States require electronic filing for certain types of returns
According to recent statistics published by the Internal Revenue Service (IRS), during the 2014 tax filing season, the IRS received 149 million tax returns. Of the total returns received, 125 million were electronically filed, representing greater than 84 percent of the total returns received. Given the high rate of electronically filed federal tax returns, many states are moving to compel taxpayers to electronically file certain state tax returns. As outlined below, several states will mandate certain tax returns be electronically filed for the upcoming filing season, unless the taxpayer receives an appropriate waiver.
California’s Franchise Tax Board (FTB) announced new e-file requirements for business entities beginning Jan. 1, 2015, for taxable years beginning on or after Jan. 1, 2014. Absent a waiver, any business entity that files an original or amended tax return prepared using tax preparation software is required to file its return electronically.
Affected businesses can request a waiver by submitting, directly to the FTB, an online fillable form that will be available on the website beginning Jan. 2, 2015. The following reasons justify the granting of a waiver request:
- Technology constraints, such as the inability of the tax preparation software used by a taxpayer to electronically file the return due to the inadequacy of the software or the complex nature of the return;
- Where compliance would result in undue financial burden; or
- Circumstances that constitute reasonable cause and not willful neglect.
The Pennsylvania Department of Revenue (DOR) issued a notice mandating e-filing for
third-party preparers of Pennsylvania Directory of Corporate Partners Returns (Form PA-65 Corp) with 11 or more pass-through entity filers.
The notice provides that “for all calendar years following a calendar year in which a third-party preparer prepares 11 or more PA Directory of Corporate Partners Returns, the third-party preparer is required to electronically file (e-file) in the manner prescribed by Departmental instructions for Form PA-20S/PA-65."
As of Jan. 1, 2015, the Virginia Department of Taxation (VaDOT) requires all pass-through entities to file their annual returns and make all payments electronically. This is effective beginning with tax year 2014 returns, return payments, and withholding payments.
Pass-through entities that are unable to file and pay electronically may request a waiver.
According to the VaDOT, a pass-through entity is “any entity other than an individual estate or trust that is recognized as a separate entity for federal income tax purposes and the owners of which report their distributive or pro rata shares of the entity's income, gains, losses, deductions and credits on their own returns.” For purposes of the filing requirement, the VaDOT defines a "pass-through entity" to include S corporations, general partnerships, limited partnerships, limited liability partnerships, limited liability companies, electing large partnerships, and business trusts.
Ohio has released a draft version of a new statute requiring all International Fuel Tax Agreement returns to be filed and paid electronically, effective June 1, 2015.
Taxpayers will be able to do this through the Ohio Business Gateway or through an electronic filing and payment system that will be accessible from the Ohio Department of Taxation’s webpage. Those wishing to be excused from the requirement may apply to the tax commissioner, who will issue written notification of his decision.
Michigan launches offer-in-compromise program starting Jan. 15, 2015
The Internal Revenue Service offer-in-compromise allows one to settle his or her tax debt for less than the full amount owed. The IRS generally approves an offer-in-compromise when it cannot expect to collect any more than the amount offered within a reasonable period of time.
Beginning Jan. 15, 2015, the Michigan Department of Treasury (MDOT) plans to launch its own offer-in-compromise program allowing taxpayers to propose settlement of an assessed tax debt for less than the amount due. For purposes of the Michigan program, an assessed tax liability includes tax and any related interest and penalty.
The Michigan Chamber of Commerce (the Chamber) notes that 40 states already utilize these arrangements, which are different from amnesty programs because they are designed for people who are “truly in distress and unable to pay” due to circumstances like job loss, medical expenses, or bankruptcy. In contrast, the Chamber characterizes amnesty programs as “gimmicks used to collect delinquent taxes” from those who are capable of paying.
In order to submit the offer-in-compromise, the taxpayer must:
- Have filed returns for all tax periods;
- Have been assessed and the time period for all appeals must have expired; and
- Have no open bankruptcy proceedings.
