened in this case, if I can negotiate a discount less than the amount of my fee then my involvement is a win/win/win for both of us plus the state.
I was pleased to work with a helpful revenue agent. At the end of the negotiation I asked for advice on how to handle the payments since it was a complex case and payments had to be applied to multiple years and different types of taxes. Normally I would make the payment online but felt this might trigger confusion. The agent said send the check to her and she would apply it appropriately. Again I was grateful, and that’s what I did.
Then, a month or so later the taxpayer received a 5% penalty notice because the payment was not made online and the check sent for the settlement was not certified! Good grief. In any event, we are just happy to move on.
The requirement of a Pennsylvania charity to register and submit an CPA attestation depends on a number of factors including the amount of “receipts”, “contributions” or “solicitations”. All three of these terms are used in the applicable code sections.
Today I received email confirmation from the Pennsylvania Department of Revenue that, for this purpose, “receipts”, “contributions” or “solicitations” does not include contributions made by the charity’s founder or a person affiliated with the charity.
Taxpayers who feel that Pennsylvania tax penalties were improperly applied may appeal those taxes. In many cases the amount of the penalty will exceed the original amount of the tax adjusted. You should explain in detail why your tax relief request should be granted and attach additional documentation, if necessary, of any supporting documents.
Petitions for refund must be accompanied by proof of payment of the tax to the commonwealth and copies of invoices, credit memoranda, exemption certificates, etc. where relevant. Copies of canceled checks must include images of the fronts and backs of the checks.
I consider handling these appeals petitions on a case-by-case basis. If I do handle the petton then the service can be provided for a fixed fee or based on a percentage of the settlement.
For he past few years the Pennsylvania Department of Revenue aggressively audited the tax returns of individuals who took a deduction for unreimbursed employee expenses on Schedule PA-UE. The topic was covered by the Pittsburg Tribune in June 2014. My quick online poll of professional tax preparers last summer indicated that the audit rate was near 100% of 2014. In other words, it appeared that every taxpayer who took the deduction was audited last year.* Some public reaction in newspapers and social media cried ‘foul’, as described in this commentary, but most taxpayers simply found it cheaper to pay the difference back to PA after receiving the audit letter.
The core issues:
- Almost all tax preparation software uses the unreimbursed expenses from the federal tax return to generate the state unreimbursed expenses. In fact, the legal criteria are actually different and PA requirements are more stringent than federal requirements.
- For both federal and state deductions, detailed record-keeping and proof of all transactions is required for the deduction. Estimates are not allowed.
- Upon audit, PA requires a letter from the employer stating that the expenses are necessary. That requirement is not mentioned in the state’s taxpayer education publications about the issue. Other public documents say that allowable expenses must be verified “either through receipts or employer verification” (emphasis added). But in fact the audit response states a requirement of both receipts AND employer verification. Few employees are willing or able to obtain this letter and are often surprised react negatively to the state requirement.
The question that remains is whether individuals who were audited in 2014 should take the deduction again in 2015. My opinion is that when the taxpayer meets the requirements for the deduction and is willing to obtain an employer letter later if requested, then they should take the deduction IF they understand the audit risk and are prepared to assume the cost of responding to that audit. If not, then the amount of money at stake in terms of tax savings is simply not worth the cost of an audit response.
The cost of responding to an UE audit, even it you do it yourself, is likely to involve labor valued at several hundred dollars. In most cases this is more than the tax savings available by taking the deduction. This is why, in the event of audit, that I advise taxpayers to simply pay the amount requested in the audit letter.
The issue that remains for me and other professional tax preparers is determining whether a taxpayer understands and has the right mental attitude toward the risk of audit. Of the three taxpayer clients I had in 2014 who took the PA UE deduction in 2014, all three were audited. One plainly blamed me for the audit, stating “I’ve always taken it before you prepared my return and there was never a problem”. A tax professional who takes the deduction risks adverse reaction when the state audits a tax return and possible even a professional liability claim. Two of the three clients audited last year did not return to have me prepare their tax return for 2015. So this audit risk issue actually represents a real business risk for me in terms of the significant cost of client recruitment and retention. This year I need to be more selective in which clients are psychologically prepared to handle the state’s hostile response to their option to take the UE deduction.
* Since then, I have found two PA taxpayers who took the PA UE deduction in 2014 and were not audited. So the audit rate is apparently not 100%.