Taxpayer's Guide to New York State Tax Problems and Solutions
In New York State, the Department of Taxation and Finances administers tax laws and collects taxes in the state. The department handles both business and individual taxes, and if you live or work in this state, you must be aware of the rules and stay compliant with tax regulations.
This can be easier said than done, but if you get into trouble, we can help. At McLaud Law, PC, we are tax attorneys based in Rochester, NY, and we’re positioned to help you deal with the full gamut of state and federal tax problems. To get help now, contact us today or keep reading for more information. The following sections outline the most common tax problems and solutions in New York State.
Common Tax Problems in New York
When you live or run a business in New York State, you have to file state tax returns. Depending on the specifics, you may need to file individual income tax, corporate income tax, sales tax, withholding, or other returns. The rules are complex, and taxpayers can get into all kinds of problems including the following.
Unfiled State Tax Returns
If you haven’t filed all of your New York State tax returns, you may face penalties and possible legal consequences. A tax attorney can help you catch up on your old returns. Alternatively, you may want to look into the Voluntary Disclosure Program.
In NYS, you can qualify for voluntary disclosure for unfiled income, corporate, and sales tax returns. To qualify, you must contact the department first before they contact you, and you may need to meet other criteria. If the department accepts your application, you can avoid penalties for not filing.
DTF Tax Audits
The DTF can select any of your tax returns for an audit. The agency selects some returns randomly, and it selects others due to inconsistencies with information from other entities. If the DTF selects you for an audit, be prepared to back up the information on your return. You may also need to argue your interpretation of the tax law in some situations. Failing an audit can lead to increased tax liabilities, penalties, and other consequences.
Most state tax audits focus on business tax returns, rather than personal returns. States don’t audit personal income tax returns in most cases since the bulk of the details go onto your federal return.
However, in NY, the DTF audits personal income tax returns for residency on a regular basis. These audits are designed to find people who live in New York but claim they don’t live in the state to avoid paying taxes. It also affects part-year residents who may be underestimating their time in the state.
Unpaid State Taxes
Even if the DTF is not coming after you, unpaid taxes can be very stressful. Unpaid tax debts accrue penalties and interest, and they can also expose you to unwanted collection actions. The state offers many different programs to help both individuals and businesses get caught up with their unpaid liabilities.
NYS Tax Warrant
If you don’t pay your taxes, the DTF will issue a tax warrant. This is a civil judgment against you, and it secures the state’s interest in your property. The warrant is worth the amount of your tax due plus interest, penalties, and collection costs. Like a federal tax lien, it attaches to all of your assets, and if you sell your assets, the DTF has a right to the proceeds.
A tax levy is when the DTF seizes your assets for unpaid taxes. Generally, the DTF starts by seizing the funds in your bank account or by contacting a third party holding your funds. For instance, if you own rental properties, the DTF can seize the rent you get from your tenants. Or if you have clients, the DTF can contact them and have them direct payments to the DTF.
Tax Refund Offset
If you owe money to the DTF, the state can seize all kinds of assets to pay the bill, but the first thing they usually target is your tax refund. Say you file one year and don’t pay, but the next year, you file a tax return showing a refund. Then, the DTF will seize your refund and apply it to your bill.
the DTF and the IRS work together on this through the Treasury Offset Program. If you have unpaid state taxes but you don’t owe money to the IRS, New York State can seize your federal refund. Similarly, if you owe money to the IRS but not the state, the IRS can take your state tax refund.
An income execution is like a wage garnishment. If you have unpaid taxes, the DTF may request that you pay 10% of your income, and if you refuse, the department will move forward with an execution. Then, your employer must withhold funds from your check and send them to the state. The execution is 10% of your gross income or 25% of your disposable pay.
The DTF may also seize your personal or business property. This includes both real estate and personal property. Because this process is expensive and labor intensive, the DTF leaves this as a last resort. Once the DTF takes your assets, they will auction them off and apply the proceeds to your bill. You will receive any extra funds.