According to the state’s guidelines, the MDOT will assess offers-in-compromise by considering whether:
- A doubt exists as to the liability based on evidence provided by the taxpayer;
- A doubt exists as to the collectability of the tax due based on the taxpayer's financial condition; and
- The taxpayer has received an offer-in-compromise from the Internal Revenue Service for the same tax periods for which the taxpayer is requesting state relief.
The MDOT cautions taxpayers seeking an offer-in-compromise that state law requires it to publish on its website a written report of each accepted offer-in-compromise; and upon request, disclose a certain amount of return information to members of the general public.
The published written report will contain, at a minimum, a statement of each of the following:
- The amount of tax assessed;
- The amount of interest or assessable penalty imposed by law on the person against whom the tax is assessed;
- The terms of the compromise and the amount actually paid in accordance with the terms of the compromise; and
- The grounds for the compromise.
The MDOT’s offer-in-compromise web page offers more detail on the guidelines, a checklist, and forms and instructions to assist taxpayers.
Ohio: Gov. Kasich signs municipal tax reform bill
On Dec. 19, 2014, Gov. Kasich signed Sub. H. B. No. 5 (HB 5), applicable to municipal tax years beginning on or after Jan. 1, 2016. The Columbus Dispatch described the bill as a “long-needed simplification of Ohio’s overly burdensome municipal-tax code,” and “one of the best, most-revolutionary things to come out of the lame-duck session of the legislature.” The article revealed that the bill increases the amount of time a worker can work in a city before having to pay taxes there from 12 days to 20 days (occasional entrant treatment), and phases-in a requirement that cities allow businesses to deduct net operating losses over a five-year period, reducing future tax burden.
The article recognized that several business groups, like the Ohio Society of CPAs, the National Federation of Independent Business/Ohio, and the Columbus Chamber, strongly backed HB 5.
In a Summary of Key Provisions, the Ohio Society of CPAs observed that HB 5 establishes a uniform tax base across all municipal tax corporations that levy an income tax. It does this by further defining the income that municipalities can and cannot tax.
The group listed four key areas of reform:
- Net operating loss carry forward (described above).
- Pass-through entities: With the exception of the 119 municipalities who previously voted to tax resident S corporation owners at the shareholder level, HB 5 imposes the municipal net profits tax on a pass-through entity at the entity level, with the owner needing to file only in their city of residence.
- Occasional entrant treatment: In addition to the provision described above, among other things, HB 5 creates a separate exemption that prohibits the taxation of income of employees of businesses with less than $500,000 in annual revenue by any municipality other than the municipality where the business’ fixed location is located.
- Administrative procedures: HB 5 sets up numerous administrative prescriptions and requirements. For instance, taxpayers will receive an automatic municipal tax filing extension if they timely filed a federal extension.
According to the Municipal Tax Reform Coalition (Coalition), Ohio is one of just a few states that allow municipalities to assess income tax on businesses and individuals, and the only state in which each municipality creates its own definition of income. The Coalition supported reform because the high cost of compliance hinders economic growth, often costs businesses more than they owe in taxes, and is especially burdensome for businesses whose employees work and travel in multiple cities.
The Coalition opined that HB 5 will benefit Ohioans by making the tax system fairer, more predictable, simpler, and less costly. Ultimately, the Coalition expects “Ohio will no longer stand out as the worst state in the nation in terms of municipal tax requirements.”
In contrast, the Ohio Municipal League (League) sent a letter to Gov. Kasich asking him to veto HB 5. The main reason for the League’s opposition was that it would cause revenue loss that is “unsustainable for scores of Ohio cities and villages.” While contending that it has always championed the notion of greater uniformity in the administration of the municipal income tax, the League lamented that the goal shifted from uniformity to reform.
Gov. Kasich continues to pursue tax reform with vigor. The Plain Dealer recently reported that he intends to seek additional cuts to personal income taxes while asking the business community to “share some of the burden…Everybody's going to have to be part of tax reform...We have to have a system that encourages economic [growth], that allows us to collect the revenue we want.''
For additional information regarding these subjects, or any other multistate tax issues, please contact:
Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.