States Look Beyond Borders to Collect Owed Income Taxes

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States Look Beyond Borders to Collect Owed Income
Taxes By Samuel Kerch Controller Director of
Tax Compliance
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Owed Income Taxes in Other States

• Many American workers cross state borders
  regularly as part of their job. Events like trade
  shows and client meetings, for example, may
  require an employee to travel from their home
  state.
• For those that do, chances are they probably owe
  income taxes in these other states. Such laws
  have been on the books for decades, however many
  states appear to have recently stepped up
  enforcement. 

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Improved Tracking Techniques

• The states claim better techniques for tracking
  income taxes owed, not pressure to fill budget
  deficits, have prompted them to become more
  tenacious at enforcing the provision.
• Originally, state tax officials relied on the
  sports pages and celebrity magazines to see when
  well-known higher-earners came to town for work.
  For everyone else, it was largely ignored because
  it was not cost-effective for states to monitor
  every worker crossing a border.

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Improved Tracking Techniques

• Now states have greater access to data warehouses
  that help them better track income taxes owed.
• Real estate transactions, federal data from the
  IRS, bids for government construction projects -
  all this information is generally available and
  can help states find additional revenue. 

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Improved Tracking Techniques

• Still, perhaps the best enforcement mechanism may
  be requiring companies to withhold additional
  taxes from their employees' paychecks.
• State auditors may not be able to monitor every
  border-crossing, but with corporate payroll
  managers as their enforcers, they don't need to. 

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Payroll Audits

• Many Fortune 500 companies say that they have
  been subjected to payroll audits more frequently
  in the last few years and that tax officials have
  requested travel logs for highly compensated
  employees during these audits.
• If, for example, an employee was reimbursed for
  airfare to California, an auditor may also check
  to see if that employee had California income
  taxes withheld from his paycheck. If not, the
  company can be fined.

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Payroll Audits

• Finding out that you owe income taxes across a
  state border can raise your overall tax bill if
  your home state has a lower income tax rate,
  although it may not rise by much since most
  states allow you to deduct income taxes paid to
  another state.
• The bigger burden associated with distributing
  your taxes to more state governments is the
  administrative effort it requires, for both
  employee and employer.

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Payroll Audits

• Many states require filing a return for a single
  day's work.
• For traveling workers like salesmen or
  consultants, filing a pile of additional state
  tax returns can become prohibitively expensive,
  not to mention frustrating. 

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Owed Income Taxes in Other States

• As long as there is a lack of understanding about
  these laws, the states with the most aggressive
  income tax compliance teams have the most to gain
  from enforcement.
• As more states catch on and start investing in
  more payroll auditors and data mining tools to
  get money back, the end result may be an arms
  race until every state comes out more or less
  evenly.

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About the Author

• Samuel Kerch, CPA is the Controller and Director
  of Tax Compliance of Symmetry Software, a
  software developer that specializes in payroll
  and payroll-related software applications for the
  internet and corporate intranets. For more
  information about filing income taxes, visit
  http//www.paycheckcity.com/ today.