Driver’s License Suspension
In New York State, you don’t have to be that far behind on your tax liabilities to lose your driver’s license. The state can suspend your driving license if you owe at least $10,000 in unpaid taxes. You can avoid the suspension by paying your tax bill or meeting one of the following criteria: 1) have a commercial driver’s license, 2) have wages that are already being garnished, 3) be responsible for child support payments, or 4) receive public benefits or Supplemental Security Income (SSI).
Private Debt Collectors
In most cases, the DTF will attempt to collect your debt directly, but in some cases, the DTF may outsource collection to a third-party agency. When the DTF assigns your account, they will send you Letter DTF-975.1. Do not talk with any collectors until you have received this letter.
Once you talk with a collector, make sure that they are contracted to work with the state. You should be able to verify this information on the DTF’s website, as it is subject to change. Note that scam artists often call taxpayers, pretending to be tax agencies. If you have any doubt that the collector is real, don’t talk with them. Contact the DTF directly or reach out to a tax attorney for help.
If you run a cannabis business in New York, you can face all of the same tax problems as any other business, but you may also have additional tax complications due to the discrepancies between state and federal law on this issue. For example, although you must file and pay payroll taxes, you cannot take deductions for wages or nearly any other expense except for cost of goods sold.
Solutions for NY Tax Problems
NY taxpayers can face all kinds of different problems, but gratefully, the state offers a lot of different programs to help people get caught up. The right solution varies depending on your budget, tax compliance history, and other factors, but here are some of the most common tax relief options in this state.
If you cannot afford to pay in full, you may be able to set up a payment plan. Typically, the state is more lenient with individual taxpayers than businesses. Businesses may need to pay 20% down to get a payment plan, and they should plan to pay off their tax bill as quickly as possible. Individuals can take up to six years to pay off NYS tax debts, but if you need more than three years, you may need to complete a financial disclosure.
NYS Offer in Compromise
Through the Offer in Compromise program, the DTF allows qualifying taxpayers to settle their tax bill for less than they owe. To get an offer accepted, you must be insolvent, and you must be compliant with other tax filing obligations. The state expects the offer to be the most you can afford to pay, and generally, you only get one chance to request an Offer in Compromise. This isn’t a program that you can use repeatedly when you get behind on your taxes.
Innocent Spouse Relief
What if your NYS tax bill is due to your spouse’s actions? What if you didn’t know that your spouse failed to report income or claimed deductions incorrectly? Then, you may be eligible for innocent spouse relief. If you qualify, the state won’t make you pay your spouse’s portion of the tax bill.
Temporary Hardship Status
The NYS DTF doesn’t have details about hardship programs on its website, but the state may be willing to pause collection actions if they’re causing hardship. Reach out to the department directly to talk about your situation, or talk with an attorney for options.
If the DTF marks your account as not collectible, they won’t pursue collections against you, but they will review the situation in 12 months to see if your finances have improved.
Statute of Limitations on New York State Tax Collection
The NY DTF has 20 years to collect unpaid taxes. This is called the collection statute of limitations. Generally, the clock starts when you incur the tax debt, but there are certain actions that can toll (pause) the timeline.
What does this mean? You cannot wait out a New York State tax debt. The state has the right to come after you for decades. To protect your finances, you should make payment arrangements as soon as possible.
Get Help With New York Tax Problems
Dealing with state tax problems can be very tricky. You certainly don’t want a generalist or a big nationwide firm in this situation. Instead, you need a local tax attorney who has experience dealing with the DTF and other New York tax problems.
At McLaud Law P.C., we are based in New York, and we can help with all of your state and federal tax problems. Whether you’re dealing with unfiled tax returns, unpaid taxes, audits, collection actions, criminal tax exposure, or other problems we can help. To learn more, contact us for a free consultation today.
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