Multiple State tax filing issues affect individuals, corporations, partnerships, trusts.
There are many reasons where multi state tax filings are required. Here are just a few:
- Own a piece of rental property in another state
- Military personnel who have non-military income in another state
- Married couples who work in different states
- Moved to another state during the year
- Corporations with physical location and/or sales people in more than one state
- Have a partnership interest in a partnership organized in another state
- Own land in another state and sell it
Not understanding multi-state ramifications could potentially cause problems down the road.
Here’s a real life example I encountered:
Decades ago, as a new accountant just out of college, I experienced the problems first hand arising from multi-state issues. A client (new to our firm due to this issue) received a letter from the State of Maine stating they had sold a piece of property 5 years previously and never reported it to the State of Maine. The gain, which I recall was somewhere around $50,000 was reported in Massachusetts properly – in the State of Mass you report all income and then take a credit for taxes paid to other jurisdictions. There was no avoiding filing a 5-year old Maine tax return to report this gain for which the tax, penalties and interest were due. What also came into play was the Statute of Limitations (generally 3 years after a return is filed that year is closed). Since a return was never filed in Maine, the clock on the Statute never started running, thus the return needed to be filed. Since the Massachusetts return was filed, the Statute ran its course, and we could not go back and amend the return to get credit for the Maine tax paid on the gain, thus the client ultimately paid state taxes twice.
Be aware that this issue exists, and if you have a shred of doubt with your own personal situation, make sure you let your tax professional know.