There are 2 basic rules concerning correspondence from the IRS or a state tax authority:
(1) Do not ignore an IRS or state tax notice. The problem will not just go away. The only things that might go away are your wages or your home!
On the other hand -
(2) Do not automatically pay the amount requested on an IRS or state tax notice. It has been my experience over the past 35 years that more than 50% of all federal and state tax notices are incorrect.
Carefully check the return being questioned. If it was prepared by a tax professional, send a copy of the notice to your preparer immediately. If you prepared the return yourself and you do not understand the notice you should consult a tax professional.
This year I have seen a lot of “Statement of Account – Balance Due” notices from “Uncle Jon” (the NJ Division of Taxation) – and more than 90% have been totally erroneous! I can count on the fingers of one hand the number of correct notices I have reviewed so far this year.
I heard from more than a dozen clients who had owed “Uncle Jon” on their 2005 Form NJ-1040 and had sent a check for the balance due with their return by the April 17th filing deadline. In each case the NJ-1040 was filed online using NJWebFile, which generated a personalized NJ-1040-V payment coupon that was included with the mailing of the return and check. And in each case the check cleared in the normal amount of time.
In September these clients all received a billing notice from the Division of Taxation for the amount due on the 2005 NJ-1040, which had already been paid, plus accrued penalty and interest. As it turns out, in each case the DOT had applied the 2005 payment to the client’s 2004 NJ-1040!
If this were the case, the 2004 account should have indicated an overpayment and NJ should have sent refunds to the taxpayers – but no refunds were sent.
Some clients called or emailed the Division of Taxation directly and explained that they had paid the tax and they had a copy of the cancelled check. Others send the notice to me and I wrote to the “cafones” in Trenton. In every case the situation was corrected.
If the DFBs (clean version is “damned fool bureaucrats”) in Trenton want tax professionals to file all NJ state resident returns electronically they should at least make sure the system works!
Just recently two clients received balance due notices from “Jon”. One statement failed to give the client credit for $100,000 in NJ state income tax withheld that was clearly reported on the W-2, and the other reported a “72t” pension distribution from Lucent, reported on a Form 1099-R, twice – both as wages and as a pension distribution. However, the NJ state income tax withheld from the pension distribution was not included twice.
I emailed the Division of Taxation in both situations, and, to my surprise, received a prompt, and satisfactory, response. For the first notice I was asked to fax a copy of the W-2; the error on the second notice was automatically corrected with no further documentation required.
In the past, when I would write (via postal mail) to the NJ Division of Taxation regarding a client issue I would never hear from Trenton. In most cases the issue would eventually be taken care of and the taxpayer would receive either the appropriate refund or no further requests for payment - but I would never receive the courtesy of a written response or acknowledgement to my correspondence. In some cases it would take several unanswered letters on my part for the state to finally resolve the matter properly. So the moral of this story appears to be if you have to write to the NJ Division of Taxation about your NJ-1040 you should do it via email.
Most of the returns I did for 2005 were filed using NJWebFile on the Division of Taxation website. The NJ-1040 paper return is a “scanable” form. The information on the return is electronically “read” by a machine – there is no person entering information from the return into a computer. In each case there is, supposedly, no longer the risk of “human error”. So how come the state issues so many error-laden notices?