NYS 2014 Income Tax Audit Notices

 

 

 

 

10/10/2017

We want our New York State clients to be aware of a developing situation. Last week, our office took many calls from participants, spouses, accountants and clients regarding audit notices sent by the State of New York Department of Taxation and Finance about 2014 personal income tax returns.
 
Effective January 1, 2014, the State Tax Law was amended to provide a special NY State tax exemption for most payments from a service award program. More details about this tax exemption can be found in our article here: http://www.penflexinc.com/c8/important-tax-information-c41.html
 
As the article states, prior to 2014, the State allowed a taxpayer to utilize the $20,000 "other pension and annuity" exclusion for LOSAP in accordance with an opinion letter issued by the Department of Taxation and Finance. Beginning in 2014, it would appear the change to the Tax law created a separate, distinct exclusion for LOSAP payments (subject to certain restrictions in both cases).
 
Based on our numerous discussions and review of several notices, it appears that the State is asserting that an individual who is utilizing the full $20,000 "other pension and annuity" exclusion for his/her non-New York State pension (such as a private pension plan or distributions from a 401(k) or IRA) cannot also utilize the service award program exclusion. In other words, the State is telling the taxpayer he/she cannot exclude more than $20,000 combined between these two provisions.
 
We disagree with this assertion and so have the many accountants we have corresponded with. We reviewed the instructions for the NY State resident income tax return (IT-201) as well as the supplemental IT-225 used to itemize the service award program deduction; neither state that the $20,000 other pension and annuity exclusion and the service award program exclusion are linked in any way, or that a taxpayer cannot exceed a total of $20,000 in exemptions between these two items. 
 
We believe the intent of the new 2014 tax law was to allow the majority of individuals being paid a service award program benefit to exempt these payments from NYS income tax. Therefore, we believe the State's assertion is incorrect. 
 
The facts and circumstances of each individual’s tax return are unique. However, most of the cases we have reviewed are very similar in nature. In addition, not all individuals receiving a service award payment will have received this notice. Therefore, there is no one solution that will be appropriate for all cases.
 
Since we are not accountants or tax attorneys, we cannot give tax or legal advice. That being said, we want to help our clients in any way we can. We are very concerned that many individuals will just pay the bill sent by the State for fear of being audited. We don't want this to happen - we believe the State has made an error in this case, and we think it should be protested. An individual shouldn’t pay tax on income that the State Tax Law, in our opinion, clearly indicates should be free from NYS income tax.
 
We have prepared some sample letters that an individual could use to protest the notice. If you are aware of a participant who received this notice, please have him/her email us a copy of the notice (omitting the SSN or other information as appropriate) to info@penflexinc.com. We then can provide these participants with a copy of our sample letter and back-up documentation. If you prefer, respond to this email and we will email it to you for distribution. Please be sure to understand that any information we provide does not constitute legal or tax advice.

 
We will provide more information as it becomes available.
 
Thank you.