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Don't Forget State Taxes - LifeBack Tax
The Internal Revenue Service isn't the only one who collects taxes. While state taxes may seem trivial compared to the size of the federal income tax, falling behind on your state taxes can still land you in hot water. State tax authorities can be just as aggressive, if not more so, than the IRS when conducting audits and chasing down delinquent taxpayers.
Each state has its own system for assessing and collecting taxes, and not all states collect the same types of tax. Some states use a graduated income tax system, while others tax income at a flat rate. Connecticut, North Dakota, and several others do not offer a standard deduction on state income tax. Seven states do not collect individual income tax at all, but set much higher rates on sales and property taxes. You may also be required to file tax returns for multiple states. Unlike the IRS, some states may charge late filing penalties even if you owed no tax on that return.
State taxes can be especially frustrating for businesses, who not only pay income tax at the state level, but may also be responsible for sales and use tax, franchise tax, excise tax, corporate income tax, and any state payroll taxes. Due to the South Dakota v. Wayfair decision, online retailers may now be required to collect and remit sales tax for states they don't operate in. To further complicate matters, each state sales tax has its own criteria (often narrowly defined) to determine what purchases are taxable.
In some ways, state tax debt can be even more of a nightmare than federal tax debt. Despite its reputation, the IRS must act in compliance with the Internal Revenue Code at all times. This includes respecting a taxpayer's rights to privacy and confidentiality, especially when conducting an audit. The IRS also makes an effort to streamline the collection process, and is willing to negotiate with taxpayers who owe back taxes.
Unfortunately, state agencies are often much harder to deal with. Taxpayers who owe state taxes may have difficulty entering a payment plan, having penalties waived, or appealing collection actions. Texas, Alabama, and multiple other states do not accept offers in compromise. California's Franchise Tax Board and New York's Department of Taxation are especially notorious for intrusive tax auditors and aggressive tax enforcement.
Since state tax authorities have their own regulations, they are not bound to the same restrictions as the IRS. The IRS normally has a 3-year limit on auditing returns and a 10-year limit on collecting back taxes. Multiple states have longer statutes of limitations: California, for instance, allows as far back as 4 years for audits and 20 years for collection. Some states have no time limit on collection at all. On top of this, if an IRS audit causes a change to your federal tax return, this can also reset the statute of limitations on your state tax return.
Like the IRS, state tax agencies can file tax liens and enact tax levies against delinquent taxpayers. However, while the IRS only uses the administrative levy as a last resort, state governments are far more willing to seize taxpayer property, wages, and assets. In the past, some have lost their homes for tax debts as low as several hundred dollars. In addition, multiple states can suspend your driver's license for unpaid state taxes. State agencies may also suspend, revoke, or refuse to renew professional or business licenses until your tax liability is resolved.
Tread carefully when it comes to filing and paying your state taxes. If you are currently in dire straits due to state tax debts, please contact us at LifeBack Tax. We are tax relief professionals, and will negotiate with your state's taxing authority on your behalf to resolve your issues as soon as possible.
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